AIG Saw Starr’s Lawsuit as Likely to Fail, Damaging

American International Group Inc. opted against joining a lawsuit against the U.S. government over its 2008 bailout because the case was unlikely to succeed and risked harming a reputation the insurer is seeking to restore.

The case “threatened to destroy much of the good work that AIG and its employees had done rebuilding AIG and its name,” the insurer’s board said in a letter released today from its lawyers. “This concern was consistent with the media coverage and statements made by elected officials highly critical of AIG for even considering the demand.”

The insurer’s board voted unanimously on Jan. 9 to reject joining the suit, filed by former AIG Chief Executive Officer Maurice “Hank” Greenberg’s Starr International Co. Greenberg, 87, says the U.S. violated shareholders’ rights by taking over New York-based AIG during a bailout that began in 2008 and swelled to $182.3 billion.

“Starr’s claim had a low likelihood of success on the merits,” said Paul Curnin, an attorney for AIG’s board at Simpson Thatcher & Bartlett LLP. He estimated Starr’s chance of prevailing at about 20 percent, according to the letter, signed by him and Collins J. Seitz, a lawyer for the board at Seitz Ross Aronstam & Moritz LLP.

The letter was addressed to David Boies, who represents Greenberg’s Starr at Boies, Schiller & Flexner LLP. It was included in a filing AIG made today in a court in Washington.

Dawn Schneider, a spokeswoman for Boies, declined to comment.

Lawmakers Critical

Greenberg’s case required AIG to weigh suing the U.S. because it makes claims on the company’s behalf. News of the deliberations drew criticism from lawmakers including Senators Elizabeth Warren and Robert Menendez and Representative Elijah Cummings, who said suing the U.S. would be an insult to taxpayers.

AIG CEO Robert Benmosche, 68, has been working to restore the company’s reputation after repaying the U.S. bailout last year. He’s reached deals to sponsor U.S. and New Zealand rugby teams, restored the insurer’s name to units, and began running television and newspaper ads to thank taxpayers for the rescue.

The U.S. owned as much as a 92 percent stake in AIG during the rescue, and recouped the cost of the bailout in part by auctioning the shares. The insurer plunged 97 percent in 2008 amid losses tied to a collapsing housing market.

Advisers hired by the board contested Starr’s claims that AIG had no choice on the bailout and that the government paid far less for the stake than it was worth. Bankruptcy could have stripped the shares of all value, one adviser said.

“A choice between rock and hard place is still a choice,” Erwin Chemerinsky, dean of the University of California Irvine School of Law, said in the letter.

The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).

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