Maurice Greenberg puts U.S. handling of AIG bailout on trial

Maurice R. Greenberg, the ousted chief executive of American International Group Inc., was practically laughed out of New York for claiming that he and other shareholders were shortchanged by the U.S. government’s $182-billion bailout of AIG.

No one’s laughing now.

In an obscure courthouse here, normally the domain of aggrieved government contractors and Native American tribes, the billionaire financier is leading a crusade against the government’s handling of the financial crisis that seems as unlikely as it does brazen.

Over government objections and dismissal motions, the trial is steamrolling forward, wringing testimony from such A-list officials as former Treasury secretaries Henry M. Paulson and Timothy F. Geithner and former Federal Reserve Chairman Ben S. Bernanke.


A verdict granting Greenberg’s claim for $40 billion more in taxpayer money is a serious possibility.

“This trial isn’t about getting the truth of the crisis and the bailout. It’s about a billionaire who wants more money,” fumed Dennis Kelleher, chief executive of Better Markets Inc., a Washington nonprofit that pushes for more stringent financial regulation.

The suit’s survival is a testament to Greenberg’s stubbornness, the skill of one of the nation’s top corporate litigators and a deft legal strategy that framed the issues for the specialized U.S. Court of Federal Claims.

Greenberg couldn’t have landed a more receptive judge than Thomas C. Wheeler, who has focused on the minutia of the bailout deal while rebuffing the government’s efforts to raise the broader context of the global financial fiasco.

Greenberg, a fallen Wall Street legend who took over AIG in 1967 and transformed it into a global financial powerhouse, has been on a warpath to reclaim his reputation.

In the late 1990s, AIG began selling a complex financial product that insured other securities against default. Known as a credit default swap, it was sold mostly to Wall Street and foreign banks looking to protect against losses on their big bets, which during the mortgage frenzy of the early 2000s were mostly concentrated in housing.

In 2005, Greenberg was ousted amid an accounting scandal, but he remained the company’s largest shareholder. AIG, meanwhile, ramped up its credit default swaps business even further before shutting it down at the end of that year.

When the housing market tanked three years later, AIG was caught owing billions to major U.S. and foreign banks — billions more than it could pay. Both AIG and the investment houses it insured faced bankruptcy.

AIG had become so intertwined with the global financial system that its failure could have triggered an even greater crisis than the one that eventually cost the global economy $13 trillion, according to the International Monetary Fund.

In the fall of 2008, as financial institutions unraveled, the Federal Reserve Bank of New York hurriedly propped up AIG with a high-interest-rate emergency loan. Eventually, the government pledged more than $182 billion and took a 92% stake in the firm. AIG ended up using about $125 billion of the promised money; with loans repaid and the stock sold, the government got all the money back — plus $22.7 billion.

The initial bailout terms were made over the protests of Greenberg, who was shut out of negotiations. Not one to take setbacks lightly — he’s still pursuing a lawsuit stemming from his 2005 ouster — the 89-year-old began a relentless legal campaign against the government, even as new managers at AIG launched a “Thank you, America” ad campaign.

In a key move, he retained one of the nation’s top corporate litigators, David Boies, who over a storied career has won a string of landmark cases, including the government’s antitrust case against Microsoft Corp.

In Greenberg’s case, Boies filed parallel suits in different venues that cited basically the same set of facts but pursued different legal claims.

One, filed in federal court in New York, argued that minority shareholders’ rights were abused, a common claim when large shareholders control a company, as the government did with AIG.

A judge soon tossed that suit, saying regulators, acting much like police in emergency situations, relied on their best judgment as they scrambled to save the world from financial collapse. Besides, the judge said, AIG had put itself in its financial predicament.

Boies filed the second case in the U.S. Court of Federal Claims, a venue designed mainly for breach-of-contract suits against the federal government. The court is rooted in mid-19th-century reforms meant to protect federal contractors from an increasingly powerful federal government.

Unlike mainstream federal courts, the federal claims court has no juries — all rulings are made from the bench. Although it handles mostly smaller claims, the court has come to specialize in complex cases alleging improper government confiscations, which is what Greenberg alleged.

The case makes two claims: One is that regulators overstepped their authority by allowing the Federal Reserve Bank of New York to profit from taking so much AIG stock and from charging high interest rates on emergency loans.

The other is that the government violated the 5th Amendment provision forbidding the taking of property for a “public use” without “just compensation.”

Both claims normally are long shots: Wins against the government in so-called takings cases are rare.

But Judge Wheeler has allowed the case to proceed in the federal claims court over the fierce opposition of the government and granted Boies sweeping latitude to call witnesses and offer evidence.

Wheeler’s rulings so far have batted aside government pleadings that point to big-picture policy questions — imminent global economic collapse, AIG’s near-certain failure and the company’s own role in bringing about the crisis. Instead, he has dived deeply into the fine points of the bailout deals themselves.

Wheeler has tut-tutted a lawyer for the government for making what he called “threatening statements” against AIG’s board when it was considering joining Greenberg’s lawsuit. The judge also expressed impatience with unnamed public officials who objected to the idea in the press.

“It is unfortunate that AIG’s board members had to deal with this misplaced pressure and public outcry,” wrote Wheeler, who spent his career as a corporate lawyer specializing in government contract claims before his appointment to the bench in 2005 by then-President George W. Bush.

Wheeler also chastised AIG’s lawyers and consultants for giving AIG’s board “a low evaluation of [Greenberg’s] potential success” in the lawsuit.

The government began presenting its case last Thursday.

At trial so far, Boies has skillfully kept ex-Cabinet members and mid-level functionaries on the defensive and regularly beaten back the objections of government lawyers, many of them decades his junior.

Boies has dwelt at length on the role that former Goldman Sachs executives played in arranging the AIG bailout — on much harsher terms than the bailouts given to Goldman and other Wall Street firms. Among those grilled was Paulson, a former Goldman chairman who led the bailout negotiations as Treasury secretary.

“Did you believe it was important for the terms to be, as you used the term, punitive?” Boies asked early in the trial.

“If we have a rescue that trumps failure and then prevents failure, that, I think is what was important that the — that the terms be harsh because I — you know, I take moral hazard seriously,” Paulson said, referring to a company that takes excessive risk believing that someone else will bear the consequences.

During one tense exchange, Boies pressed Sarah Dahlgren, a top Fed official who had managed the bailout, to name the beneficiaries of the government loans to AIG. Dahlgren resisted, even though the names have been known for years.

“Could I ask you to answer my question?” Boies said, his normally flat, methodical voice firming.

Soon, the judge chimed in. “I understood the question as wanting names of entities,” Wheeler said from the bench, turning to Boies. “Isn’t that what we’re after?”

“Yes, your honor,” Boies said.

“Oh, you must be kidding me,” said a flustered Dahlgren, who thought she was being asked to name every possible beneficiary instead of just a few.

Finally, she came up with Goldman Sachs, JPMorgan Chase, Citigroup.

“Now we’re getting somewhere,” Wheeler said.

In an interview after a recent day in court, Boies said the case is about protecting property owners against government overreach.

Boies said he understood, though, why the public might be mystified by the case and even conceded, as a philosophical public policy matter, that a “fairer” solution to the crisis would have been for the government to treat all Wall Street firms as harshly as it did AIG.

“But,” he said, turning to enter his law office, “that’s all a public thing. It has little to do with what happens in court.”