Starr International claims U.S. government broke the law in its AIG bailout

Starr International, the investment firm of former AIG CEO Maurice Greenberg, has made allegations in a lawsuit that the U.S. government broke the law by taking control of AIG as part of the bailout.

AIG was rescued with $182 billion in fear that its collapse would have a hugely negative affect on the American economy.

It was a bailout that angered many people. In a letter by Rep. Peter Welch, D-Vt., written in 2013, he said that “taxpayers are still furious that they rescued a company whose own conduct brought it down.”

The lawsuit against the government is driven by the fact that when the Fed bailed the company out it did not properly compensate shareholders to cede control. AIG is said to have been subject to punitive treatment that violated the constitutional rights of the firm’s shareholders given the process and compensation for their property.

The lawsuit asks for over $40 million for Starr and other major AIG shareholders.

In a complaint filed by attorney David Boies, Starr says that the Fed used AIG “as a vehicle to covertly funnel billions of dollars” to its trading partners “in a now well-documented ‘backdoor bailout’ of these financial institutions.”

The complaint stated:

“This is the only time in history when the government has taken without just compensation and/or illegally exacted the assets and equity of a company and its shareholders in connection with a loan, let alone a fully-secured loan bearing an extortionate interest rate.”

Mr. Greenberg lost a bid to dismiss a case that accused him of accounting fraud during his time at AIG by the New York Attorney General’s office. Greenberg resigned in 2005 – around the time that these accounting allegations are dated back to.

The U.S. government says that Starr does not have the legal standing to bring the case on behalf of the firm’s shareholders, denying the Court of Federal Claim’s allegations.

AIG has repaid the bailout and is no longer government controlled and has been reporting somewhat impressive financial results. However, in 2013 AIG declined to join the Starr lawsuit.

AIG Chairman, Robert Miller, said:

“To date, AIG has returned $205 billion to America, including a profit of $22.7 billion. We continue to thank America for its support.”

Judge Thomas Wheeler did not accept the government’s bid to dismiss the case. He said that “the complexity of the submissions and the factual disagreements strongly point to the need for a trial.”

The trial will last around six weeks long and will include testimonies from major people in the government involved in carrying out the bailout. Ben Bernanke (the President of the Fed at the time of the bailout), Timothy Geithner, and Henry Paulson have been called to testify at court.

Bernanke once expressed the decision to rescue AIG in 2009, by saying that the decision angered him to the extent that he “slammed down the phone more than a few times.”

In an interview Bernanke said:

“I understand why the American people are angry. It’s absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.”