The U.S. Court of Federal Claims ruled that the government acted illegally when it acquired stock during its $85 billion bailout of insurance giant, American International Group (AIG). Although a win for AIG’s former longtime CEO, Maurice R. “Hank” Greenberg, he considers it to be only a moral victory, as Judge Thomas C. Wheeler declined to issue compensation to investors despite the rebuke of the Federal Reserve’s takeover. In Monday’s ruling, Wheeler said, “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.” Wheeler concluded, however, not to award compensation because had the government not intervened, AIG would have needed to file for bankruptcy protection and “would most likely have lost 100 percent of their stock value.” Greenberg’s attorneys have already indicated that they will appeal the ruling and it is possible that the U.S. Government may appeal as well, possibly sending the case up to the Supreme Court.
The mixed-ruling leaves essentially nobody happy. In a statement, Greenberg’s attorneys said, “We respectfully disagree with the trial court’s legal conclusion that, under applicable appellate cases, there is no remedy for the government’s illegal conduct.” The Justice Department announced that its attorneys will be reviewing the decision, which could also possibly lead to an appeal. The Treasury Department released a statement following the ruling, saying “We disagree with the Court’s conclusion regarding the Federal Reserve’s legal authority.” For its part, the Federal Reserve denies any wrongdoing, releasing a statement after the decision, “The Federal Reserve strongly believes that its actions in the AIG rescue during the height of the financial crisis in 2008 were legal, proper and effective.” Wheeler also criticized on several occasions the mega-law firm of Davis Polk, citing an email from one of the firm’s attorneys stating that the government “is on thin ice and they know it.” Legal experts noted a possible tactical mistake made by the Justice Department in putting Davis Polk attorneys on the stand, leaving them vulnerable to plaintiff’s request for documents that might have otherwise remained private.
As a consequence of the $85 billion Federal Reserve loan, the government acquired a 79.9 percent stake in the company and effectively prevented AIG executives from voting on the takeover. According to Greenberg’s attorneys, the takeover led to a $23 billion loss of equity to investors and enriched the federal government. In the Federal Reserve’s statement, however, the organization notes that there likely would have been no equity to lose, agreeing that Judge Wheeler’s ruling “recognizes that AIG’s shareholders are not entitled to compensation for that decision, and that the Federal Reserve’s extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG’s collapse during the financial crisis.”
The 2008 bailout occurred in stormiest moments of the financial meltdown as huge companies like Lehman Brothers went down overnight. AIG appeared headed toward the biggest collapse in U.S. history, as the company is now once again viable. The AIG bailout essentially coined the term, “too big to fail.” At the same time, recent revelations about government spying and the NSA, secretive trade deals, and the Security and Exchange Commission’s exhaustive attempts to pen legal interpretations of the Frank-Dodd financial reform law into code, may continue the debate over what the consequences of “illegal government activity” are. For this reason alone, if an appeal makes its way to the Supreme Court, it might turn this case into an issue of prime national importance.
Insurance Journal – Andrew G. Simpson
New York Times – Matthew Goldstein
Wall Street Journal – Leslie Scism