A federal court in Washington has cleared the way for Maurice Greenberg, former head of American International Group, to further pursue his claim that the U.S. government illegally took control of AIG in 2008.
Greenberg is chairman and managing director of Starr International, which once held a 12 percent stake in AIG. Greenberg himself resigned his position at AIG in 2005 under pressure from New York attorney general Eliot Spitzer's multiple allegations of fraudulent business practices at AIG.
Judge Thomas Wheeler of the U.S. Court of Federal Claims said that Greenberg, on behalf of all shareholders of AIG at the time, had met the minimum standard to further pursue his claims.
“A plaintiff need only “state a claim to relief that is plausible on its face,” Wheeler said in his decision.
“The Court must accept as true all well-pleaded allegations in the complaint and draw all reasonable inferences in favor of the plaintiff,” he added.
Greenberg is seeking $25 billion from the government, alleging that the government “coerced” AIG’s board to turn over control of AIG to the federal government in September 2008. He argues that because AIG’s assets exceeded its liabilities, that the government should have provided it with enough liquidity to meet the demands of creditors—as it did for other troubled financial companies in 2007 and 2009—and not demanded control of 79.9 percent of its stock as the price for aid.
In a 49-page decision issued Monday, Wheeler said that whether AIG or the government caused or contributed to the dire financial situation of AIG, and whether AIG was the ultimate intended beneficiary of the bailout, remain open issues.
"Given the existing factual disputes on these issues, the court denies the government's request to dismiss Starr's takings claim on the basis that the loan agreement was a rescue of AIG from the consequences of its own business risks,” Wheeler said.
The government initially provided $85 billion in cash to AIG to meet calls for additional cash on credit default swaps AIG issued to insure mortgage-backed securities other firms and individuals had bought.
Greenberg alleged that the federal government took control of AIG in order to bail out other financial institutions. He also cited the original 14.5 percent interest rate on the loans as onerous and depriving AIG shareholders of their due process and equal protection rights.
The federal government had asked a federal court to dismiss the lawsuit, alleging that AIG had asked and agreed to be rescued, "electing to save itself from a failure of its own making."
The government filing was in the U.S. Court of Claims in Washington. Greenberg and Starr sued, in a suit amended Jan. 31 that claimed that through its acquisition of AIG Sept. 16, 2008 that the terms of federal aid to AIG starting in 2008 “amounted to an attempt to ‘steal the business.’”
In seeking dismissal, the government claimed that although Starr may disagree with the terms to which AIG agreed, any loss resulting from that agreement should be borne by AIG and its shareholders, and not the public.
The suit was originally filed Nov. 21 and revised in February. It seeks $25 billion from the federal government for Starr, Greenberg “and on behalf of all others similarly situated and, derivatively, on behalf of AIG.”
On the same date, Starr also sued the Federal Reserve Bank of New York, which provided the initial $85 billion in aid to AIG in September 2008. That suit is pending in Federal District Court for the Southern District of New York in Manhattan.
That suit argues that other troubled banks were offered better terms than AIG in a “backdoor bailout.”
It charged that the Fed’s government aid, starting Sept. 16, 2008 in return for 79.9 percent of AIG’s stock, is an unconstitutional “taking” of property.
The amended complaint filed by Starr on behalf of Greenberg and others says that during the financial crisis, the government in a number of cases provided guarantees and access to federal funds.
The complaint says that “AIG was a particularly good candidate for such liquidity support because its assets substantially exceeded its liabilities; its problem of solvency but of temporary liquidity.”
In addition, the complaint says, “a bankruptcy filing by AIG would have severely worsened the finances of many other financial institutions.”
The complaint also alleges that “rather than providing AIG with the liquidity support offered to comparable firms,” the government in September 2008 “took control of AIG away from its shareholders by becoming a controlling lender and a controlling shareholder.”