Why is AIG Thinking About Suing the U.S. Government?

The insurance giant says it may sue the government for the bailout that saved it. Here's why.

Former AIG CEO Maurice 'Hank' Greenberg enters Manhattan federal court in New York, June 18, 2009. The Securities and Exchange Commission said Aug. 6, 2009, that Greenberg agreed to pay a $15 million fine to settle fraud charges.
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AIG, one of the most recognizable figures of the 2008 financial crisis, announced this week that it was considering joining a suit against the U.S. government. The reason? That depends on whom you ask.

Ask countless lawmakers and pundits, and the explanation is pure greed. Massachusetts Democratic Sen. Elizabeth Warren called the lawsuit "outrageous," saying that it would be tantamount to the company "biting the hand that fed them." Two U.S. Democratic representatives, Vermont's Peter Welch and Massachusetts' Michael Capuano, wrote a letter to AIG chairman Robert Miller saying that the company now "seeks to become the poster company for corporate ingratitude and chutzpah."

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Outrage over the potential lawsuit is rampant, particularly as AIG is running advertisements thanking American taxpayers for the bailout. So is the company being as flagrantly ungrateful as it sounds? For those who want to go beyond the vitriol, here is the other side of the story:

The Government Violated the Bill of Rights

First, the basics: AIG's board is meeting with former AIG Chairman and CEO Hank Greenberg Wednesday. Greenberg was not chairman in 2008, but was still a major shareholder when the government loaned the failing firm $85 billion and took a 79.9 percent stake in the company. His current company, investment firm Starr International, has already filed suit against the government on behalf of AIG shareholders, and AIG now has the opportunity of joining—or even taking over—that suit. The lawsuit alleges, among other things, that the government violated a section of the Fifth Amendment known as the "takings clause" in the bailout. That clause states that the government cannot seize private property without providing "just compensation."

The lawsuit blasts the government for taking "property and rights" from shareholders by not putting the deal to a shareholder vote, and also accuses the government of asking for concessions the company feels were too steep when it took over the firm.

...And Extracted Too High a Price When it Did So

One of the steep penalties named in the complaint is that the government charged more than 14 percent on its loans to the company, a rate that Starr considers "punitive." That could be part of the case for unjust compensation—essentially a charge that the government acted like the mortgage lenders who helped to spur the crisis, says one expert.

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"It reminds me of when people say lenders are engaged in predatory lending, charging exorbitant interest rates," says James Barth, senior finance fellow at the Milken Institute, a California think tank.

In addition, the suit alleges that the government used money from AIG on "backdoor bailouts" for other Wall Street firms. In 2009, New York Times' Dealbook explained that the government directed the company to buy toxic assets from banks at full price, instead of market prices. Companies that benefited from the deals include the titans of banking: Goldman Sachs, Bank of America, and Merrill Lynch, among others. These "backdoor bailouts" also constitute the government taking property "without due process or just compensation," says the complaint.

"Coulda, Shoulda, Woulda"

The U.S. government has made a $22.7 billion profit from its investment in AIG, and the company is seeking a little more than that, $25 billion, in damages in this lawsuit.

The fact that the company has recovered from the crisis and that the government has profited from the bailout may give the company a feeling of "coulda, shoulda, woulda," says Robin Lumsdaine, a professor at American University's Kogod School of Business and a former Federal Reserve official.

In retrospect, the company may feel that it could have tried to negotiate more comfortable terms, she says, but the simple fact is that the board of directors voluntarily agreed to this agreement. Even if AIG feels there are scenarios that could have returned further profit to shareholders, in other words, what's done is done...and, of course, at the time of the bailout, no one knew how it would eventually play out.