Today AIG will hear arguments for and against its participation in an ongoing lawsuit against the Federal government for the way officials handled the company’s bailout during the housing crisis.
AIG was stuck paying out insurance on billions of dollars worth of defaulted mortgage bonds back in 2008 was saved from bankruptcy when the government stepped in.
Since then, the company has paid back the $182 billion the American people lent it, but now former CEO Maurice “Hank” Greenberg wants to sue the government for punitive damages stemming from the terms of that loan.
Greenberg’s basic argument is that the terms hurt shareholders. And while one New York City Judge dismissed that claim with prejudice, a Washington D.C. Court is allowing the trial to proceed.
That’s where AIG’s board will decide if they want to join in or not. Greenberg (represented by his company Starr International) is requesting $25 billion in damages.
In a statement yesterday, AIG CEO Bob Benmosche said that his company “mean(s) it when we say thank you to the American people,” but at the same time, according to the company’s release, the board only has three options:
The Board has three options with respect to the derivative claims asserted on its behalf: (1) take over Starr’s claims and prosecute them on its own; (2) refuse the demand and prevent the claims from being prosecuted by Starr, a decision Starr is likely to challenge; or (3) allow Starr to prosecute the claims on AIG’s behalf. Importantly, the Court of Federal Claims has denied the Government’s motion to dismiss the suit, so that the case will go forward with or without AIG’s participation. If AIG does not allow the derivative claims to proceed on AIG’s behalf and Starr prevails or obtains a favourable settlement on its direct claims, then AIG will not receive any of the amounts recovered.
Both options 1 and 3 would really tick off the American people, and according to Fox Business News’ Charlie Gasparino, AIG management is telling people they’re not going to happen.
That leaves option two, which is really interesting because it pits AIG against its former CEO and its brother company.
Starr and AIG were both founded by Cornelius Vander Starr, it was he who appointed Greenberg to succeed him as the head of both companies in the late 1960s (check them out together here).
Hank Greenberg held both positions simultaneously from 1967 to 2005 when he stepped down from AIG over allegations that he engaged in some creative accounting at the firm (he eventually paid out a $15 million fine).
Based on their statement, AIG is not interested in having Starr go on with this case without it because it would risk losing the chance for more government money if Greenberg is successful in Court.
Their option, then, if they don’t join in the suit, is to go to battle with Starr to stop it from suing the government.