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AIG may join bailout lawsuit against US government

Draws condemnation from lawmakers after saying it may join a lawsuit that alleges the bailout terms were unfair

Reuters  |  New York/Washington 

American Group Inc , the insurer rescued by the US in 2008, drew angry condemnation from lawmakers on Tuesday after saying it may join a that alleges the bailout terms were unfair.

A leading congressional Democrat called criticism of the deal's terms "utterly ridiculous," and former New York Attorney General Eliot Spitzer - who probed when he was in office - called the prospect of a suit "insulting to the public."

The White House declined to comment on the potential for a but defended the $182 billion bailout.

Meanwhile, newly elected Senator Elizabeth Warren, feared by as a potential thorn in its side on the Senate Committee, called the suit talk "outrageous" and said the company should not "bite the hand that fed them for helping them out in a crisis."

The move would be something of a shock, given that just launched a high-profile television ad campaign called "Thank you, America," in which it offers the public its gratitude for the bailout. On Tuesday, the company promoted the ads on Twitter, even as it came under fire over the

Securities experts said AIG's board needs to consider the matter as part of its fiduciary duty, but also said it was unlikely they will actually join.

said its board would meet Wednesday to discuss joining a lawsuit filed against the by the insurer's former chief executive, Maurice "Hank" Greenberg.

Greenberg, whose Starr owned 12% of AIG before its near-collapse, has accused the New York Fed of using the rescue to bail out banks at the expense of shareholders, and of being a "loan shark" by charging exorbitant interest of 14.5% on the initial loan.

"If AIG enters this suit it would be the equivalent of a patient suing their doctor for saving their life," said Mark Williams, a former Federal Reserve bank examiner who teaches in the finance department at Boston University.

Business Judgement

A federal judge in Manhattan already dismissed one of Greenberg's suits in November; it is being appealed.

In his ruling dated November 19, Judge Paul Engelmayer said AIG had notified the court it would hold a board meeting January 9 to discuss joining one of the suits, with a decision expected by the end of the month.

A separate suit under different legal theories is still pending in the US Court of Federal Claims in Washington.

In a mid-December hearing in the Washington case, a lawyer for AIG told the court that all sides had already made three written submissions to the board and that the board would spend half the day on January 9 discussing the suit.

One expert in securities said he doubted AIG would ultimately decide to join the case.

"All the fiduciary standards that guide board behavior would warn against joining the suit," said James Cox, a professor of corporate and securities at Duke University School of in Durham, North Carolina. "I see nothing to be gained by AIG piling on, and I see a lot of downside risk."

An AIG spokesman declined to comment beyond confirming that the board would meet as planned. T he deliberations were first reported by the New York Times.

'Choice was bankruptcy'

The New York Fed said Tuesday there was no merit to any allegations that the bank harmed AIG.

"AIG's board of directors had an alternative choice to borrowing from the Federal Reserve and that choice was bankruptcy. Bankruptcy would have left all AIG shareholders with worthless stock," a representative of the bank said Tuesday.

Elijah Cummings, the ranking Democrat on the House Committee on Oversight and Reform, acknowledged that AIG's board has a fiduciary duty to consider the lawsuit. But he also said the company had a choice in 2008 and picked what it considered the better option.

"The idea that AIG might sue the government is an unbelievable insult to our nation's taxpayers, who cleaned up the mess this firm created," he said in a statement.

Cummings' former colleague, the recently-retired Barney Frank, said he was "stunned" by the news and added that AIG was a fully willing participant in the rescue.

"There was not the hint of a suggestion of any coercion. They did this very voluntarily, very gratefully. And if the company were now to go around and join this lawsuit, that would be outrageous," Frank said in an interview.

The US Treasury declined to comment. It completed its final sale of AIG stock in mid-December, concluding the bailout with what Treasury called a positive return of $22.7 billion.

AIG shares fell 0.8% to close at $35. 65 . After losing half its value in 2011, the stock rose more than 52% in 2012, tripling the gains of the broader S&P index

Greenberg Rolls on

If AIG decides to join Greenberg's suit, it would be another legal victory for the man who once ran the world's largest company but was ultimately forced to leave under a cloud of scandal.

On Monday, a federal judge ruled that New York Attorney General Eric Schneiderman does not have standing to object to a $115 million settlement between AIG shareholders and the former chief executive. Schneiderman wanted the deal rejected.

The judge's ruling apparently clears the way for approval of the deal, whose broad releases would preclude New York from pursuing its high-profile 2005 fraud case against Greenberg, according to court papers.

The state case, brought by Spitzer, accuses Greenberg and former Chief Financial Officer Howard Smith of using sham transactions to mask the company's financial position.

The claims, which Greenberg and Smith have fought through three New York attorneys general, await an appeal at the state's highest court.

First Published: Wed, January 09 2013. 03:04 IST