(Adds Obama administration statement)
By Lindsay Dunsmuir and Jonathan Stempel
WASHINGTON/NEW YORK, June 15 (Reuters) - A U.S. judge on Monday awarded no damages to American International Group Inc shareholders led by former chief executive Maurice “Hank” Greenberg in their lawsuit against the U.S. government, despite finding that the U.S. Federal Reserve exceeded its authority in the insurer’s 2008 bailout.
While Judge Thomas Wheeler of the Federal Court of Claims in Washington, D.C. sided with Greenberg on a key legal claim, the decision amounts to a pyrrhic victory that could help shield regulators from legal challenges to their responses in future financial crises.
In his opinion, Wheeler said the government showed “unduly harsh treatment” of AIG compared to other institutions it bailed out, but that shareholders ultimately benefited from the rescue.
“In the end, the Achilles’ heel of Starr’s case is that, if not for the government’s intervention, AIG would have filed for bankruptcy,” wrote Wheeler, who was appointed by George W. Bush.
Shares of AIG, which could have been on the hook if damages had been awarded, rose after the decision became public. They were up $1.58, or about 2.5 percent, at $63.47 in mid afternoon trading.
Greenberg, through his company Starr International Co, sued the U.S. government in 2011. He argued federal officials acted illegally in the initial $85 billion loan package to the stricken company, which included an interest rate of 14 percent and a nearly 80 percent stake.
Starr International Co was AIG’s largest shareholder at the time of the bailout, with a 12 percent stake.
Greenberg, 90, had sought as much as $50 billion in damages on behalf of Starr and about 270,000 other shareholders.
An Obama admnistration spokesman said the U.S. government continues to believe it acted “well within legal bounds.”
The Federal Reserve added in its own statement that the bailout terms were appropriately tough to protect taxpayers.
The decision is a blow to Greenberg, whose claims gathered momentum as his star lawyer, David Boies, hammered away at the likes of former Federal Reserve Chairman Ben Bernanke, and former Treasury secretaries Henry “Hank” Paulson and Tim Geithner, during a six-week trial last fall.
The New York-based insurance giant was rescued by the U.S. government in September 2008 to stave off bankruptcy after the company ran up billions of dollars in losses stemming from insurance it wrote on shoddy mortgage securities.
Justice Department lawyers argued the bailout, which ultimately rose to $182.3 billion, raised the value of AIG shares. AIG finished repaying the bailout in 2012, leaving U.S. taxpayers with a nearly $23 billion profit.
Greenberg, who was ousted from AIG in 2005 after almost four decades at the helm, is due shortly to face trial in a separate lawsuit brought against him by New York state, which accuses him and Howard Smith, a former AIG financial officer, of accounting fraud at AIG from 2000 to 2005. (Reporting by Lindsay Dunsmuir and Jonathan Stempel; Editing by Paul Simao and Andrew Hay)