(FROM THE WALL STREET JOURNAL 11/24/14)
By Leslie Scism
WASHINGTON -- The headlines in the long-running trial over the
bailout of American International Group Inc. have been dominated by
three heavy hitters who testified -- and one who didn't.
But as testimony likely wraps up Monday after eight weeks, legal
observers said two low-profile witnesses from early in the
proceedings addressed what may be the key question: whether the
government correctly interpreted a 1930s-era section of the Federal
Reserve Act to allow it to acquire a sizable equity stake in AIG to
help compensate taxpayers.
That issue stands out as one that former longtime AIG Chief
Executive Maurice R. "Hank" Greenberg has the best chance of
winning, said attorneys and legal scholars.
The lawsuit is at its strongest as "a test of the scope of a
government agency's authority: Did it do things it was authorized
to do by law, or did it exceed those boundaries?" said Anthony
Sabino, a professor of law at St. John's University. "The
government is vulnerable on that argument."
The nearly two months of testimony in the U.S. Court of Federal
Claims delivered few bombshells.
The most-scrutinized moments involved Mr. Greenberg's lawyer,
prominent litigator David Boies, squaring off against former
Federal Reserve Chairman Ben Bernanke and former Treasury
secretaries Henry Paulson and Timothy Geithner.
But their verbal jousting was largely incidental to the
statutory-authority legal dispute.
Mr. Greenberg is seeking $40 billion on behalf of AIG
shareholders in the lawsuit.
Mr. Greenberg, who is 89 years old and leading a new global
insurance conglomerate, Starr Cos., was on the government's witness
list but was never called.
Justice Department lawyers changed their mind about calling Mr.
Greenberg as they streamlined their arguments amid urging from
Judge Thomas Wheeler for the parties to avoid duplicative
testimony.
Even with testimony essentially finished, a ruling may be months
away. The two sides are expected to file legal briefings in coming
weeks that Judge Wheeler can consult in his deliberations.
The losing side is expected to appeal.
Mr. Greenberg, who built AIG into a global titan before
departing in 2005, was AIG's biggest individual shareholder when it
nearly collapsed in September 2008.
His lawsuit claims that the government didn't have statutory
authority to demand a 79.9% ownership stake in AIG in exchange for
providing an $85 billion loan at the height of the financial
crisis. He maintains the law in question restricted the Fed to
collecting interest on its loan.
Early in the trial, Mr. Boies called Scott Alvarez, general
counsel for the Fed, and Thomas Baxter, general counsel for the
Federal Reserve Bank of New York.
Over the course of their combined four days on the stand, Mr.
Boies used internal emails, memos and other documents to seek to
show uncertainty and debate within the Fed and New York Fed as to
whether the government was on solid legal footing in acquiring the
AIG equity stake.
Mr. Alvarez said staff at the Fed, which historically has
regulated banks, started analyzing options for dealing with
nonbanks in early 2008, as housing and financial markets were
deteriorating. He said he prepared a memo concluding that the
Federal Reserve Act gave the Fed flexibility in designing loan
terms, going beyond merely charging interest.
In justifying the AIG equity stake, the government's legal
filings cite phrasing in the act including that the Fed can make
loans to nonbanks "subject to such limitations, restrictions and
regulations" as it deems necessary, and it puts the equity stake in
that bucket.
Mr. Bernanke testified he relied on Messrs. Alvarez and Baxter
and other Fed lawyers to determine the legality of the AIG rescue
package.
Even if Judge Wheeler rules that the government overreached its
authority, it is unclear that Mr. Greenberg and about 300,000 other
shareholders in the class action would receive any of the $40
billion being sought. Judge Wheeler could rule in favor of Mr.
Greenberg on the legal question but conclude shareholders didn't
suffer an economic loss, because their alternative to the bailout
was being wiped out in bankruptcy court, the lawyers and scholars
said.
The lawsuit also alleges other wrongdoing, including that the
government violated shareholders' constitutional rights by taking
their property without just compensation.
But legal experts said there is a high hurdle to clear to win on
this claim, as former AIG directors have testified they voluntarily
accepted the bailout to avert the insurer's bankruptcy.
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