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 Hank’s chutzpah

29 September 2014 By Reynolds Holding

Investors suing over American International Group’s bailout have law and gall on their side. With Hank Greenberg, the insurer’s pesky former chief executive, leading the charge, claims that Uncle Sam cheated shareholders while also saving them may actually succeed at trial. Extracting terms like an equity stake and seemingly punitive lending rates in exchange for rescuing AIG was legally questionable. The tricky part will be proving anyone lost in the deal.

AIG, after all, was on the brink of bankruptcy in September 2008, its shares in danger of becoming worthless. The government stepped in with an $85 billion loan and later injected nearly $100 billion more. The price: an 80 percent stake that grew to 92 percent; and loan terms that were higher than banks received in their bailouts. Uncle Sam ultimately made about $23 billion in the bargain, but shareholders also benefited. Today, the stock trades at about $54 a share.

But bankruptcy was never an option, the shareholders now claim. That’s because the government wouldn’t have allowed it, given the costly effect it would have had on AIG’s counterparties. The likes of former U.S. Treasury Secretary Timothy Geithner and former Federal Reserve Chairman Ben Bernanke will testify to that effect, they say. So the question is whether the inevitable bailout was legal.

On its face, the statute authorizing the loan allowed the Fed to charge interest, but not to acquire equity. In any event, the Fed may never have approved the loan’s final terms. And while the AIG board probably did so – albeit under duress – stockholders didn’t vote on the dilution of their shares or a subsequent 20 to 1 reverse stock split necessary to accommodate the government’s stake. The upshot, they argue, is that Uncle Sam swiped their property illegally.

They have a point. Less clear is what they lost. The government says their 20 percent stake in AIG after the rescue was worth more than the 100 percent they owned before. But the investors argue that they’re owed the value of illegally seized assets: Shares worth about $35 billion immediately after the loan, plus related rights, for a total of some $40 billion.

That could be a tough sell, especially in the Court of Federal Claims, where judges lack the life tenure that shields other federal jurists from an unpopular decision’s fallout. The case somehow managed to make it to trial, though, a reminder never to underestimate the power of chutzpah – especially when wielded by Hank Greenberg.

 

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