Starr Lawsuit Charges Feds Unlawfully Took Over AIG

Starr International Co. Inc. has amended a lawsuit against the federal government, alleging the government's 2008 takeover of American International Group was illegal, and a way for the government to covertly funnel billions of dollars to other financial institutions.

While the federal government stepped in with emergency loans to help a number of companies — including foreign banks — facing liquidity issues during the financial crisis, the Federal Reserve Bank of New York insisted on acquiring a majority share of AIG's stock instead of offering a similar loan to AIG, according to the amended suit.

"Rather than providing AIG with the liquidity support offered to comparable firms, the government in September 2008 took control of AIG away from its shareholders ... without just compensation," the lawsuit said. Starr, which is led by AIG's former long-time chief executive Maurice "Hank" Greenberg, was one of the largest shareholders of AIG at the time of the takeover.

The lawsuit, which was originally filed Nov. 21 in U.S. Court of Federal Claims, names the United States of America as a defendant and AIG as a "nominal defendant" (Best's News Service, Nov. 21, 2011).

Starr seeks damages of $25 billion, which includes an amount equal to the Jan. 14, 2011 market value of the 562,868,096 shares of common stock the government received under the conversion of the Series C preferred shares, the complaint says.

Starr says the government ultimately took 90% of AIG stock from stockholders without adequate compensation. The lawsuit also claims that although the government initially agreed to take the stock ownership only after AIG shareholders voted to approve the move, when shareholders voted against the takeover, the government found another way to take the stock.

The suit claims "the unprecedented approach the government took with AIG enabled the government to use AIG as a vehicle to covertly funnel billions of dollars to other preferred financial institutions, including billions of dollars to foreign entities, in a now well-documented 'backdoor bailout' of these financial institutions. In so doing, the government is not empowered to trample shareholder and property rights even in the midst of a financial emergency."

In 2008, while AIG was solvent, it faced possible bankruptcy because it would eventually not have the cash available to meet the cash collateral demands of its AIG Financial Products counterparties — including J.P. Morgan and Goldman Sachs.

On Sept. 16, 2008, the government provided AIG with a three-page term sheet that included plans to establish a $85 billion Federal Reserve Bank of New York credit facility, and to have the government take an 80% equity position in AIG.

"These guys are going to try to steal this business," an unnamed banker hired to represent the FRBNY's interests said, according to the complaint.

The government also set up Maiden Lane III as a vehicle to hold AIG's trouble assets, and used it to provide "backdoor bailouts" to a number of AIG counterparties, according to the lawsuit. Those counterparties received far more than market value for the assets. Those counterparties, who might have been persuaded to settle for a lesser amount, included Goldman Sachs, which received $14 billion in the deal, the complaint alleged.

"The government loaned billions of dollars to numerous other financial institutions without taking any ownership in those institutions; when the government did take an equity interest, its interest was limited; it loaned billions of dollars to domestic and foreign institutions at interest rates that were a fraction of those charged to AIG; and it guaranteed hundreds of billions of dollars in loans to various institutions, including Citigroup Inc. AIG and its common stock shareholders, by contrast, were singled out for differential — and far more punitive — treatment," the suit alleges.

The U.S. Court of Federal Claims handles cases against the federal government, including claims that the government took private property for public use without just compensation, which is a violation of the Fifth Amendment.

A companion suit was filed in the Southern District of New York.

Starr International, a private investment vehicle, owned 10.4% of AIG's stock as of March 2010 (Best's News Service, March 22, 2010). On Feb. 3, Starr's holdings were down to 1%. The U.S. government held 83% of the stock.

Shares of AIG (NYSE: AIG) were trading at $27.17 midday on Feb. 3, up 3.27% from the previous close.

AIG's rated insurance companies currently have Best's Financial Strength Ratings of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])