Maurice “Hank” Greenberg, the former CEO of American International Group, won the case against the U.S. government in connection with the $85 billion bailout during the financial crisis, but no damages were award to him.
In November 2011, Greenberg through his firm, Starr International filed a lawsuit challenging the U.S. government’s bailout and takeover of AIG. Starr International was one of the largest shareholders of AIG common stock prior to the bailout.
In its lawsuit, Starr International argued that the U.S. government violated the Fifth Amendment of the Constitution after taking control of AIG without giving shareholders just compensation. Starr demanded $40 billion damages.
The technology industry has long been on the receiving end of billions of dollars in capital, but what's next for the industry? Greylock General Partner Sarah Guo joined Wall Street Journal reporter Zoe Thomas to talk about the future of tech investment. Q3 2021 hedge fund letters, conferences and more Seed Funding Thomas asked Guo Read More
Court says government’s treatment of AIG had no legitimate purpose
In his opinion and ruling, United States Court of Federal Claims Judge Thomas Wheeler noted that the government treated AIG “much more harshly than other institutions in need of financial assistance.”
According to him, the government’s reasoning for taking control of the ownership of AIG “appeared to be entirely misplaced.”
Judge Wheeler said based on the evidence submitted to the court, the “government carefully orchestrated its takeover of AIG in a way that would avoid any shareholder vote, and maximize the benefits of the government and to the taxpaying public.”
The government’s action resulted in a profit of $22.7 billion to the U.S. Treasury. He also noted that AIG’s benefit was avoiding bankruptcy and “to live to fight another day.”
“The government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose,” said Judge Wheeler. However, he emphasized that the question in the case was not whether this treatment was inequitable or unfair, but whether the government’s actions created a legal right of recovery for AIG’s shareholders. Judge Wheeler’s answer to the question was no.
In his opinion, Judge Wheeler ruled in favor of Starr International’s illegal exaction claim. He explained that the ruling meant that firm’s Fifth Amendment taking claim necessarily must fail. According to him, if the government’s takeover of AIG was unauthorized, there can be no Fifth Amendment taking claim.
Judge Wheeler denied the split stock claim of Starr International, citing the reason that the primary motivation behind the action ensure that AIG would not be delisted from the New York Stock Exchange.
Court denies damages for Starr
In his ruling, Judge Wheeler emphasized a few relevant data points concerning the issue of damages. According to him, the government made $22.7 billion profits from the shares of stock that it took illegally from AIG. The stocks were sold on the open market.
Judge Wheeler said, one could assert that the government’s profit fro the authorized deal should be returned to AIG shareholders—the rightful owners. However, the judge noted that Starr’s claim for shareholder loss was premised upon AIG’s stock price on September 28, 2008 at $3.31 per share. According to Wheeler, the stock price was “irrefutably influenced” by the $85 billion bailout by the government.”
Judge Wheeler said, “To award damages on this basis would be to force the government to pay on a propped-up stock price that it helped create with an $85 billion loan.” He noted that the Achilles’ heel of Starr International’s case was the AIG would have filed for bankruptcy if the government did not provide the bailout.
According to the judge, AIG shareholders most likely lost 100% of their stock value in a bankruptcy proceeding.
“The end point for this case is that, however harshly or improperly the government acted in nationalizing AIG, it saved AIG from bankruptcy. Therefore, application of the economic loss doctrine results in damages to the shareholders of zero,” said Judge Wheeler. Stay tuned for the implications for Fannie Mae and Freddie Mac.
The Fed released the following statement:
The Federal Reserve strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective. The court’s decision today in Starr International Company, Inc. v. the United States recognizes that AIG’s shareholders are not entitled to compensation for that decision, and that the Federal Reserve’s extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG’s collapse during the financial crisis. The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made.
Analysts from RBC capital state:
The ruling is particularly relevant since the implication was that AIG would have been responsible for any financial damages that were awarded to Starr. While we aren’t surprised by the outcome and we think investors assigned a fairly low probability that Starr would be awarded significant monetary damages, this is still a positive in the sense that it removes a slight overhang and distraction to the company.
Analysts from Barclays opine:
Bottom line, this is a positive event for AIG because it removes a negative overhang, in our view. The judge’s decision in the Starr (formerly AIG’s largest shareholder) litigation against the US Government is in Starr’s favor but no damages were awarded. Still, we think it could ultimately take years to fully resolve this case after appeals are exhausted. We have viewed this as headline risk without much earnings risk for AIG. This is because even if Starr won the case, it was unclear, in our view, if the judge would enforce the indemnification agreement for AIG to reimburse the US government’s payouts for litigation tied to the emergency loans during the 2008 global financial crisis. Since no damages were awarded to Starr, the risk of AIG needing to reimburse the US government appears to no longer be a factor.
See full court ruling below.