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New York Fed Asks Judge to Toss Starr’s Lawsuit Over AIG Bailout

The Federal Reserve Bank of New York urged a federal judge to dismiss Starr International Co.’s lawsuit over the government bailout of American International Group Inc.

Starr, an AIG shareholder that is headed by AIG’s founder, Hank Greenberg, claims the government used its 2008 bailout of New York-based AIG to channel money improperly to the insurer’s trading partners.

John Kiernan, a lawyer for the New York Fed, yesterday told U.S. District Judge Paul Engelmayer in Manhattan that Starr failed to make a demand on AIG’s board before filing the suit and that the board’s decisions about terms of the bailout loans aren’t subject to court review under state law.

Starr sued the Federal Reserve Bank of New York in November, saying it breached its duty to AIG shareholders by loaning $85 billion at 14.5 percent while offering better terms to banks in a “backdoor bailout.” AIG almost collapsed after bets tied to the housing market soured, and the bailout was revised at least four times before reaching $182 billion.

David Boies, a lawyer for Starr, said yesterday that Starr correctly seeks compensation for the New York Fed’s breaches of fiduciary duties it owed both to AIG and to AIG’s shareholders, including Starr.

‘Millennial Situation’

Engelmayer questioned Boies on the timeliness of the filing of the suit and whether any statute of limitations had expired.

“I have a great deal of difficulty understanding why you aren’t sunk by the timing of your lawsuit,” the judge said.

Engelmayer also asked if what occurred at AIG was a “millennial situation” and whether the actions by AIG’s board were consistent with “finding a creative way to grant headroom for terms that saved its life.”

Starr said in the complaint that the bank coerced, induced and required AIG directors and officers to “violate their duties” to Starr International and AIG. Beginning in 2008 and continuing until at least January 2011, the federal government “imposed a series of transactions” that “resulted in depriving” AIG and its shareholders of tens of billions of dollars, Starr said.

The reserve bank said in a court filing that AIG sought and freely accepted the government bailout.

“No cognizable cause of action arises from FRBNY’s decisions regarding specific proposed terms for its rescue or from the AIG board’s decision to accept those terms,” the bank said.

Starr filed a related complaint in November against the federal government in the U.S. Court of Federal Claims in Washington.

The New York case is Starr International Co. v. Federal Reserve Bank of New York, 11-8422, U.S. District Court, Southern District of New York (Manhattan).

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