Greenberg Loses Key AIG Ruling -- WSJ

By Leslie Scism Features Dow Jones Newswires

Appeals court voids judgment that U.S. erred in taking stake in return for bailout

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A federal appeals court on Tuesday vacated a lower court's ruling that the 2008 federal bailout of American International Group Inc. was unlawful, taking a moral victory away from former Chief Executive Maurice R. "Hank" Greenberg.

Mr. Greenberg, who had built AIG into a financial-services powerhouse, had initially sued the government in 2011. He argued that the Federal Reserve overstepped its legal authority when it demanded a 79.9% equity stake in AIG in exchange for an $85 billion emergency loan to avert bankruptcy. In Tuesday's ruling, an appellate panel ruled in favor of the U.S. government.

At the heart of the case was a dispute about the breadth of the Fed's powers and the limits on the central bank's discretion during the financial crisis. The matter isn't over yet. Mr. Greenberg's legal team said it would appeal to the Supreme Court.

Mr. Greenberg, now 92 years old, filed the litigation through Starr International Co., which was AIG's largest overall shareholder in 2008. Mr. Greenberg is building a new insurance and investments conglomerate, Starr Cos.

In 2015, following more than a month of trial, a U.S. Court of Federal Claims judge ruled that the government violated the law when it took the controlling stake in AIG. Judge Thomas C. Wheeler concluded that the government's acquisition of the stake constituted "an illegal exaction."

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Still, Judge Wheeler accepted the government's arguments that without the Fed's $85 billion loan to AIG, the company would have filed for bankruptcy and shareholders likely would have been left with nothing. So he didn't award Mr. Greenberg and the many shareholders represented by Starr any of the $40 billion in damages they had sought.

In the new appellate ruling, the panel concluded that Starr International and the other AIG shareholders lacked standing to pursue the claims directly. The appellate court said "those claims belong exclusively to AIG," which had declined to participate in the lawsuit.

The appellate court said it was vacating "the Claims Court's judgment that the Government committed an illegal exaction and remand with instructions to dismiss the equity-acquisition claims that seek direct relief."

In a statement Tuesday afternoon, Mr. Greenberg's lead lawyer, David Boies, said: "The trial court found that the Government had improperly and unconstitutionally confiscated 80% of the AIG shareholders' equity. ... The court of appeals, without disagreeing with that finding, holds that the shareholders have no remedy.... We respectfully disagree and will ask the Supreme Court for review."

AIG, which potentially could have been on the hook to reimburse the government for damages, declined to comment.

Judge Wheeler's opinion had cast a shadow over the government's role in any future financial crisis, lawyers and other legal observers said at the time. That is because of its potential to make officials think twice in dire circumstances about taking bold action that isn't specifically detailed in their regulations.

The bench trial featured a parade of high-profile witnesses, including former Fed Chairman Ben Bernanke and former Federal Reserve Bank of New York President and Treasury Secretary Timothy Geithner.

Early in the case, many legal observers anticipated an easy win for the government. But in the trial, Mr. Boies used internal emails, memos and other documents to show uncertainty and debate within the Fed and New York Fed as to whether the government was on solid legal footing in acquiring the AIG equity stake.

AIG fully repaid the bailout, which ultimately swelled to nearly $185 billion, by late 2012.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

May 10, 2017 02:48 ET (06:48 GMT)