American International Group Inc. (AIG), the insurer that’s weighing whether to join a shareholder suit alleging its 2008 bailout was unconstitutional, would face tough odds in court, a former government watchdog said.
AIG’s board is scheduled to meet tomorrow to review whether it should join a case brought in 2011 by former Chief Executive Officer Maurice “Hank” Greenberg. The ex-CEO said that the rescue cheated shareholders by diluting their stake in the company. The insurer needed help after it was unable to raise money in equity and bond markets to pay clients who had bought protection against losses on mortgage-related securities.
“The idea that AIG would have been better off by going bankrupt, for the shareholders is a very, very hard thing to sell, I think, to a judge,” Neil Barofsky, the former inspector general of the U.S. Troubled Asset Relief Program said today on Bloomberg Television. “I just don’t see how you get past the fact the board voted” to accept U.S. aid.
The lawsuit presents both legal and public-relations challenges for a company that repaid the remainder of a $182.3 billion bailout last year. The New York-based insurer last week began an advertising campaign to thank taxpayers for their support and highlight that the U.S. made a profit on the rescue.
AIG said in court papers in August that Greenberg’s Starr International Co. may file a complaint against the company if it doesn’t join the case. The New York Times reported on the board meeting yesterday, saying that directors may have an obligation to shareholders to consider the possibility of recovering money through a lawsuit.
“They have to show they made an informed judgment,” Charles Elson, a corporate-governance professor at the University of Delaware, said of the board. If they decide not to join the lawsuit, they would likely be protected by the so- called business-judgment rule, which shields corporate officers as well as directors from lawsuits over their decisions made on behalf of the corporation, he said.
AIG’s board will review presentations by the U.S. Treasury Department, Federal Reserve Bank of New York and Starr as directors work toward a decision by the end of this month, according to the court filing from August. While the board has a responsibility to hear the arguments, joining the case would invite outrage from the public, said Barofsky.
Barofsky said he doesn’t expect AIG to “turn around and give the American taxpayer the equivalent of a giant middle finger of suing them for saving them,” Barofsky told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle, referring to an insulting and obscene gesture in the U.S.
White House press secretary Jay Carney said at a briefing today that he hadn’t discussed the lawsuit with President Barack Obama and that the government rescued AIG “after concluding that such a failure would have caused catastrophic damage to the economy and financial system.”
Matt Anderson, a Treasury spokesman, and AIG’s Jon Diat declined to comment. Greenberg couldn’t immediately be reached for comment.
“There is no merit to these allegations,” Jack Gutt, a New York Fed spokesman wrote in an e-mailed statement. “AIG’s board of directors had an alternative choice to borrowing from the Federal Reserve and that choice was bankruptcy.”
The latter option would have left shareholders with “worthless stock,” Gutt said. AIG’s shares tumbled more than 90 percent in 2008. After the bailout, the company approved a 20-for-1 reverse stock split to buoy the share price. The insurer fell 0.8 percent to $35.65 at 4:01 p.m. in New York.
“While boards have a duty to their shareholders, they must also weigh the potential public relations fallout and negative publicity associated with these types of decisions, which could also prove detrimental to shareholders,” Brian Lee, a managing director at CEB, an advisory firm that works with corporations on governance issues, said in an e-mail.
Greenberg won a federal judge’s approval to proceed with the case against the U.S. in July. In the complaint, Starr said the government paid $500,000 for a stake in the company that was worth $25 billion, violating the constitutional rights of shareholders to due process and equal protection of the law. A parallel case against the New York Fed was dismissed in November.
“AIG should thank American taxpayers for their help, not bite the hand that fed them for helping them out in a crisis,” said Senator Elizabeth Warren, a Massachusetts Democrat, in an e-mailed statement. Warren previously led a congressional panel that reviewed federal bailouts of financial firms.
The U.S. converted its preferred stake in AIG into 92 percent of the company’s common shares in 2011. The holding was sold in six share sales over the last two years.
“If AIG enters this suit, it would be the equivalent of a patient suing their doctor for saving their life,” said Mark Williams, a former Federal Reserve bank examiner who teaches finance at Boston University.
The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).
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