AIG Is NOT On The Hook If Greenberg Wins v Government

AIG Is NOT On The Hook If Greenberg Wins v Government by Todd Sullivan, ValuePlays

As usual with something like this so much has been reported yet so little work has actually been done on it… So the general thesis out there is:

  1. Greenberg is suing the US for its onerous bailout terms.
  2. He is greedy for doing it
  3. Inexplicably, it seems as though he is winning.
  4. People are shocked by this
  5. It seems that everyone has their “bailout history” based on the movie “Too Big to Fail” in which the gov’t was assumedly  “shocked” in the fall 2008 with AIG’s issues
  6. American International Group Inc (NYSE:AIG) apparently indemnified the gov’t for its action
  7. AIG’s board should held responsible, not the US
  8. Should Greenberg win, AIG might be on the hook for the monetary damages

Sound about right? Now let’s take each one by one and look at them

  1. Yes he is
  2. He may be, who cares, I sure as hell don’t. If he wants to spends millions of his own $$ pursuing this, let him..
  3. Yes, it appears he is. 99% if people disregarded the suit because they felt he was greedy so they did not bother to look into its merits
  4. Yes, they are…because they actually know so little about the lawsuit (it’s linked below)
  5. This is FALSE, the fact is American International Group Inc (NYSE:AIG) was actively engaged with the NYSDFS, and the NY Fed for almost all of 2008 trying to shore up operations and repeatedly asked the NY Fed for assistance through the spring, summer and into the fall of 2008 similar to what was given every other financial institution that requested it….they were repeatedly denied
  6. Yes they did….up to a point…
  7. As one can see below, American International Group Inc (NYSE:AIG)’s board was not a party to the original term sheet that was executed and the NY Fed effectively took control of AIG once that term sheet was signed. Therefore, the board cannot be held accountable for an action they did not take
  8. This is also false and I will touch on it below

For those who want to really know what went down during the American International Group Inc (NYSE:AIG) bailout please read the link below. It will also explain to you why it appears Starr is winning. The government’s actions in regards to AIG can only be described as “depraved indifference” and one could argue effectively aided in its near collapse (Paulson and Geithner discouraged potential suitors). Please read the document…I promise once you start you will not be able to stop….

From the 8-22-14 finding of fact filed in Starr v US:(click for link)

12.1 The AIG Board was never presented with the version of the term sheet Defendant claims was executed. 12.1.1 Willumstad was the only member of the AIG Board of Directors that saw a term sheet on September 16, 2008. 12.1.2.The term sheet Willumstad saw on September 16 has not been produced in this litigation.….

Later:

17.0 ON SEPTEMBER 21, 2008, DEFENDANT TOLD AIG’S OFFICERS AND DIRECTORS THAT IF THEY DID NOT APPROVE THE CREDIT AGREEMENT AS PROPOSED BY DEFENDANT, INCLUDING WITH THE CHANGES DEFENDANT HAD UNILATERALLY MADE, DEFENDANT WOULD CALL ITS SECURED DEMAND NOTES AND AIG WOULD BE REQUIRED TO FILE FOR BANKRUPTCY.. 17.2 At the September 21, 2008 meeting, Liddy told the Board: “the Corporation will be required by the Bank and the Treasury Department to finalize the documentation and sign the Credit Agreement before the opening of the market the following day” (JX 103 at 2)… 17.4 Defendant threatened to cut off funding for AIG by calling its secured demand notes if the AIG Board did not approve the Credit Agreement as drafted by Defendant… 18.0 FACED WITH DEFENDANT’S NON-NEGOTIABLE DEMANDS, ITS THREAT TO CALL ITS SECURED DEMAND NOTES, AND THE OPINION OF AIG COUNSEL THAT A DECISION TO FILE FOR BANKRUPTCY WOULD NO LONGER BE PROTECTED BY THE BUSINESS JUDGMENT RULE, AIG HAD NO CHOICE BUT TO ACCEPT DEFENDANT’S LOAN ON DEFENDANT’S TERMS. 18.1 The AIG Board of Directors’ outside counsel, Rodgin Cohen of Sullivan & Cromwell LLP, advised the Board during the September 21, 2008 meeting that “bankruptcy was a considerably worse alternative now than it was previously,” (JX 103 at 6), and that “if the Board accepted the Bank transaction, the Board would have properly exercised its business judgment,” but that “if the Board chose to file for bankruptcy, he was not prepared to render a similar opinion to the Board” (JX 103 at 5-6). (See also Bollenbach (Dec. 4, 2013) Dep. 165:6-25.) 18.1. By contrast, during the September 16, 2008 AIG Board meeting, Cohen had advised the Board that it “could accept either option” of accepting the proposed credit facility or filing for bankruptcy “if the Board believed in good faith that that option was in the best interests of the constituencies to whom the Board now owes its duties” (JX 74 at 5).

In short, the BOD had no other option on 9-22 when presented with this altered agreement. Willumstad signed the term sheet on the 16th and was removed by Treasury/NY Fed the following day. The very next time the BOD took a vote, they did so with a gun to their head.

Now, here is the “indemnification” section of the actual agreement signed 9-22-2008:

Section 8.05. Expenses; Indemnity. (a) The Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lender in connection with its due diligence and the financial analysis of the Borrower, the preparation and administration of this Agreement and the other Loan Documents, any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made hereunder, including in each case the fees, charges and disbursements of counsel, accountants, financial advisers and other experts engaged by the Lender (including the allocated fees of in-house counsel). (b) The Borrower agrees to indemnify the Lender and each of its Representatives (each such Person being called an “Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto (and regardless of whether such matter is initiated by a third party or by the Borrower, any other Loan Party or any of their respective Affiliates) or (iv) any actual or alleged presence or Release of Hazardous Materials on any property currently or formerly owned, leased, operated or used by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted primarily from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent permitted by applicable law, the Borrower shall not assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.

So, now follow this. Starr v Treasury  is a 5th Amendment takings claim.  Starr asserts (among other things):

12. In violation of these fundamental principles, and without valid legal authority, the Government took the property and rights of AIG’s common shareholders without just compensation, in a discriminatory manner, and by means of an intentional and knowing violation of the established requirements of law designed to protect the rights of those shareholders. 13. The Government’s actions were ostensibly designed to protect the United States economy and rescue the country’s financial system. Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed by the Government to achieve that goal. Even in exigent times, and perhaps most especially then, the Government may not ignore basic protections afforded under the United States Constitution or disregard established legal rights. Yet beginning in 2008 and continuing through at least January 2011, the Government ignored the Constitution and singled out American International Group Inc (NYSE:AIG) Common Stock shareholders for discriminatory and unlawful treatment in clear violation of the Takings, Due Process, and Equal Protection Clauses of the United States Constitution.

  1. This lawsuit seeks redress for these Constitutional violations.

In its essence, Starr is stating that the conduct of the US WAS illegal and willful…….. sooooooo, if Starr is victorious, then the indemnification clause is void as it will have been determined that the US’s actions were in fact “willful misconduct”. Now, if we take the opinion Greenberg will still lose, then the entire argument is moot as there are no damages to be paid.

AIG Is NOT On The Hook If Greenberg Wins v Government



About the Author

valueplays
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.