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Government coerced AIG's board into harsh terms allegedly cheating shareholders - Hank Greenberg to sue

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Hank Greenberg Challenges AIG Bailout


Financial Crisis Moves by New York Fed, Government to Shore Up Insurer at Center of Trial

The Wall Street Journal
By Leslie Scism
28 September 2014

Maurice R. "Hank" Greenberg built American International Group Inc. into a global financial-services powerhouse during nearly 40 years at its helm. But as the firm in 2008 neared collapse, three years after his departure, he couldn't get calls, emails or faxes returned as he tried to offer his help, people familiar with the matter said.

Now, the 89-year-old Mr. Greenberg is getting his chance at revenge—and, as he sees it, justice—by challenging the government's historic bailout of AIG.

Mr. Greenberg's lawyer, David Boies, is expected starting Monday to ask a federal judge in Washington to rule that the government coerced AIG's board into harsh terms, allegedly cheating shareholders including Mr. Greenberg in the process.

At the time of the rescue, Starr International Co., an investment and charitable firm long headed by the businessman, was AIG's largest single shareholder, with roughly an 11% stake. Mr. Greenberg has been adamant over the years that the government ran roughshod over him and others by taking their property without the just compensation he maintains they were owed under the Constitution.

At the center of the dispute is a 79.9% equity stake that the government acquired in September 2008, in exchange for an emergency loan of $85 billion. The since-repaid assistance ultimately expanded to $184.6 billion, and the government stake peaked at 92%.

The government's position is that AIG sought out the rescue and its board accepted it voluntarily as an alternative to bankruptcy. Nothing in the Constitution or the law "required American taxpayers to rescue AIG and cushion the fall of its shareholders, much less to do so on terms even more favorable to Starr," it says in a court filing.

The emergency loan by the Federal Reserve Bank of New York was extended "to protect and stabilize the United States economy," it also says. The New York Fed, "and therefore ultimately taxpayers," took on significant risk given the size of the loan, the Fed's "prior unfamiliarity with AIG" and uncertainty about AIG's financial condition and the general economy, a filing states.

AIG, primarily an insurance company regulated by state insurance departments, largely got in trouble from sales of an unregulated type of insurance by a financial-products unit to banks and others to mitigate their risk on debt exposures.



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While some of the original claims against the government have been dismissed, the surviving ones could cost U.S. taxpayers more than $40 billion if Starr wins. However, the government says shareholders don't deserve any financial award as their alternative was a possibly worse outcome in bankruptcy court.

The debate is expected to unfold over six weeks in the U.S. Court of Federal Claims. The suit was certified as a class action last year, and about 300,000 stockholders of AIG in 2008 and 2009—from big mutual-fund firms to AIG employees and retirees—would share any award with Starr.

Messrs. Greenberg and Boies have maintained over the years that, had officials listened to Mr. Greenberg at the time, his expertise could have helped the company avoid the punishing terms it ultimately got.

"He knows more, he has more contacts, he can raise money in all sorts of places," Mr. Boies said in an interview with The Wall Street Journal last year. Messrs. Boies and Greenberg declined to be interviewed for this article, citing the pending trial.

Robert Willumstad, AIG's then-CEO, declined to comment, as did government officials.

Much of the lawsuit's focus is on what the government did and didn't do to foster a private-sector solution for AIG. These contentions include assertions that the government excluded Mr. Greenberg from important meetings, though he knew the company well.

Starr contends the government coerced AIG's board into accepting the rescue, partly by discouraging deals with sovereign-wealth funds or other private sources. Mr. Greenberg might have helped arrange a deal, so that AIG would have had options other than bankruptcy and the rescue package that was adopted, Starr says.

The government denies those assertions and maintains it sought to assist a private-sector solution but nothing panned out. One person familiar with the matter said that under nearly chaotic conditions in the financial markets, the Federal Reserve had worked with appropriate AIG representatives: its management, board and counsel.

Mr. Greenberg was a controversial figure as he offered to help. He left AIG in 2005 as then-New York Attorney General Eliot Spitzer was probing the company for alleged improper accounting to bolster results. Mr. Greenberg, a World War II and Korean War veteran, wanted to fight Mr. Spitzer's assertions. But the board opted to settle the allegations against AIG itself, while Mr. Greenberg resisted claims specific to him; those remain pending in a civil fraud suit in New York and could go to trial in early 2015.

After AIG secured government aid, Mr. Greenberg lobbied the company and government to revise the terms, and he unsuccessfully tried to find other ways for AIG to eliminate or shrink the government presence. He also was building his own insurance business, Starr Cos.

In the interview last year, Mr. Boies said Mr. Greenberg had received "letter after letter, email after email, from [AIG] employees, some he had known, some he had never known, talking about how their retirement savings had been destroyed."

Mr. Greenberg sued as the statute of limitations on some claims approached.

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