The U.S. government mistreated insurance giant American International Group in its bailout during the financial crisis, a court ruled Monday, but its investors will receive no compensation.
Although the company received “unduly harsh treatment,” U.S. Court of Claims Judge Thomas Wheeler wrote in a decision released Monday, it would have gone bankrupt without the government’s $85 billion in assistance. Its owners would have seen their stake in the company rendered worthless and therefore are not owed damages.
The lawsuit against the government was brought by Starr International, an investor in AIG, and its head Maurice Greenberg. Greenberg previously was the CEO of AIG, being ousted in 2005, well before its 2008 collapse and bailout that followed its derivatives bets with Wall Street banks.
The case was high-profile, centering on the question of whether the company received bailout terms unfavorable to those extended by regulators to banks. It involved testimony from the top regulators in office during the financial crisis, including Federal Reserve Chairman Ben Bernanke, Treasury Secretary Hank Paulson and Federal Reserve Bank of New York President and Treasury Secretary Timothy Geithner.
Greenberg sought damages upward of $40 billion from the government.
“In the end, the Achilles’ heel of Starr’s case is that, if not for the government’s intervention, AIG would have filed for bankruptcy,” Wheeler wrote in the decision released Monday. “In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value.”
Nevertheless, Wheeler’s decision outlines ways in which the Federal Reserve exceeded its authority in some of the terms of the AIG bailout and demanded harsher terms for the company than it did for banks in separate bailouts.
“The weight of the evidence demonstrates that the Government treated AIG much more harshly than other institutions in need of financial assistance,” Wheeler wrote.
Those terms included a much higher interest rate charged to AIG than to other banks, an 80 percent stake in the company, and an overhaul of AIG’s management.
While the Fed had authority to set interest rates on emergency loans, Wheeler determined, it did not have the power to demand an equity stake in the company or to change its management.
The case raise the “troubling” possibility that the Fed may impose unfair requirements on institutions it bails out without them later being able to sue for damages, the judge noted.
Congress since further constrained the Fed’s bailout powers in the 2010 Dodd-Frank financial reform law.
The Fed defended its AIG bailout Monday, releasing a statement following the decision that it “strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective.”
The Fed said that its intervention protected millions of AIG policyholders, as well as businesses and workers who would have been harmed by AIG’s collapse, and stated that the “terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made.”
