The Legality of the AIG Lawsuit

After seven years since the controversial $85 billion bailout of AIG, the debate over the legality of the bailout is again rearing its ugly head. This post will cover the history of the bailout, a short explanation of the recent suits related to the bailout, and a summary of the vast legal opinions surrounding these cases.

AIG Bailout Timeline

In September of 2008, just a week after the United States government allowed Lehman Brothers to file for bankruptcy, the Treasury Department decided to bail out the American International Group (AIG).1 AIG, one of the world’s largest insurers, had been brought to its knees, like many other large financial institutions in 2008, due to participating with risky financial products.2 The bailout consisted of the Federal Reserve Bank of New York promising a loan of up to $85 billion in exchange for an almost 80% stake in AIG.3 By October of 2008, AIG received additional bailout funds of $38.8 billion in cash to counteract the demands of clients withdrawing funds from AIG’s securities-lending programs.4 In November of 2008, the U.S. Treasury committed an investment of $40 billion to AIG; at the same time, the New York Fed created new corporations to spend additional funds, up to $52.5 billion, to fuel AIG.5 Meantime AIG’s liquid credit was cut to $60 billion, given a lower interest, and three more years to pay the loans.6 In January of 2009, the New York Fed created the AIG Credit Facility Trust to hold the controlling equity interest in AIG.7 In March of 2009, AIG recorded a record loss in their fourth-quarter, prompting the U.S. Treasury to insert around $30 billion into AIG.8 By 2009, AIG had received a bailout of $182.3 billion. Also in March of 2009, AIG paid out $90 billion to Wall Street because of pressure from lawmakers.9 Throughout 2010, AIG sold off various assets and subsidiaries to streamline its business and increase capital10 By January of 2011, the U.S. government held 92% of AIG common stock.11 In May of the same year, AIG and the U.S. government sold their shares at $29 apiece in AIG’s first public stock offering since the bailout began in 2008; this offering raised $8.7 billion and allowed the government’s stake to decrease to about 77%.12 February 2012 brought a realization that AIG had consistent profitability, which allowed AIG to get around $20 billion in tax-related benefits. In August of 2012, the New York Fed severed its connection to AIG, selling its last assets associated with AIG.13 The following month, the Treasury held its fifth sale of AIG shares for about $18 billion, which cut the government’s interest in AIG around 20%; meanwhile, AIG sold to Chinese investors a majority of shares in a plane-lease unit for $4.23 billion.14 By the end of 2012, taxpayers had recovered the cost of the AIG bailout with a profit of over $20 billion.15

Recent AIG Suits Against the Government

            Two suits are currently pending against the government relating to the AIG bailout. In March of 2013, former CEO of AIG, Maurice “Hank” Greenberg, filed a complaint against the government and New York Fed arguing that the Treasury had imposed too harsh and onerous terms on the bailout and sold AIG mortgage bonds too cheaply, all to the detriment of AIG shareholders.16  Greenberg argues that “the government ‘violated the statutory, contractual, and Constitutional rights of’ him and his fellow shareholders by snagging $25 billion worth of AIG stock during the crisis.”17 However, the board of directors for AIG refused to join this suit.18  As of January 2014, Greenberg, who had lost his first suit against the government, lost his appeal as well.19 Circuit Judge John Walker, of the three-judge panel presiding over the case, said that “permitting state law claims such as Greenberg’s to go forward would force the New York Fed to shirk its obligation to act in the public interest, and instead to act in the best interests of corporate shareholders.“20

The second case, which claims that the onerous terms of the bailout were in effect an illegal taking and violated the Fifth Amendment of the U.S. Constitution, is still pending before the U.S. Court of Federal Claims in Washington, D.C.21 Though similar to the original suit, this claim posits a Fifth Amendment claim against the government, which allowed the bringing of a new claim and a changed venue.22

The Legal Landscape

Legal experts are mixed on whether the courts will rule in favor of Greenberg or the government.  Those that posit that Greenberg’s suit is destined to lose, do so on a few platforms. First, Judge Engelmayer of S.D.N.Y. looked at Greenberg’s complaint and dismissed the similar suit in 2012, holding that Greenberg “failed to present a plausible argument that the Federal Reserve Bank of New York exercised sufficient control over AIG to support a claim that it had a fiduciary duty to the crippled insurance company.”23  The critics of Greenberg’s claims point out that there are two major problems with the “illegal taking” claim: First, the taxpayers through the government saved AIG from bankruptcy, they did not “seize” or “take” AIG.24 Second, the alternative to the bailout was bankruptcy, so the board of directors of AIG voluntarily agreed to the terms of the bailout.25 Furthermore, many point out the absurdity of the suit. Without the bailout the AIG stock would have fallen to zero, but because of the rescue Greenberg’s and other shareholders’ stock were diluted but remained viable, and have since grown again.26

However, while not focusing on the merits of the case, some legal scholars say that the Greenberg team could actually win the suit. First, Greenberg’s lawyer, David Boies, has been able to extract statements from past government officials that weaken the government’s defense or shrink their credibility.27 Second, Boies is focusing on demonstrating that AIG’s shareholders were basically compelled to accept government help, which could be used as a basis for a claim; as opposed to the claim that the company willingly entered into the contract with the government.28 Third, there is the question of why AIG was treated differently than big banks in the bailouts of 2008.29

Forward Looking Thoughts

The case will likely turn on “how much force the government used in involving itself in the affairs of this private company.”30 The trial in the U.S. Court of Federal Claims, under Judge Thomas Wheeler, is scheduled to last six weeks. With extensive discovery and a long witness list, the case will likely move slowly and steadily.31

  1. Leslie Scism, Trial in $40 Billion Lawsuit Against AIG Bailout Begins, Wall St. J. (Sept. 29, 2014, 7:40 PM),; Steve Schaefer, AIG: Bailout in Brief, (last visited Oct. 21, 2014. 

  2. Schaefer, supra note 1. 

  3. Zachary Tracer, AIG Bailout Ends Four Years After Two-Year Plan: Timeline, Bloomberg (Dec. 11, 2012, 9:36 AM), 

  4. Id. 

  5. Id. 

  6. Id. 

  7. Actions Related to AIG: Overview, Fed. Res. Bank N.Y. (last visited Oct. 21, 2014). 

  8. Tracer, supra note 3. 

  9. Id. 

  10. Fed. Res. Bank N.Y., supra note 7; Tracer, supra note 3. 

  11. Tracer, supra note 3. 

  12. Id. 

  13. Id. 

  14. Timeline-The Government’s Rescue and Sale of AIG, Reuters (Sept. 10, 2012, 5:25 AM), 

  15. Id. 

  16. Mark Gongloff, Former AIG CEO Hank Greenberg Presses on with Lawsuit Against Feds over AIG Bailout, Huffington Post (Mar. 12, 2013, 5:07 PM), 

  17. Id. 

  18. Id. 

  19. Jonathan Stempel, Ex-AIG CEO Loses Appeal of Bailout Lawsuit vs. N.Y. Fed, Reuters (Jan. 29, 2014, 1:37 PM), 

  20. Id. 

  21. Id. 

  22. Paul M. Barrett, Making Sense of the Farcical Hank Greenberg-AIG Trial: Four Blunt Points, Bus. Week (Oct. 8, 2014), 

  23. Id. 

  24. See id. 

  25. Id. 

  26. See id. 

  27. Tim Cavanaugh, 5 Reasons the Gov’t Might Lose the AIG Lawsuit, Nat’l Rev. Online (Oct. 10, 2014, 2:19 PM), 

  28. Id. 

  29. Id. 

  30. Id. 

  31. Id.