Zero for Starr International in Bailout LawsuitPosted: June 15, 2015 Filed under: Exactions | Tags: Monetary Policy Comments Off on Zero for Starr International in Bailout Lawsuit
The U.S. Court of Federal Claims today handed Maurice (“Hank”) Greenberg and his attorney David Boies a stinging defeat by declining to award a penny in monetary compensation in their lawsuit seeking in excess of $40 billion in connection with AIG bailout. (The NY Times headline for today’s story about the case starts off by asserting, “Victory for Ex-A.I.G. Chief in Bailout Suit . . .;” we have to wonder what part of goose egg they don’t understand over at the gray lady.)
As most will recall, at the very height of the financial crisis, with the American International Group (“AIG”) on the brink of financial collapse and threatening to take the U.S. (if not the world) economy down with it, the U.S. government stepped in with tens of billions of taxpayer dollars to keep the company afloat and rescue the economy. A major part of AIG’s business consisted of entering into highly remunerative but very risky agreements to backstop mortgage-backed securities. When the housing market tanked, and mortgage-backed securities collapsed in value as well, AIG found itself without the financial wherewithal to make good on all the promises it had made, threatening not only its own continued existence but that of many other companies to which it owed money. The federal government eventually pumped over $100 billion into AIG, allowing AIG to fulfill its financial obligations, recover financially and continue to exist as a New York Stock Exchange company. Importantly for the purpose of this litigation, the federal government accomplished this rescue not merely by lending money to AIG but by taking a temporary 80% equity stake in the company, giving the government effective control of the business.
Enter Starr International, which formerly was one of the largest shareholders in AIG, and is controlled by Maurice Greenberg (formerly AIG’s chief executive). Starr International sued the United States alleging that the rescue effected an “illegal exaction” and/or a “taking” (sort of like kicking a gift horse in the mouth, if you will). Judge Thomas Wheeler of the claims court has now ruled that the federal government committed an illegal exaction because the government lacks the legal authority under the Federal Reserve Act to acquire an equity stake in a company it is bailing out (as opposed to simply making a large secured loan). However, the court ruled that Starr International was entitled to zero in damages. “In the end,” the court wrote, “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.” In short, no harm no foul. As to the alternative takings issue, the court quickly disposed of that claim on the ground that, given the ruling that government committed an “illegal” exaction, Starr was precluded from claiming a taking, which has to be predicated on “legal” government action.
You can enjoy Judge Wheeler’s carefully drafted (and promptly executed) 75-page opinion, but this is the gist of the matter.