Trial begins in lawsuit over AIG’s $182-billion taxpayer bailout

The U.S. extorted American International Group Inc. shareholders when it extended a $182-billion taxpayer bailout at the height of the 2008 financial crisis, a lawyer for Maurice “Hank” Greenberg said.

Greenberg’s Starr International Co., AIG’s largest shareholder when the financial crisis struck, sued the government, calling its assumption of 80% of the insurer’s stock an unconstitutional taking of property that requires at least $25 billion in compensation.

A trial over his claims began Monday in Washington, where David Boies, Greenberg’s famed litigator, will question the architects of the bailout, including Ben S. Bernanke, Henry Paulson and Timothy F. Geithner.

Boies said the Federal Reserve Bank of New York punished AIG by demanding equity and charging 14% interest to borrow, or far more than major banks paid.

“They charged an extortion rate,” Boies said in his opening statement in the U.S. Court of Federal Claims. “They tried to demonize AIG and suggest somehow that AIG was a poster child for problems during the financial crisis.”

Greenberg, who built AIG into the world’s biggest insurer before leaving in 2005, contends that the government trampled the rights of shareholders. Boies said the banks, including Morgan Stanley and Citigroup Inc., got bailout loans at rates of less than 4% without surrendering equity.

Some, including Citigroup, later settled civil claims that they fraudulently marketed mortgage-backed securities.

“They didn’t take Citibank’s equity” as a condition of getting a loan, Boies told Judge Thomas Wheeler. “They said Citibank was a fraudster.”

The 85 names on Starr International’s witness list include Bernanke, the former Federal Reserve chairman; Paulson, former treasury secretary under President George W. Bush; and Geithner, head of the Federal Reserve Bank of New York in 2008 and former Treasury secretary under President Obama.

In outlining the government’s defense, Justice Department attorney Kenneth Dintzer said the U.S. acted lawfully through the bailout of AIG to avert a world economic collapse. Without the deal, AIG would have faced bankruptcy, he said.

“It was so big and so entrenched in the world’s economic system that its failure threatened the world’s economy,” Dintzer said in his opening statement. “The goal was to save the world from AIG.”

Starr is improperly seeking “a $40-billion windfall,” Dintzer said. The bailout was “the largest package of assistance in human history,” he said. Even though AIG shareholders owned less of the company for a period, they still received a benefit, Dintzer said.

“This enormous benefit was a benefit that shareholders were not entitled to, they didn’t earn and apparently they don’t appreciate,” Dintzer said.

The 80% equity stake the New York Fed took mirrored an effort by private investors to save AIG before the government stepped in, Dintzer said.

The loan was legal and voluntarily accepted by AIG’s board, Dintzer said. He said Starr can’t show that AIG shareholders were injured by the government’s actions, or that they would be better off if the government hadn’t acted.