WASHINGTON — A federal judge ruled that regulators went too far in taking a huge stake in American International Group Inc. as part of its 2008 bailout, but he decided that damages weren’t warranted for the giant insurer’s former chief executive and other shareholders.
After a high-profile trial that included testimony by former Federal Reserve Chairman Ben S. Bernanke and two former Treasury secretaries, Judge Thomas C. Wheeler ultimately found that regardless of the Fed’s overstepping its authority, AIG would have gone bankrupt without federal aid and would have left investors with nothing anyway.
Wheeler’s decision, released Monday, faulted the Fed for taking a 79.9% stake in the company in exchange for an $85-billion loan that helped keep the firm afloat during the financial crisis.
The loan — the first part of a complex bailout that ultimately totaled $125 billion — was “an illegal exaction under the 5th Amendment,” which prohibits the government from taking private property “without just compensation.”
“There is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan,” wrote Wheeler, a judge on the U.S. Court of Federal Claims.
Despite his findings, Wheeler did not award any money to AIG's former longtime chief, Maurice R. Greenberg, or other shareholders in the class-action suit. Greenberg had sought damages of more than $40 billion.
Although the Fed wasn't permitted under law to take the ownership stake, “the government did not cause any economic loss to AIG’s shareholders,” Wheeler said. He quoted a financial advisor to AIG's board during the financial crisis, who noted that “20% of something [is] better than 100% of nothing.”
“The inescapable conclusion is that AIG would have filed for bankruptcy, most likely during the week of September 15-19, 2008,” Wheeler wrote in his 75-page ruling. “In that event, the value of the shareholders common stock would have been zero.”
The Fed's loan “significantly enhanced the value of the AIG shareholders’ stock,” Wheeler said.
The Fed said Monday that officials believed the central bank's bailout was “legal, proper and effective” and “prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG's collapse during the financial crisis.”
“The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made,” the Fed said.
Greenberg, who built AIG into a financial powerhouse, was ousted as the company's chief executive in 2005 after an accounting scandal.
In 2011, Greenberg's Starr International Co. insurance firm, which holds a large stake in AIG, sued the federal government on behalf of AIG shareholders claiming that the bailout amounted to an illegal taking of their property.
The government eventually increased the amount of money it pledged to AIG to about $182 billion and its ownership stake to 92%. AIG later repaid the $125 billion it borrowed plus interest and dividends, and the government made gains on its stake as the company’s stock price recovered. Taxpayers ended up with a net $22.7-billion gain from the bailout.
Andrew Stoltmann, a Chicago investors' lawyer specializing in securities lawsuits, agreed with Wheeler's decision not to award any damages.
“Had Greenberg been able to secure a recovery, it would have been a real miscarriage of justice,” Stoltmann said. “AIG executives and their reckless conduct were to blame for the losses, not any actions taken by the federal government.”
Experts and government officials have said the conduct of AIG, a powerhouse deeply entwined in the worldwide financial system, was one of the major elements leading to the global credit crisis then and deepening the Great Recession.
But Wheeler said the government “treated AIG much more harshly than other institutions in need of financial assistance” and “the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions.”