American International Group Inc.’s (AIG) former CEO, Maurice "Hank" Greenberg has questioned the Federal Reserve about the legitimacy of the $182.3 billion bailout loan granted, along with the 92% ownership in the company, which was at the brink of bankruptcy in Sep 2008.
This unique class-action trial is initiated by Starr International Co., the investment and charitable firm run by Greenberg. Notably, Greenberg was AIG’s CEO for 40 years until 2005. He was succeeded by Robert Benmosche, under whose supervision AIG recovered from the financial turmoil of 2008. He retired on Sep 1 and was succeeded by Peter Hancock.
The primary issue revolves around the government’s inadequate initiatives taken at the time of bailout and illegal confiscation of shareholders’ property. According to the plaintiff, the government had no right to attain ownership in the company, done in only one of the 200 companies bailed out then. The Fed would never have let AIG go bankrupt even if the bailout loan was not granted to the company. Furthermore, the Fed used its authority to initiate reverse stock split in 2009, which further diluted shareholders’ stake in the company.
However, the government refutes the allegations by arguing that AIG had willingly agreed upon conceding the major equity stake, as the other option would have been bankruptcy. The whole process of bailout was legal, according to the Fed.
If the government is proved guilty of misconduct, it could raise AIG’s liability to pay for the indemnities as the company is bound to recompense the US government for any penalties due to the lawsuits related to bailout. The bailout agreement between AIG and the Fed specifies that “AIG indemnified the Federal Reserve Bank of New York for any payouts from litigation tied to the emergency loans.”
Hence, an adverse outcome of the lawsuit could raise financial concerns for AIG as the damages are estimated to be as much as $40 billion, as shares worth $35 billion were taken over by the government for only about $0.5 million. The entire penalty amount would be shared by the AIG shareholders of record in 2008 and 2009. Hence, the litigation may not be favorable for the company. The trial that began on Sep 29 will expectedly continue for the next six weeks in the US Court of Federal Claims in Washington DC. Meanwhile, former Federal Reserve Chairman Ben Bernanke and ex-Treasury Secretary Timothy Geithner are expected to be called upon to testify in the case.
While the losing side can even move the Supreme Court in the US, a final payment stage in the trial is not expected anytime in the near future.
Notably, AIG repaid the federal loan completely and stabilized operations ahead of schedule in 2012. Moreover, the company also proved to be a lucrative investment for the US government, which received additional income worth about $23 billion, apart from interest, fees and other gains. Despite the payouts, AIG is designated as a non-bank systemically important financial institution (SIFI) since 2013, along with peers like Prudential Financial Inc. (PRU) and GE Capital of General Electric Company (GE), posing additional government interference. Another close rival, MetLife Inc. (MET), is also expected to be tagged as a SIFI soon.
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