By Leslie Scism
Nearly seven years after the government's 2008 takeover of
American International Group Inc., Maurice R. "Hank" Greenberg won
an unlikely victory in his legal crusade against U.S. authorities.
But the former AIG chief and thousands of shareholders who joined
his action didn't win any of the $40 billion in damages they had
sought.
Judge Thomas C. Wheeler ruled Monday that the government
violated the law when it took a controlling stake in AIG in 2008,
the most dramatic stretch of the financial crisis. Still, he
accepted the government's arguments that without a Federal Reserve
bank's $85 billion loan to AIG, the company would have filed for
bankruptcy and shareholders likely would have been left with
nothing.
"The government's unduly harsh treatment of AIG in comparison to
other institutions seemingly was misguided and had no legitimate
purpose," Judge Wheeler of the U.S. Court of Federal Claims wrote
in his opinion.
Judge Wheeler's opinion could cast a shadow over the
government's role in any future financial crisis, lawyers and other
legal observers said.
"It's a harsh lesson for the government to think twice about
interfering in the private sector and the free market," Anthony
Sabino, a professor of law at St. John's University, said
Monday.
Mr. Greenberg brought the suit in 2011 alleging the government
had cheated shareholders when it demanded a 79.9% equity stake as
part of the loan agreement. At the heart of the case was a dispute
about the breadth of the Fed's powers and the limits on the central
bank's discretion during the financial crisis.
The ruling follows a bench trial last fall that featured a
parade of high-profile witnesses, including former Fed Chairman Ben
Bernanke and former Federal Reserve Bank of New York President and
Treasury Secretary Timothy Geithner. It is the latest big case for
Mr. Greenberg's lawyer, David Boies, who is widely regarded as one
of the best trial lawyers in the country after successfully
litigating an antitrust lawsuit for the U.S. government against
Microsoft Corp. in the late 1990s. Early in the case, many legal
observers anticipated an easy win for the government.
In the trial, Mr. Boies used internal emails, memos and other
documents 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. Bernanke appeared visibly
annoyed at times during his time on the stand, often giving one- or
two-word answers to Mr. Boies.
The negotiations over AIG's rescue had taken place in the wake
of a whirlwind weekend during which the government decided to let
Lehman Brothers Holdings Inc. fail. At the time, U.S. officials
said the government acted because AIG was so entangled with other
firms around the world that they feared the insurer's collapse
would be catastrophic to the global financial system.
AIG had sought government aid as capital markets froze and it
couldn't meet collateral calls. Its problems largely stemmed from
sales of an unregulated type of insurance to protect Wall Street
firms and banks from losses in holdings of mortgage bonds, as well
as its own investments in such bonds.
The Fed said in a statement Monday that it "strongly believes
that its actions in the AIG rescue during the height of the
financial crisis in 2008 were legal, proper and effective," adding
that the deal's terms "were appropriately tough to protect
taxpayers from the risks the rescue loan presented when it was
made."
A Treasury spokesman echoed that sentiment, saying: "The Court
confirmed today that AIG shareholders were not harmed by [the
government's] actions. We disagree with the Court's conclusion
regarding the Federal Reserve's legal authority and continue to
believe that the government acted well within legal bounds."
A spokeswoman for the Justice Department said it is "reviewing
the court's decision." Mr. Greenberg's office referred comment to
Mr. Boies's office, which didn't respond to a request for comment.
Either side could appeal the ruling.
In justifying the equity stake, the government cited language in
a 1930s-era law that gave it the power to make a loan to a nonbank
subject to certain conditions that it said included taking a stake.
The government had argued that taxpayers needed extra compensation
for risks in a loan to a company in an unfamiliar industry, given
the Fed historically regulated banks. It also stressed that AIG's
board had approved the transaction.
The fact that the government had to boost the original aid
package by $100 billion to stabilize AIG attested to those risks,
it said.
AIG by the end of 2012 had fully repaid the bailout, which
reached nearly $185 billion at its peak, by divesting many units
and returning to profitability in its core property-casualty and
life-insurance businesses. The government earned a profit of $22.7
billion.
Public-policy, corporate-governance and legal scholars said
Judge Wheeler's opinion could have ramifications for how government
officials interpret the voluminous Dodd-Frank financial-overhaul
law, which was enacted in 2010 and provides for the orderly winding
down of systemically important firms, among other things. Most
notably, it could make them skittish of taking bold actions that
aren't specifically detailed under the law.
The Fed's own powers and discretion already have been curtailed
by Congress. The Dodd-Frank law restricted it from bailing out any
individual institution, as it did in the case of AIG.
Judge Wheeler wrote in his ruling that "the weight of the
evidence demonstrates that the government treated AIG much more
harshly than other institutions in need of financial assistance"
and "publicly singled out AIG as the poster child for causing the
September 2008 economic crisis," though the "evidence supports a
conclusion that AIG actually was less responsible for the crisis
than other major institutions." That was a central plank of Mr.
Greenberg's case.
Judge Wheeler said the evidence showed that the government
"carefully orchestrated its takeover of AIG in a way that would
avoid any shareholder vote, and maximize the benefits to the
government and to the taxpaying public."
He concluded, "There is nothing in the Federal Reserve Act or in
any other federal statute that would permit a Federal Reserve Bank
to take over a private corporation and run its business as if the
Government were the owner."
Mr. Greenberg built AIG into a world-wide powerhouse over nearly
four decades before departing in 2005. Starr International Co., a
firm he heads, was AIG's largest overall shareholder in 2008. Mr.
Greenberg, who turned 90 years old in May, is building a new
insurance conglomerate.
The government's case was led by Justice Department lawyers.
They entered the trial with the wind at their back, as a related
case filed by Mr. Greenberg's legal team had been dismissed in
2012. In that case, in federal court in Manhattan, Mr. Greenberg
similarly accused the New York Fed of statutory overreach,
including by allegedly wrongly funneling money from the AIG bailout
to big banks and Wall Street firms in "covert backdoor
bailouts."
AIG's bailout has always been controversial, but largely because
the public saw it as too generous. Many taxpayers and politicians
complained about the lifeline to a big corporation in the wake of
the bursting of the real-estate bubble when millions of homeowners
were losing their homes in foreclosure proceedings.
The ruling comes as the Fed already has suffered setbacks. Some
lawmakers are trying to further restrain the central bank's
emergency lending powers and they are exploring other ways to hold
it more accountable to Congress, including by subjecting it to
audits by the Government Accountability Office, a congressional
watchdog agency.
Jon Hilsenrath contributed to this article.
Write to Leslie Scism at leslie.scism@wsj.com
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