Insurance titan American International Group Inc (NYSE:AIG)’s lawsuit against the U.S. government is expected to begin on Monday, October 6th. The suit claims AIG was singled out by regulatory authorities for harsh treatment during the 2008 financial crisis. Three government leaders who had central roles in planning and approving the 2008 financial bailouts — Henry Paulson, Timothy Geithner and Ben Bernanke — are expected to testify in the AIG trial later this week.
Details on the AIG trial
The Federal Reserve’s 2008 rescue plan prevented AIG from collapsing, saved the firm’s many financial partners from major losses and kept the financial system functional. Despite these facts, AIG’s former CEO, Maurice Greenberg, is claiming that the government’s bailout was unfair and illegal, and is asking for $40 billion in damages to compensate shareholders.
Of note, Greenberg negotiated a deal back in 2010 to sell $278 million in AIG shares that his holding company owned. Analysts and observers have pointed out that profitable share sale without almost certainly not have been possible without the government’s intervention.
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The AIG lawsuit is claiming the bailout violated the Fifth Amendment by taking control of AIG without “just compensation.” Greenberg argues the $180 billion-plus in taxpayer-backed bailout loans were not fair compared to the bailout terms other companies such as Citigroup received.
Most legal experts call the lawsuit a long shot, but note there are substantive issues so it is not an open and shut case.
Bernanke, Paulson and Geithner to testify in AIG trial
Some analysts have also noted that this lawsuit may well have a personal component. It forces Bernanke, the former Federal Reserve chairman, and former Treasury secretaries Paulson and Geithner, defend their actions during the most worrisome moments for the U.S. financial system since the late 1920s.
All three men have well-honed arguments defending the AIG bailout. Geithner memoirs were published a few months ago, and Paulson appeared in a Netflix documentary film about his experiences during the crisis in 2013. Bernanke is reportedly writing a book to be published in 2015.
The rationale for the AIG bailout boiled down to the fact that no private firm would loan money to AIG at the time. The company “faced severe liquidity pressures that threatened to force it imminently into bankruptcy,” Bernanke testified to the House Financial Services Committee back in 2009.
Bernanake went on to say that a collapse of AIG “would have posed unacceptable risks for the global financial system and for our economy.” He also warned the viability of state and local governments, banks and 401(k) plans was at risk.