Six years after AIG bailout, trial asks: was it legal?

Sun Sep 28, 2014 9:42pm EDT
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By Aruna Viswanatha

WASHINGTON (Reuters) - One of the more unusual trials to come out of the 2008 financial crisis is set to begin on Monday, when a federal judge will consider whether the U.S. government's rescue of American International Group Inc (AIG.N: Quote) was, in fact, legal.

In a case that explores the limits on U.S. government power in responding to major financial crises, the trial is expected to revisit in detail the New York Federal Reserve's September 2008 decision to extend a bailout package to AIG as the insurance giant was minutes from bankruptcy.

The AIG bailout, on the heels of the Lehman Brothers collapse in 2008, preceded the "too big to fail" auto and bank bailouts the federal government undertook during a U.S. financial crisis underpinned by faulty mortgage lending.

The major players in that drama will be back on the Washington stage during the six-week trial: Former Federal Reserve Chairman Ben Bernanke, and former Treasury Secretaries Timothy Geithner and Henry "Hank" Paulson.

A lawyer for the insurance giant's former chief executive, Maurice "Hank" Greenberg, was expected to argue that the government unlawfully sought to punish AIG shareholders with excessively harsh terms.

Greenberg's lawyers have said in court papers the bailout "offer" from the New York Fed to provide AIG an $85 billion loan in exchange for high interest rates and a nearly 80 percent stake in the company amounted to unconstitutional theft from AIG shareholders.

Greenberg, through his Starr International Co, was AIG's largest shareholder at the time. Starr filed lawsuit, to considerable public scorn, in November 2011.

Government lawyers have defended the actions as appropriate, pointing out that the deal had been approved by the AIG board, as the company faced no other alternative to bankruptcy. Lawyers at the U.S. Department of Justice have described the case as a "conspiracy theory" and "built on a mistaken premise."   Continued...

The AIG headquarters offices are seen in New York's financial district, January 9, 2013.  REUTERS/Brendan McDermid