Biting the Hand that Feeds: AIG’s Potential Lawsuit against the Fed

By Stevie Duffin Updated on 1/8/2013

By Daniel Duffield

It seems that the audacity of the American International Group Inc (AIG) knows no bounds. AIG, the organization that received a total of $182 billion from the federal government as bailout to save the company from impending bankruptcy in 2008, has now decided that this small sum was unfairly given, and in a shocking announcement on Tuesday, AIG confirmed that it has been considering joining a lawsuit against the U.S. government which alleges that the terms of the bailout were unfair, thereby asserting that they are deserving of additional compensation.

The public disclosure of this news prompted a quick reaction from one of the key players in the bailout, as the Federal Reserve Bank of New York responded that the insure could just as easily have left the company alone to sink into bankruptcy and thus entirely wipe out its shareholders.

Even more audacious, this outrageous move comes at a time when AIG only recently aired high-profile television ads which claimed gratitude for the bailout under the now ironic slogan, “Thank you, America.”

According to Mark Williams, a former bank examiner for the Federal Reserve who now teaches in the finance department for Boston University, “If AIG enters this suit it would be the equivalent of a patient suing their doctor for saving their life.”

Williams added that AIG needs only to consider their own reckless practices which originally necessitated the bailout in the first place, prior to the government giving them a second chance.

AIG provided confirmation on Tuesday that its board would meet on Wednesday to deliberate the possibility of joining a lawsuit against the government by former AIG chief executive, Maurice “Hank” Greenberg.

Greenberg, whose company Starr International had previously owned 12% of AIG before the bailout, alleges that the New York Fed performed an unjust bailout at the expense of shareholders, even throwing out the term “loan shark” to describe the government with respect to his take on the interest rates of the government’s bailout loan. While the government charged a rate of 14.5 percent on the initial loan, AIG could have simply gone bankrupt rather than accept the terms, putting shareholders in an even worse position.

In November, a federal judge in Manhattan had previously dismissed Greenberg’s lawsuit, although it is currently being appealed. In addition, a separate suit utilizing a different legal strategy is still pending in the U.S. Court of Federal Claims.

In the ruling on November 19^th, Judge Paul Engemayer stated that AIG would hold a discussion regarding the joining of this lawsuit on January 9 to make a decision by the end of the month.

While an AIG spokesman confirmed that such a meeting would take place, he declined to comment any further. This meeting was first publically disclosed in a report by the New York Times.

The New York Fed dismissed these allegations on Tuesday, claiming that there was nothing to support any such claims that the government’s actions unfairly damaged AIG.

A representative of the bank stated on Tuesday that AIG’s board of directors could have undergone bankruptcy as an alternative to the offered bailout, although this would have left AIG shareholders in an even worse place, with worthless stock.

The U.S. Treasury declined to give a comment in response to this suit. It finalized the sale of all AIG stock in mid-December, thus ending the bailout with a positive return of $22.7 billion through the transaction.

AIG shares dropped 1.6% to $35.35 during morning trading. After declining to half of its value in 2011, the stock rose more than 52% during 2012, tripling the profits of the broader S&P insurance index.

And let us not forget that the initial bailout was followed by AIG granting its executives, who lead the company to its near-ruin, a $100 million bonus immediately after avoiding bankruptcy. This, of course, is an act which is blatantly indicative of their attitudes in protecting the interests of shareholders.