With a Little Bit of Luck, AIG Will Shun This Lawsuit

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By Deborah Solomon

Imagine, for a moment, if Eliza Doolittle sued Henry Higgins.

Yes, he transformed the Cockney sprite into the toast of London, but he did nothing for the friends poor Eliza had to leave behind. And darn if the terms of her deal didn't border on abusive, what with all the voice and etiquette lessons required, not to mention making her ditch her sullied clothes.

Bloody preposterous, you might say. Yet this is exactly what American International Group Inc. is mulling as it considers whether to sue the U.S. government for rescuing, rehabilitating and resuscitating its collapsing self during the financial crisis.

As the New York Times reported, AIG's board is considering joining a lawsuit filed in 2011 by former chief executive officer Maurice R. "Hank" Greenberg, who retains a large stake in the giant insurer. Greenberg's lawsuit accuses the government of violating the Constitution by exacting onerous terms that deprived shareholders of tens of billions of dollars. The lawsuit essentially says the U.S. government violated the "takings" clause of the Fifth Amendment, which prohibits seizing private property for public use "without just compensation."

This may come as a surprise to anyone reading recent news reports. Isn't AIG, once considered an unfortunate casualty of the financial crisis, back to health with a strengthening stock price? Hasn't the company gained solid enough footing to repay the loans extended to it during the crisis? Didn't AIG CEO Robert Benmosche recently send a letter to employees calling the government-led turnaround "one of the most extraordinary … in American history"?

Yes, yes all that happened. But don't let the facts get in the way of greed. After all, that's what this is about. AIG wasn't harmed by the bailout -- it was saved. As I've written before, the government's rescue did more than put AIG on life support, it transformed the company into a more beautiful version of itself. Thanks to the government's involvement, AIG was able to shed its riskiest assets and find solid financial footing -- so much so that it has generated a $22.7 billion profit for U.S. taxpayers. Its share price, while lower than before its almost-collapse in 2008, has strengthened and the company's market capitalization is higher than before the bailout.

Yet Greenberg insists that the bailout -- a $182 billion lifeline involving credit lines, equity purchases and other investments -- was too onerous, extracted too high an interest rate (14.5 percent initially) and unfairly diluted the holdings of existing investors.

In fairness, AIG's board has a responsibility to shareholders to at least consider joining the lawsuit. If Greenberg wins a settlement, shareholders could sue AIG over its failure to join the case. Yet Greenberg's lawsuit is an irrational response to a rational act and the board -- which could have chosen bankruptcy over the bailout -- should reject becoming a party.

Perhaps AIG, in the words of Higgins, would have found it preferable to have been left "so deliciously low! So horribly dirty!" If that's the case, it should have rejected the bailout at the outset instead of trying to bite the hand that fed, groomed and transformed it into a better version of itself.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.



-0- Jan/08/2013 19:20 GMT