Hank Greenberg's $25B Lawsuit Against the US Government May Succeed

Former AIG chief Maurice “Hank” Greenberg’s on-going lawsuit against the government is probably one of the most high profile cases to emerge in recent times and has the entire nation on tenterhooks. The verdict of the trial will decide if the U.S. government in fact, as Mr Greenberg claims, bailed out the insurance firm American International Group on “unfair” terms in 2008 as it nearly collapsed during the financial crisis. It had seemed impossible when the trial began about six weeks ago; but today, many experts are of the opinion that Greenberg just might win, and walk away with a $25 billion judgement in the process.

Yes, you read that right. $25 billion! That’s roughly twice the value of all housing aid given through TARP, the relief program designed to help out troubled mortgage holders. If the verdict is announced in favour of Greenberg, it would effectively mean that the AIG shareholders were victims of the government bailout that protected their stake in the Company from falling to zero in the first place. There is no end to the public outrage that is bound to follow, especially since the general opinion is that there was no way other than government support in which AIG could have been rescued.

What is making this win seem possible for Greenberg is the attitude of the judge, Thomas Wheeler. The judge seems to be intent on setting a precedent in order to establish what the government can and cannot do during a financial crisis. This is quite pointless, as the Dodd-Frank financial reform act signed by President Obama in July 2010 has already laid out the rules in case of future bailouts. The Dodd-Frank Act empowers the Federal Reserve to use its emergency lending powers for the benefit of a broad class of firms, at a rate equivalent to the Fed’s discount rate (the rate at which the Fed lends to banks). Had these rules been in place in 2008, AIG could not have been rescued the way it was, as the Fed would not have had the authority to bail out an individual firm.

Judge Wheeler seems to sympathize with Mr Greenberg’s woes. Greenberg claims that the government forced the Board of AIG to accept harsh terms in order to receive the bailout, and in the process, cheated the shareholders of the Company, including himself. At the time of the bailout, Starr International Co., an investment and charitable firm headed by Mr Greenberg, was AIG’S largest single shareholder, with a stake of about 11%. In exchange for an emergency loan of $85 billion, the government acquired a 79.9% stake in the Company. The since-repaid loan, Greenberg alleged, ultimately expanded to $184.6 billion while the government stake peaked at 92%. Moreover, Greenberg claims that the government discouraged deals with sovereign-wealth funds and other private sources so that AIG had no option but to accept the offered rescue package. In its defence, the government claims that in the absence of clear laws in 2008, it did what it had to do in order to protect and stabilize the U.S. economy, and that the Company’s shareholders don’t deserve any financial award, especially since their alternative was a possibly worse outcome in a bankruptcy court.

In case Wheeler sides with Greenberg, this case could cost the country billions of dollars in taxpayers’ money and invite public anger at the same time – all for the sake of establishing a precedent that the Congress has already codified.