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Greenberg case over AIG takeover questions government reach

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Greenberg case over AIG takeover questions government reach

The legal battle pitting former American International Group Inc. Chairman and CEO Maurice R. Greenberg and other AIG stockholders against the government over the terms of AIG's 2008 bailout may — or may not — have lasting significance.

Legal experts are divided on what effect a Greenberg victory would have given the unique circumstances. But some say Mr. Greenberg's argument that he suffered uncompensated damages as a result of the bailout could hamper future government bailouts if he is successful.

The case, in which closing arguments were held last week in the U.S. Court of Federal Claims in Washington, involves only the particular stockholders. But it also is the first case asking whether the government acted “abusively,” as alleged by the plaintiffs, during the financial crisis when it demanded a nearly 80% stake in AIG in return for bailout funds.

For the shareholders, the answer is clear: The plaintiffs in Starr International Co. et al. v. United States et al. allege the government's actions cost them billions of dollars in lost equity, and they want to be repaid. The government overreached its authority and diluted the value of shareholders' stock in the process, they argue.

In closing arguments before Judge Thomas Wheeler last week, attorney David Boies said the section of the Federal Reserve Act under which AIG received the first $85 billion of what ultimately amounted to more than $180 billion in federal assistance — all of which has been repaid — never in its 75 years required equity as compensation in return for financial guarantees, except for AIG.

Mr. Boies, who is chairman of law firm Boies, Schiller & Flexner L.L.P. in Armonk, New York, said the government made a “political decision” to single out AIG as a “scapegoat” in the financial crisis.

The government countered that the plaintiffs suffered no harm. When AIG directors agreed to accept the $85 million loan in return for allowing the government to take a 79.9% stake in the AIG, all involved agreed the loan was preferable to bankruptcy, Justice Department attorney Kenneth Dintzer argued. If the Federal Reserve “had wanted to harm AIG in some way, all it had to do was nothing,” he said.

Mr. Dintzer said that without the loan, the value of AIG stock was “zero.” He added that “there never was an entitlement to a loan.”

“No money moved from Starr's pockets to the government,” he also said.

Mr. Dintzer held that the AIG board voluntarily agreed to the terms of the assistance, which Mr. Boies argued was agreed to under duress.

Judge Wheeler expressed some skepticism about some of the government's argument.

“There's no question in anybody's mind” that there was a change in ownership of AIG when the government assumed control of nearly 80% of the company stock, he said.

At the conclusion of the closing remarks, Judge Wheeler said, “Not surprisingly, just about everything in this case is still in dispute.”

The ultimate effect of the case also is in dispute.

“Obviously, there is a lot at stake in this case, as much reputationally as financially,” said Donald Langevoort, a professor at the Georgetown Law Center in Washington.

“The question of what, if any, damages occurred is extraordinarily complex. With all the lingering doubts about whether the government acted abusively during the financial crisis, we've never had a court answer that question. ... I think this will be very memorable no matter how it comes out.”

However, Wake Forest University School of Law Professor Ralph Peeples said it is hard for him to see the significance of whatever decision is made because the facts are “unique.”

“First, you have the bailout and crash. Then you have to rescue a company that writes a lot of insurance and also has a dicey offshore operation,” he said, referring to AIG Financial Products, the London unit that incurred big losses in 2008 from credit default swaps trades that almost brought AIG down.

“If there's ever a question again on overreaching by the government, then it might have some relevance, but it's really hard to see how the case by itself has a lot of precedential value,” he said.

Mr. Peeples said even if the plaintiffs win, “the next phase is, "OK, then what are the damages?' If AIG did better after the bailout, then it's a little bit hard to see where the damages are.”

“A critical component of Starr's argument is the takeover was not an authorized act by the Fed,” said Lawrence Hamermesh, professor at Widener University Law School in Wilmington, Delaware. “If that's the basis on which Starr would win, obviously it's not going to have a lot of resounding implications for corporate life generally.”

“Given the alternative between wiping out equity entirely and doing what was done, it's sort of hard to find extortion or harm in that situation,” he said.