American International Group’s (AIG) board will meet today to consider a request filed on September 21, 2012 by Starr International, former AIG chief Maurice “Hank” Greenberg’s company, that AIG either “take over” or let Starr pursue a lawsuit Starr filed against the government contesting the constitutionality of the U.S. rescue of AIG in September 2008, the insurer says in a statement.
Starr International's suit says AIG’s $182.3 billion rescue violates the Fifth Amendment, improper government use of private sector assets. The suit says the government’s receipt of a 79.9% equity stake in AIG constituted a wrongful “taking” without just compensation. It also says the government charged punitive 14% interest rates on rescue loans to the company.
Greenberg has also said the government rescue turned into a “backdoor bailout” of other Wall Street companies, including Goldman Sachs (GS), Deutsche Bank (DB) and Societe Generale. Starr International owns a large stake in AIG. The government earned $22.7 billion on its AIG bailout.
AIG says its board by law must consider Starr’s demand, and expects to do so by the end of January. Meaning, it has a fiduciary duty to do so, because if it didn’t, AIG could be exposed to further shareholder lawsuits, an AIG official tells FOX Business.
AIG assets were used to settle derivatives trades that brought the insurer to its knees in September 2008. The U.S. Treasury, along with the New York Federal Reserve, provided bailout help to AIG — and Greenberg now says government overseers ran ‘amok’ in the bailout. That includes giving too much of AIG’s assets away. AIG sold off an estimated $66 billion of its assets to repay the government.
The company has since come under withering criticism for considering joining the $25 billion lawsuit. Democrat members of Congress including Peter Welch and Michael Capuano are pressuring AIG’s board, warning it not to even think about joining the suit. The congressmen, in a letter to AIG, now say AIG has morphed into the poster company of chutzpah from the poster company of greed.
The New York Federal Reserve has told FOX Business the suit “has no merit,” noting that AIG “had an alternative choice — bankruptcy.”
But did it really have a choice? Didn’t the New York Fed, then run by now Treasury Secretary Tim Geithner, as well as the U.S. Treasury, maintain in the fall of 2008 that AIG was too big to fail, because if it did it would bring down companies around the world, and ruin 401(k) accounts? What of the settlement of those derivative trades, where lots of money went out the door to Wall Street firms like Goldman Sachs?
The Starr International lawsuit also brings up once again the public’s right to know what was done with government funds and AIG’s assets. It’s about the public’s right to know why suddenly Wall Street firms like Goldman were too big to fail. It’s about the government’s sudden decision in declaring there was systemic risk to the U.S. economy in not fully remunerating 100% Goldman, Merrill Lynch and foreign banks in their rotten derivatives deals.
And the lawsuit raises again the public’s right to know how Goldman and other Wall Street banks, as well as the French government, were pressuring the U.S. government into getting 100% of their money back, despite the fact that rotten subprime deals sat at the heart of these trades, caveat emptor Goldman, Societe Generale and Calyon.
After the government stepped in to rescue AIG, the New York Fed decided to force AIG to reimburse 100% of the $62.1 billion worth of trades made by counterparties with American International Group, including Goldman, Societe Generale and Merrill Lynch. No haircuts, no concessions for their part in these rotten deals. A report from the special inspector general for the TARP bailout program has questioned these moves (for more, click here.)
Didn't Goldman have enough collateral to protect itself in the event of an AIG default, as it often boasts of its huge cash reserves on hand? Another question worth asking: did Goldman low-ball the value of its securities underlying its AIG swaps in order to get more bailout money out of AIG?
Goldman had about $22.1 billion worth of swaps with AIG, $20 billion of which covered its CDOs. Goldman refused to take a haircut because it didn't want to book a loss on the deals, and got $14 billion back on its trades with AIG ($5.6 billion from Maiden Lane III, and $8.4 billion in collateral payments).
