* Lawsuit seeks $25 bln for AIG shareholders
* Starr Int'l says AIG takeover violated Constitution
* Federal Reserve Bank of New York also sued
* Treasury Department calls AIG bailout necessary, legal
By Jonathan Stempel
Nov 21 A company run by former American
International Group Inc Chief Executive Maurice "Hank"
Greenberg sued the United States government for $25 billion,
calling the 2008 U.S. takeover of the insurer
The lawsuit marks an unusual effort to force the government
to pay shareholders, who have seen AIG's stock price tumble 98
percent since the middle of 2007, when the insurer's risky bets
on mortgage debt through credit default swaps began to falter.
Greenberg's company filed a separate, related lawsuit
against the Federal Reserve Bank of New York.
Starr International Co, which once had a 12 percent stake
in AIG and was its largest shareholder, said the government
illegally took a nearly 80 percent AIG stake without seeking a
shareholder vote, hoping to provide a "backdoor bailout" for
AIG trading partners such as Goldman Sachs Group Inc .
It said the bailouts that began on Sept. 16, 2008 violated
shareholders' rights to due process and equal protection, and a
Fifth Amendment ban against taking private property for public
use without just compensation, known as the "takings clause."
Greenberg, 86, runs Starr, and had led AIG for nearly four
decades prior to his 2005 ouster.
"The government's actions were ostensibly designed to
protect the United States economy and rescue the country's
financial system," David Boies, a lawyer for Starr, said in the
"Although this might be a laudable goal, as a matter of
basic law, the ends could not and did not justify the unlawful
means employed," he continued. "The government is not empowered
to trample shareholder and property rights even in the midst of
a financial emergency."
Shareholders of other companies, including mortgage
financiers Fannie Mae and Freddie Mac and
the bank Citigroup Inc , also saw their holdings diluted
in the fallout from the 2008 financial crisis. It is unclear
whether Starr's constitutional arguments might apply to them.
Starr sued the government in the U.S. Court of Federal
Claims in Washington, D.C., which handles lawsuits seeking
money from the government.
It sued the New York Fed, which gave AIG an initial $85
billion credit line, in the U.S. District Court in Manhattan.
The bailouts eventually totaled $182.3 billion.
Despite broad public anger at how bailouts were conducted,
it is "hard to imagine Hank winning," Adam Levitin, a professor
at Georgetown Law School, said in emailed comments.
Levitin noted that the AIG bailout had been approved by the
insurer's board, and that the terms "arguably" were fair.
The U.S. Treasury Department said it is reviewing the
matter and expects to defend its actions vigorously.
"The government provided assistance to AIG -- and stopped
it from collapsing -- in order to prevent a meltdown of the
entire global financial system," Tim Massad, assistant
secretary for financial stability, said in a statement. "Our
actions were necessary, legal, and constitutional."
A New York Fed spokesman and AIG spokesman Mark Herr
declined to comment. AIG was named as a nominal defendant in
The $25 billion estimate reflects what Starr called the
value of the government's stake on Jan. 14, 2011, when it
swapped AIG preferred stock for 562.9 million common shares.
AIG was once the world's largest insurer by market value.
"Courts have recognized that the takings clause can apply
to intangible property such as shareholder rights," said Ilya
Somin, a George Mason University law professor who has written
about the takings clause. "It is not clear how valuable these
rights are, especially given all of AIG's liabilities."
DISCRIMINATORY, PUNITIVE BAILOUT ALLEGED
The bailouts began one day after Lehman Brothers Holdings
Inc went bankrupt and Bank of America Corp
agreed to buy Merrill Lynch & Co.
But according to Starr, the AIG bailout was done as "a
vehicle to covertly funnel billions of dollars to other
preferred financial institutions" such as Goldman.
Goldman spokesman Michael DuVally declined to comment.
Starr also called the 14.5 percent interest rate on the $85
billion credit line "punitive," and out of line with aid
provided to comparable companies at the time.
The government's AIG stake has fallen to about 77 percent.
AIG itself in August sued Bank of America for $10 billion
over alleged losses on mortgage securities.
Greenberg stepped down from AIG amid questions by
regulators over its accounting practices. AIG in 2006 paid
$1.64 billion to settle federal and state probes into its
business practices, and in July 2010 agreed to pay $725 million
to settle a shareholder lawsuit accusing it of accounting fraud
and stock price manipulation.
Starr's counsel Boies is a partner at Boies, Schiller &
Flexner. One of the best-known U.S. lawyers, he represented
Vice President Al Gore after the 2000 presidential election,
and now represents players locked out by the National
Basketball Association. He was not immediately available for
further comment on Monday.
In afternoon trading, AIG shares were down 82 cents, or 3.7
percent, at $21.06 on the New York Stock Exchange, amid broad
declines in U.S. stock prices.
The cases are Starr International Co v. U.S., U.S. Court of
Federal Claims, No. 11-00779; and Starr International Co v.
Federal Reserve Bank of New York, U.S. District Court, Southern
District of New York, No. 11-08422.