Tomorrow insurance company AIG’s board will consider whether or not it should sue the U.S. government for bailing out the company during the country’s financial meltdown.
In 2008 AIG almost went bankrupt as it was responsible for insuring billions of dollars worth of the mortgage bonds that failed during the housing crisis. The Federal government was forced to step in and AIG finally paid back their loan at the end of last year.
AIG’s former CEO Hank Greenberg has been trying to sue the government — both the Feds in D.C. and the Federal Reserve Bank of New York (FRBNY) — over this bailout since 2011. To do that he filed two cases, one in New York City and one in Washington.
In August of 2012 he told the Court that he would approach AIG’s board to get them to join him this month.
In Washington D.C. the case is still open, and that’s the case that AIG’s shareholders could join.
In NYC, however, Judge Paul Engelmayer wrote a scathing dismissal of the case (in which Greenberg is represented by his company, Starr International), saying that it did not base the case on enough facts.
From the dismissal (via New York Law Journal):
In resolving a motion to dismiss, the Court must “construe the Complaint liberally, accepting all factual allegations in the Complaint as true, and drawing all reasonable inferences in plaintiff[‘s] favour.”… Nevertheless, the “[f]actual allegations must be enough to raise a right of relief above the speculative level,” and the complaint must plead “enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [plaintiff’s claim].”… Put differently, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'”
Now here, specifically, is what Starr claimed.
First, Starr alleges, FRBNY breached the fiduciary duty it allegedly owed to AIG and its shareholders, by virtue of “its control of AIG and its power to act on behalf of AIG.”… Starr alleges that, while controlling AIG, FRBNY took actions involving self-dealing “that were deliberately contrary to the interests of the company.”…
Starr alleges that there were three specific circumstances where the FRBNY screwed over AIG shareholders — the Credit Agreement, the “Maiden Lane transaction”, and in stock transactions in which the AIG created more shares.
The “September 2008 Credit Agreement” is the bailout itself. AIG asked for help in July of 2008, and the FRBNY said no. After Lehman collapsed on September 15th, however, and Moody’s, S&P, and Fitch all downgraded AIG, it was clear that the company was going to have to get some help.
On September 16th, the FBRNY sent AIG a three page agreement for an $85 billion bailout fully secured by AIG assets with a 14.5% interest rate giving the FBRNY 80% voting rights. According to Greenberg’s allegations, though, AIG didn’t have a choice in this matter.
Judge Engelmayer thought that was laughable:
Merely because the AIG Board felt it had “no choice” but to accept bitter terms from its sole available rescuer does not mean that that rescuer actually controlled the company. By Starr’s logic, a loan shark whose usurious interest rate is agreed to by a small business so that it may stay afloat could equally be said to have had actual control over that business so as to compel its agreement to a loan. To be sure, AIG’s directors faced wrenching circumstances. But Starr has not pleaded facts sufficient, under Delaware law, to shift responsibility from the Board to FRBNY for the Board’s decision to agree to the term sheet and Credit Agreement.
Then there’s the Maiden Lane III (ML III) transaction issue. Maiden Lane III is one of three LLCs the FRBNY created to handle bad assets from Bear Stearns and AIG. Maiden Lane III dealt specifically with AIG credit default swaps (CDS) on failing mortgage bonds.
Starr argued that the FRBNY forced AIG to pay out CDS in full because it didn’t give the company enough time to negotiate with CDS counterparties who may have accepted less than full value on those contracts. He said it was because the FBRNY wanted to enrich counterparties and that it was a “backdoor bailout” of those counterparties.
On top of that, Starr argued that the FRBNY “effectively confiscated profits due to AIG under the CDS contracts: Under ML III’s terms, the money generated by the CDO securities held by the ML III vehicle was to be used, first, to pay back FRBNY’s $24.3 billion loan.”
Starr also brought up a June 2009 reverse stock split of AIG’s shares that increased the amount of AIG common stock. It alleged that the move circumvented shareholders and that the company was powerless to do anything about it.
The problem with all of this, according to the Court, is that Starr can’t prove that the FBRNY controlled AIG through Maiden Lane III, or that it had any fiduciary duty to AIG’s shareholders as a creditor.
Under these circumstances, Starr faces an uphill battle in arguing that it has plausibly pleaded that FRBNY was a “controlling lender” of AIG. It is well-settled that, because a creditor-debtor relationship does not, in the ordinary course, entail a creditor’s control of a debtor’s board, “as a general rule, there is no fiduciary relationship between a debtor and a creditor…and, therefore, there can be no breach of fiduciary duty.”
That logic settles quite a bit of Starr’s claims, according to the Judge. However one remains:
….Starr alleges, FRBNY violated the Equal Protection, Due Process, and Takings Clauses of the United States Constitution by expropriating AIG’s assets, in a discriminatory manner, and without due process or just compensation.
In arguing against this claim, the Judge gets particularly colourful.
…To be sure, Starr’s Amended Complaint paints a portrait of government treachery worthy of an Oliver Stone movie. Starr claims that, as the global financial system teetered on the brink of collapse, FRBNY seized control of AIG. Then, Starr claims, FRBNY, in an act of Napoleonic plunder, stole AIG’s assets, re-distributing some to shore up other flagging financial institutions while keeping much of the residue for itself. It is, however, one thing to make a sweeping and dramatic claim of government misconduct. It is quite another to plead plausibly — under the established standards of Delaware law, and based on concrete factual allegations…— that FRBNY exercised control over AIG.
Moreover, the Judge wrote, because of the dramatic and unprecedented circumstances surrounding AIG’s bailout, the FRBNY was totally within its right to do what it did.
Each FRBNY action that Starr challenges was either (1) premised on FRBNY’s §13(3) power to lend in unusual and exigent circumstances, (2) incidental to that power, and/or (3) part of the process of implementing the September 22, 2008 Credit Agreement, which had been explicitly authorised under that power.
In his conclusion, the Judge went so far as to dismiss Starr’s claims “with prejudice”. That indicates misconduct on Starr’s part and prohibits it from refiling the case in New York.
We’ll see if a D.C. Judge takes this massive legal burn into consideration in the coming months.