A court ruled Monday that the federal government was “unduly harsh” in its takeover of AIG during the financial crisis, but refused to award the company’s former head any damages.
The ruling draws to a close the high-profile lawsuit against the federal government, brought by Maurice "Hank" Greenberg, the former head of the insurance giant, and other AIG shareholders under the umbrella of Starr International.
In his ruling, Judge Thomas Wheeler determined the federal government violated the Constitution by stepping in and effectively seizing the insurance company during the crisis, even if the takeover was intended to save the company from imminent bankruptcy.
However, since AIG would have ceased to exist almost immediately had the government not stepped in, the judge also determined that Greenberg and the shareholders were not due the billions of dollars in damages sought.
In his U.S . Court of Federal Claims opinion, Wheeler found merit in the argument that the Federal Reserve overstepped its bounds in providing AIG with a critical cash infusion at the height of the crisis, but also taking over the company and ousting its leadership. Wheeler said the government’s bailout of the insurance firm, which came immediately following the collapse of Lehman Brothers, was “misguided and had no legitimate purpose.”
“What is clear from the evidence is that the Government carefully orchestrated its takeover of AIG in a way that would avoid any shareholder vote, and maximize the benefits to the government and to the taxpaying public, eventually resulting in a profit of $22.7 billion to the U.S. Treasury,” Wheeler wrote.
In his ruling, Wheeler pointed out that other major financial institutions were also under significant stress during the crisis, and did not face the same onerous terms, which effectively resulted in the government taking over the insurance company. In fact, he argued AIG was actually treated more harshly than institutions that contributed more significantly to the financial downturn.
Wheeler went on to say the Federal Reserve had no legal authority to step in and take over AIG, even though the company accepted the terms of the deal, facing imminent collapse otherwise.
While Greenberg had sought billions of dollars in damages, arguing in his suit that the government effectively stole the company from him, Wheeler found that argument less compelling. The “Achilles’ heel” of the claim that AIG shareholders were owed damages as a result of the bailout was the fact that if the government did not step in, AIG would have gone bankrupt.
Therefore, even if the government imposed overly strict and punitive terms on its financial rescue, and even if that bailout came with no legal underpinning, it does not change the fact that AIG would have ceased to exist without that lifeline, Wheeler said.
“The end point for this case is that, however harshly or improperly the Government acted in nationalizing AIG, it saved AIG from bankruptcy. Therefore, application of the economic loss doctrine results in damages to the shareholders of zero,” he wrote.
The high-profile lawsuit dominated Washington in the fall, as the masterminds behind the bailout, including Ben Bernanke, Timothy Geithner, and Hank Paulson were called to testify.
In response to the ruling, the Federal Reserve maintained that the actions it took were necessary and fully within the law.
“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,” the Fed said in a statement. “The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made.”
This story was updated at 2:02 p.m.