Government sued for $25B over AIG takeover

Starr International, the company run by the former head of insurance giant American International Group (AIG), has filed a $25 billion lawsuit against the federal government, arguing that the takeover of the insurance company at the height of the financial crisis was unconstitutional.

When the government took an 80 percent interest in AIG during the financial crisis, it did so without "due process or just compensation," in violation of the Fifth Amendment of the Constitution, according to the suit filed Monday in the U.S. Court of Federal Claims.

"The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency," the suit states. "Financial emergencies do not eviscerate this Constitutional protection."

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The company, which is run by former AIG head Maurice "Hank" Greenberg and was AIG's largest shareholder during the takeover, also filed a companion suit against the Federal Reserve Bank of New York.

The amount requested is what Starr determines to be the government's stake in the company when it received nearly 563 million common shares of stock at the beginning of 2011.

The suit paints the Treasury's actions as unfairly wresting control of AIG from its shareholders, pointing out that other financial institutions hit hard by the crisis received government support without having to give up a substantial chunk of their ownership.

"The government's actions were ostensibly designed to protect the United States economy and rescue the country's financial system," the suit states. "Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed."

The Treasury Department promised a spirited defense of its handling of AIG during the crisis, arguing its actions saved the company and the world's financial system.

"It is important to remember that the government provided assistance to AIG — and stopped it from collapsing — in order to prevent a meltdown of the entire global financial system," said Timothy Massad, the Treasury's assistant secretary for financial stability. "Our actions were necessary, legal and constitutional. We are reviewing the lawsuit and expect to defend our actions vigorously."

The suit argues that simply providing guarantees to AIG's obligations, as was done with other financial institutions, would have been a "less costly and more efficient (and more fair)" course of action. But by taking control of the insurer, the government's "unprecedented approach" allowed it to "covertly funnel billions of dollars" to other financial institutions — including foreign ones — in a "backdoor bailout."

It also says that while AIG shareholders opposed the steps needed to allow the Treasury to take substantial control of the company, the government "deliberately ignored and evaded" that opposition.

AIG came in many ways came to symbolize the financial crisis, as the extensive insurance company — at one point the world's most valuable — found itself in trouble thanks to a number of interconnected deals with other financial institutions.

The suit argues that "its problem was not one of solvency but of temporary liquidity," pointing out that its assets "substantially exceeded" its liabilities.

To keep the company afloat, the government ultimately pumped $182.3 billion into the company. The government has since begun slowly winding down its investment in the company, which stood at roughly $50 billion at the beginning of November.

AIG became a flashpoint for the financial crisis after it was revealed that the company paid out $165 million in bonuses to employees after receiving federal support, making it the subject of public scorn and drawing presidential rebuke.