Judge: Fed Takeover of AIG Was Illegal, But Investors Won’t Get Damages

By Published on June 16, 2015

Former American International Group CEO Maurice Greenberg won his bailout-related lawsuit against the U.S. government Monday, but did not receive a single dime in damages.

Judge Thomas Wheeler of the United States Court of Federal Claims agreed with Greenberg that the Federal Reserve had no legal right to demand 79.9 percent of the company’s equity as a condition for bailing out the insurer in 2008, but said Greenberg had not proven that shareholders suffered any quantifiable damage from the action, The New York Times reports.

Greenberg had been seeking between $25 and $40 billion in compensation on behalf of himself and other AIG shareholders.

While acknowledging that the Fed had no legal to right to take majority ownership of a firm, as well as that AIG received “unduly harsh treatment” in comparison to other bailout recipients during the financial crisis, Wheeler reasoned that shareholders were nonetheless better off under the deal they were given.

“The inescapable conclusion is that AIG would have filed for bankruptcy” in the absence of a bailout, he claimed. “In that event, the value of the shareholders common stock would have been zero.”

AIG’s bailout, which started at $85 billion and eventually reached $182 billion, was fully repaid by 2012, leaving the government with a $22.7 billion profit on the interest, according to Bloomberg.

Greenberg had argued that the 14 percent interest rate the Fed imposed on the bailout was excessive, while the government countered that the rate merely reflected the high-risk nature of the loan.

Wheeler came down somewhere in the middle rhetorically, saying that while the government’s treatment of AIG “was misguided and had no legitimate purpose,” its actions did not create a “legal right of recovery” because there is no evidence that shareholders would have been any better off without the intervention.

On a practical level, the ruling is a blow to AIG shareholders, though it does establish a precedent that may protect other companies from enduring a similar fate the next time the economy slows.

 

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