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Former American International Group Inc. leader Maurice R. Greenberg and other AIG shareholders vowed to continue their legal battle to win billions in damages stemming from the government's “unduly harsh” terms to bail out the insurer in 2008.
Legal experts say last week's ruling by U.S. Court of Federal Claims Judge Thomas Wheeler could limit the government's flexibility in any future bailouts.
In Starr International Co. Inc. v. United States, Judge Wheeler ruled that the government acted illegally in setting the conditions of AIG's initial $85 billion bailout seven years ago. But he also ruled that Mr. Greenberg and other shareholders were not entitled to any monetary damages.
Mr. Greenberg, who now heads Starr, and other shareholders argued that the “government's actions in acquiring control of AIG constituted a taking without just compensation and an illegal exaction” that violated the U.S. Constitution and caused their stock to lose value, Judge Wheeler wrote.
In return for $85 billion in financial assistance, the government took a nearly 80% stake in the insurance giant. Further assistance reached about $180 billion, but AIG repaid all of it as well as a profit to the government of nearly $23 billion, Judge Wheeler wrote.
“The weight of the evidence demonstrates that the government treated AIG much more harshly than other institutions in need of financial assistance,” Judge Wheeler wrote. “While the government publicly singled out AIG as the poster child for causing the September 2008 economic crisis, the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions.”
“The government's justification for taking control of AIG's ownership and running its business operations appears to have been entirely misplaced” and was “unduly harsh” compared with its treatment of other institutions.
But on the issue of shareholder damages, Judge Wheeler said the question wasn't whether the treatment was “inequitable or unfair, but whether the government's actions created a legal right of recovery for AIG's shareholders,” which he said was not the case.
“The Achilles' heel of Starr's case is that, if not for the government's intervention, AIG would have filed for bankruptcy,” he wrote. “In a bankruptcy proceeding, AIG's shareholders would most likely have lost 100% of their stock value.”
Starr, saying it disagrees with the judge's decision on damages, said it would appeal to the U.S. Court of Appeals for the Federal Circuit in Washington.
“The question at trial was whether the government could demand the shareholders'' equity as a condition of that loan,” Starr said in a statement. “The court properly held it could not.”
The shareholders will ask the appeals court “to confirm that the government is not entitled to keep billions dollars of citizens' money in its pocket,” Starr said in the statement.
The board of the Federal Reserve issued its own statement saying it “strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective.”
“The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made,” the Fed said.
Legal experts said the ruling could limit the government's ability to react should there be future crises like the one that left AIG near bankruptcy.
“I thought it was kind of Solomonic,” Lawrence Hamermesh, a professor at Widener University's Widener Law Delaware in Wilmington, said of the judge's ruling. “I applaud him for acknowledging the economic reality of the situation and not rewarding the stockholders, which under the circumstances would have been inappropriate.”
Still, “the limitation could make the Fed's range of movement more restricted if we have any future blowups like that. That might not be a good thing,” Mr. Hamermesh said.
“I think the implications are larger for the government and anybody who might be in the government's crosshairs in the future,” said Carl W. Tobias, a professor at the University of Richmond School of Law in Richmond, Virginia.
He noted that Judge Wheeler could find no statutory authority for the government's action, which could lessen its ability to address future problems.
Another legal expert said the circumstances surrounding the case are unique.
“You're looking at an economic disaster that really in our lifetime is unparalleled,” said Andrew Popper, a professor at American University's Washington College of Law in Washington. “Because of that, the court rightly preserved the ability of the government to function under circumstances where mistakes are going to be made. When things really hit the fan, I think what we want is a government that can act without undue fear of significant legal consequences.”
While calling the ruling “pretty smart,” Mr. Popper also described it as a “Pyrrhic victory” for the plaintiffs, who “won the battle but lost the war.”
“The opinion giveth with the large print and taketh away with the small,” Mr. Popper said.