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Ex-AIG CEO Greenberg loses appeal over insurer’s bailout

Posted On: May. 9, 2017 9:53 AM CST

(Reuters) - A federal appeals court threw out a ruling that the U.S. government illegally bailed out insurer American International Group Inc. during the 2008 financial crisis, in a defeat for former chief executive officer Maurice R. Greenberg.

The Federal Circuit Court of Appeals in Washington said on Tuesday that Mr. Greenberg’s Starr International Co. lacked standing to challenge the bailout because that right belonged to AIG, which chose not to sue.

Mr. Greenberg’s lawsuit is one of the main challenges to federal authority to bail out companies, including those deemed “too big to fail.” AIG was rescued in September 2008 after running up huge losses from insurance on shoddy mortgage securities.

Starr accused the government of harming existing AIG shareholders through an unconstitutional “exaction,” by taking a 79.9% stake in the stricken insurer in exchange for an $85 billion loan from the Federal Reserve Bank of New York.

“While punitive measures against a corporation may ultimately be borne by its shareholders, a finding that those measures targeted shareholders directly is a wholly different matter,” Chief Judge Sharon Prost wrote for a three-judge panel. “The alleged injuries to Starr are merely incidental to injuries to AIG.”

David Boies, Starr's lawyer, said "we respectfully disagree" with the decision and they would appeal to the U.S. Supreme Court. The Department of Justice had no immediate comment.

Starr had been New York-based AIG’s largest shareholder, with a 12% stake, and sought more than $40 billion of damages for itself and other shareholders.

In June 2015, Court of Claims Judge Thomas Wheeler agreed with Starr that the New York Fed overstepped its authority in arranging the $85 billion loan, but he refused to award damages because AIG would have gone bankrupt without it.

The judge also rejected damages for a subsequent reverse stock split.

Judge Wheeler ruled after a trial where former Fed chairman Ben Bernanke and former Treasury secretaries Henry "Hank" Paulson and Tim Geithner testified.

Greenberg appealed Wheeler’s damages ruling. The government appealed his standing and exaction rulings.

Dennis Kelleher, CEO of nonprofit Better Markets, said AIG would not exist without the bailout, and Tuesday’s decision “prevents taxpayers from being victimized yet again.”

AIG’s bailout eventually totaled $182.3 billion but was repaid, leaving taxpayers with nearly $23 billion of profit.

Mr. Greenberg, 92, led AIG for nearly four decades before being ousted in March 2005.

The case is Starr International Co v. U.S., Federal Circuit Court of Appeals.