As previously reported by FOX Business, the government's definition of systemic risk took into account political fallout from not making whole foreign counterparties to AIG, government documents show. In particular, France finance ministers had a heated reaction to AIG not fully remunerating AIG’s counterparties, including its companies Societe Generale and Calyon, documents show.
So, the decision to force AIG to pay par for these trades, to fully compensate these counterparties 100%, did meet with a hailstorm of criticism. The sheepish defense: The triple-A rated U.S. government was backing AIG at the time, right after the giant insurer was downgraded by the three main ratings agencies, so AIG had the full backing of the government. This, despite the fact that at that time, the value of the subprime loans underlying AIG's swaps had already eroded to the point where one of AIG's counterparties, UBS, had already agreed to a 2% haircut in price.
What really happened, government documents show, is that the New York Fed was negotiating with Commission Bancaire, the French bank regulator whose legal mandate is to protect its own country’s depositors and act as a watchdog over the French financial system to ensure profitability and financial stability. French regulators argued the regulator faced criminal liability if they didn’t get reimbursed 100%.
Specifically, Commission Bancaire officials, overseeing the negotiations for Societe and Calyon, “forcefully asserted that, under French law, absent an AIG bankruptcy, the banks could not voluntarily agree to less than par value for the underlying securities in exchange for terminating the swap contracts,” says the TARP inspector general report on the AIG bailout. “Thus, the French banks claimed they were precluded by law from making concessions and could face potential criminal liability for failing to comply with their duties to shareholders.”
In France, it is a crime for a manager to use company assets in bad faith contrary to the interests of the company (essentially criminalizing a breach of fiduciary duties to shareholders).
So the New York Fed folded. It demanded the 100-cents-on-the-dollar deal for AIG's counterparties, and it demanded that their identities be kept strictly confidential.
The counterparties got $27.1 billion to wipe out the securities underlying the swaps, and they also got to keep $35 billion in taxpayer-paid-for collateral that AIG had posted in exchange for tearing up their swap contracts, according to the TARP inspector general.
Tens of billions of dollars were used to buy the securities underlying AIG's swaps from counterparties, including Goldman, Societe General and Merrill Lynch. Money was also used to help AIG meet a cash drain in the form of collateral calls from the big banks that had bought AIG's credit default swaps to insure their asset-backed securities.
New York Fed officials, including Geithner, have since said they felt there was little chance it could demand reductions from AIG's counterparties because it had no leverage over the negotiations — despite the haircut offer from UBS. The government could also not use the threat of an AIG bankruptcy because it had stepped in quickly to avoid an AIG default.
In a stunning twist, government officials argued they could not use its position as a top regulator of the U.S. counterparties as leverage in the negotiations because the government had become a creditor of AIG. Officials were “uncomfortable with violating the principle of sanctity of contract,” government documents show, despite the fact that the government would soon tear up all sorts of contracts, notably with creditors in the bailouts of the automakers. In other words, the Fed had no legal mechanism in place to selectively impose losses on counterparties.
Meaning, the powerful U.S. government negotiating team led by Geithner somehow couldn’t force a haircut after the fact on these trades.
Getting back to the Starr lawsuit, AIG says the suit “makes claims on a ‘derivative’ basis in the name of AIG and for its benefit,” so Starr is asking the AIG board to either join the suit or let Starr “pursue these claims on AIG’s behalf.”
AIG says in its statement it “has three options with respect to the derivative claims asserted on its behalf: (1) take over Starr’s claims and prosecute them on its own; (2) refuse the demand and prevent the claims from being prosecuted by Starr, a decision Starr is likely to challenge; or (3) allow Starr to prosecute the claims on AIG’s behalf.”
It notes that “the Court of Federal Claims has denied the Government’s motion to dismiss the suit, so that the case will go forward with or without AIG’s participation. If AIG does not allow the derivative claims to proceed on AIG’s behalf and Starr prevails or obtains a favorable settlement on its direct claims, then AIG will not receive any of the amounts recovered.”
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.