By Leslie Scism
A federal judge ruled that the U.S. government exceeded its
authority in its 2008 rescue of American International Group Inc.,
handing former AIG Chief Maurice R. "Hank" Greenberg a moral
victory in a case that once seemed unwinnable.
But the judge didn't award Mr. Greenberg and other members of a
class of about 287,000 shareholders any money, accepting the
government's arguments that the company's alternative to the
government bailout had been a bankruptcy filing that likely would
have left shareholders with nothing.
"The government's unduly harsh treatment of AIG in comparison to
other institutions seemingly was misguided and had no legitimate
purpose," Judge Thomas C. Wheeler of the U.S. Court of Federal
Claims wrote in his 75-page opinion.
At the center of the case was a dispute about the breadth of the
Federal Reserve's powers, and the limits on the central bank's
discretion, during the financial crisis.
The government demanded a 79.9% equity stake in the
then-teetering financial-services conglomerate in exchange for
providing an $85 billion loan at an initial 14.5% interest rate. At
the time, U.S. officials said the government acted because AIG was
so entangled with other firms around the world that they feared its
collapse would be catastrophic to the global financial system.
To award damages "would be to force the government to pay on a
propped-up stock price that it helped create with an $85 billion
loan," Judge Wheeler wrote.
Mr. Greenberg's lawyers and a spokeswoman for the Justice
Department didn't have immediate comment, while AIG declined to
comment on the ruling.
The Federal Reserve said in a statement 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,"
adding that the deal's terms "were appropriately tough to protect
taxpayers from the risks the rescue loan presented when it was
made."
Mr. Greenberg's class-action lawsuit maintained that a
decades-old law governing such emergency loans by the Fed
restricted the nation's central bank from taking the equity
stake.
AIG by the end of 2012 had fully repaid the huge bailout--which
reached nearly $185 billion at its peak--by divesting many units
and returning to profitability in its core property-casualty and
life-insurance businesses. The government earned a return of about
$20 billion.
But the dispute over the bailout might be far from over, as
either side could appeal the ruling.
Judge Wheeler's opinion could cast a shadow over the
government's role in any future financial crisis. Public-policy,
corporate-governance and legal scholars say it could have
ramifications for how government officials interpret the voluminous
Dodd-Frank law, which was enacted in 2010 to provide for the
orderly winding down of systemically important firms. Most notably,
it could make them skittish of taking bold actions that aren't
specifically detailed under the law.
An adverse ruling "could limit discretion to act fast," Ernest
Patrikis, a partner in the New York office of White & Case and
a former New York Fed counsel, said in an interview before the
judge's opinion was released. "And with banking institutions,
things can happen fast."
The Fed's own powers and discretion already have been curtailed
by Congress. The Dodd-Frank law restricted it from bailing out any
individual institution, as it did in the case of AIG. In that
respect, the Wheeler ruling is another swipe at the Fed's powers,
but from the judicial branch of government.
Judge Wheeler wrote in his ruling that "the weight of the
evidence demonstrates that the government treated AIG much more
harshly than other institutions in need of financial assistance,"
and "publicly singled out AIG as the poster child for causing the
September 2008 economic crisis," though the "evidence supports a
conclusion that AIG actually was less responsible for the crisis
than other major institutions." That was a central plank of Mr.
Greenberg's case.
Judge Wheeler said the evidence showed that the government
"carefully orchestrated its takeover of AIG in a way that would
avoid any shareholder vote, and maximize the benefits to the
government and to the taxpaying public, eventually resulting in a
profit of $22.7 billion to the U.S. Treasury."
Yet, he concluded, "There is nothing in the Federal Reserve Act
or in any other federal statute that would permit a Federal Reserve
Bank to take over a private corporation and run its business as if
the Government were the owner," he said.
The victory is sweet for Mr. Greenberg, who had built AIG into a
world-wide powerhouse over nearly four decades before departing in
2005. Starr International, a firm he heads, was AIG's largest
overall shareholder in 2008. Mr. Greenberg, who turned 90 years old
in early May, is building a new insurance conglomerate.
The ruling, which followed a 37-day bench trial last fall, is
another high-profile victory for Mr. Greenberg's lawyer, David
Boies. He is widely regarded as one of the best trial lawyers in
the country, in part after successfully litigating an antitrust
lawsuit for the U.S. government against Microsoft Corp. in the late
1990s.
The government's case was led by Justice Department lawyers.
They entered the trial with the wind at their back as a related
case filed by Mr. Boies on behalf of Mr. Greenberg had been
dismissed in 2012. In that case, in federal court in Manhattan, Mr.
Greenberg similarly accused the Federal Reserve Bank of New York of
statutory overreach, including by allegedly wrongly funneling money
from the AIG bailout to big banks and Wall Street firms in "covert
backdoor bailouts."
Some lawyers applauded Judge Wheeler's decision.
"It's a harsh lesson for the government to think twice about
interfering in the private sector and the free market," Anthony
Sabino, a professor of law at St. John's University, said Monday.
"Stay within the narrow confines of the written law, be it
statutory like this or Constitutional. Put it this way--bad day for
Hank Greenberg, good day for Americans, business and people."
AIG had sought government aid as capital markets froze and it
couldn't meet collateral calls. Its problems largely stemmed from
sales of an unregulated type of insurance to protect Wall Street
firms and banks from losses in holdings of mortgage bonds, and its
own investments in such bonds.
In justifying the equity stake, the government cited language in
a 1930s-era law that gave it the power to make a loan to a nonbank
subject to certain conditions that it said included taking a
stake.
The government had argued that taxpayers needed extra
compensation for risks in a loan to a company in an unfamiliar
industry, given the Fed historically regulated banks. The
government also said the package was modeled on an unsuccessful
11th-hour private-sector rescue effort, and the Fed didn't think it
should lend on more-generous terms. It also stressed that AIG's
board had approved the transaction.
The fact that the government had to boost the original aid
package by $100 billion to stabilize AIG attested to those risks,
it said.
Among those testifying on these points were former Fed Chairman
Benjamin Bernanke and former Federal Reserve Bank of New York
President and Treasury Secretary Timothy Geithner.
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.
The bailout has always been controversial--but largely because
the public saw it as too generous. Many taxpayers and politicians
complained about the lifeline to a big corporation in the wake of
the bursting of the real estate bubble when millions of homeowners
were losing their homes in foreclosure proceedings.
The ruling comes as the Fed already has suffered setbacks. Some
lawmakers are trying to further restrain the central bank's
emergency lending powers and they are exploring other ways to hold
it more accountable to Congress, including by subjecting it to
audits by the Government Accountability Office, a congressional
watchdog agency.
Under the Dodd-Frank law, any lending to a specific firm is to
be made through the Treasury Department. The law created the
Financial Stability Oversight Council to designate nonbanks as
"systemically important" and subject to oversight by the Fed.
--Jon Hilsenrath contributed to this article.
Write to Leslie Scism at leslie.scism@wsj.com
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