Shareholder’s $40B Class Action Securities Lawsuit Over AIG Bailout Goes to Trial

The trial over whether the U.S. government unlawfully seized a majority stake in American International Group Inc. (AIG) during the bailout has started. The securities case was brought by Starr International Co., which is the charitable and investment firm helmed by former AIG CEO Maurice R. Greenberg. Starr was the insurer’s biggest shareholder when the company became a ward of the government at the height of the economic crisis.

The lawsuit, now a class action case, claims that government violated the rights of shareholders to receive fair compensation under the U.S. Constitution. Some 300,000 AIG stockholders from 2008 and 2009, including AIG employees, large mutual fund companies, and retirees, would be entitled to any award issued to Starr. Greenberg wants about $40 billion in compensation over the government takeover and the high interest rates the U.S. charged for the loans. AIG is not one of the plaintiffs.

The insurance giant got into financial trouble in the wake of the financial crisis mostly because of sales of an insurance of the unregulated variety to banks and others, which was intended to mitigate debt exposure risks. The government loaned AIG $85 billion in 2008 to keep it from falling into bankruptcy. In opening statements, Kenneth Dintzer, a lawyer for the U.S., noted that the insurance company’ shareholders hugely benefitted from the efforts made to stabilize AIG. The government maintains that it had to bailout AIG to keep the world economy from collapsing.

Now, AIG shareholders hold an approximately 20% stake in the insurance giant. If AIG had filed for bankruptcy, shareholders might have gotten nothing. The government’s assistance ultimately reached $184.6 million, which AIG has paid back. The insurer’s net income from the latest quarter was $3 billion.

This week, during the first day of trial, Greenberg’s lawyer David Boies contended that the Federal Reserve exceeded its authority when it issued the rescue loans and took controlling ownership of the insurer. He noted that the loan terms issued to AIG were stricter than the terms given to banks.

For example, Federal Reserve Bank of New York not only demanded equity from AIG but also charged 14% interest to borrow. This is a lot more than what big banks paid. (Citigroup (C) and Morgan Stanley (MS) were given bailout loans with rates of under 4% without having to give up equity.)

Some of these financial firms were later accused of fraudulent misrepresentation in their mortgage-securities business and have since paid huge settlements.

At issue is whether it was legal for the government to take $35 billion in AIG shares and pay just $500,000. Under the U.S. Constitutions’ Fifth Amendment, private property cannot be taken for public use without fair compensation. Also up for argument is whether the government could condition its initial $85 billion loan on an equity stake in the insurance company. Starr’s legal team claims that under the Federal Reserve Act the government could not insist on a company stake as an exchange for the loan.

AIG Bailout by U.S. Was ‘Extortion,’ Greenberg Lawyer Says, Bloomberg, September 29, 2014

Trial in $40 Billion Lawsuit Against AIG Bailout Begins, The Wall Street Journal, September 29, 2014

More Blog Posts:
Stakeholders With $55M Securities Fraud Case Against Government Over AIG Bailout Get Class Action Certification, Institutional Investor Securities Blog, March 19, 2013

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012