You may recall that the federal government demanded American International Group Inc. stock in return for an $85 billion bailout during the financial crisis that the Obama Administration inherited. Starr International Co. filed suit against the Federal government claiming that illegal terms were set by the government. During an eight-week trial, Starr’s lead lawyer, David Boies, seemed to be having a field day questioning Ben Bernanke, Hank Paulson and Timothy Geithner. Reports indicate that U.S. Court of Claims Judge Thomas Wheeler repeatedly ruled in the Plaintiff’s favor. In his final order, however, the judge didn’t award damages in the case. In short, he found no legal basis for a claim. Judge Wheeler said in his order:
The government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose. The question is not whether this treatment was inequitable or unfair, but whether the government’s actions created a legal right of recovery for AIG’s shareholders.
Hank Greenberg — who had sought at least $25 billion in damages for shareholders — got nothing for them under the court’s ruling. It’s not clear what effect the judge’s ruling will have. Considering the harsh rebuke of the government’s handling of the bailout by Judge Wheeler, the ruling may limit the Federal Reserve’s ability to deal with the next crisis. In the suit, filed by Starr in November 2011, it was claimed that the government broke the law by insisting on 80 percent of AIG stock and imposing a 14 percent interest rate on the $85 billion loan.
The government defended, saying these demands were justified because the loan was high-risk. It should be noted that even though the bailout ballooned to $182 billion, AIG became profitable, returned to the black and repaid the assistance in 2012. This gave the government a $22.7 billion profit. Judge Wheeler, explaining his ruling further, said in his order:
In the end, the Achilles’ heel of Starr’s case is that, if not for the government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value.
Greenberg says the Judge’s ruling will be appealed by Starr. It will be interesting to see if the appeals court will differ with Judge Wheeler’s logic and reasoning. The case is in the Court of Federal Claims (Washington).
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