Six Years After Financial Crisis, Litigation Carries On With AIG Suit

Sep 30, 2014
Originally published on September 30, 2014 6:46 pm
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ROBERT SIEGEL, HOST:

Did the federal government's bailout of the huge insurance company AIG, amount to extortion? The founder of AIG, Hank Greenberg says yes. Greenberg's allegations are the basis of a civil suit that went to trial this week in Washington. It's all about the 2008 financial crisis and the terms the government imposed on the insurance company it rescued. The plaintiffs say those terms were excessively harsh. Among the likely witnesses are some of the key players in the financial crisis including former Fed Chairman Ben Bernanke and former Treasury Secretaries Henry Paulson and Timothy Geithnerand. We're joined now by NPR's Jim Zarroli, who is following the trial and Jim what's this case about and why is it coming up now?

JIM ZARROLI, BYLINE: The case is about whether the government overstepped its constitutional authority when it bailed out AIG. You remember then in 2008, AIG had gotten into a lot of trouble because of all the credit default swaps it had sold. These are, you know, insurance contracts on mortgage assets. So the government gave it a loan of $85 billion - later on that went to $184 billion. Now as part of the bailout the government charged really high interest rates for the money it lent and it also took - temporarily anyway, it took nearly 80 percent of the company's shares. Greenberg says that diluted the value of this company's stock, so he filed a class-action lawsuit on behalf of the shareholders and his investment company was the biggest shareholder of AIG when the bailout occurred.

SIEGEL: So does Greenberg believe that the government was wrong to bail out AIG altogether?

ZARROLI: You know, he has always opposed the bailout. He says the terms were confiscatory, this is a seizure of private property and that's unconstitutional. He also says, you know, the bailout wasn't voluntary, the government pretty-much forced it to accept the terms. And he also makes the point, which other people have made, that the money didn't actually go to AIG. It was passed on to the big banks and the investment funds that AIG owed money to, firms like Goldman Sachs and J.P. Morgan Chase. They were really the beneficiaries of the bailout, but the board at AIG approved the bailout and even though, you know, Greenberg had founded the company he was no longer chairman by the time this happened. So there wasn't really anything he could do about it except sort of tenaciously pursue this suit, and that's what he's done even though the company itself hasn't gotten involved with it.

SIEGEL: How has the federal government responded to this?

ZARROLI: With a lot of indignation. U.S. officials say this was a bailout. AIG was not entitled to dictate the terms of the bailout. The company was in trouble because of its own actions. It had sold a lot of what are called credit default swaps and it was having to pay out a lot of money, which it didn't have and, you know, yes shareholders lost a lot of the value of their shares, but, you know, if the bailout hadn't happened they would have lost everything. The company would have gone under and also that would've had a kind of domino effect on other financial institutions and it would have made the economic crisis a lot worse.

SIEGEL: So if the government loses, how much money would it have to pay Greenberg and the other shareholders?

ZARROLI: Oh, it could be billions of dollars. I mean the suit is asking for 40 billion. The thing is this case is unusual in a lot of ways. For one thing the suit was dismissed in federal court and then an appeals court upheld that dismissal, but Greenberg took it to the U.S. Court of Federal Claims, that's a sort of obscure corner of the judiciary, it hears claims against the government. It takes a lot of contract claims. It doesn't usually get cases of this magnitude. So, it's a little hard trying to predict how it will respond. The attorney for Greenberg is David Boies, who's a very famous lawyer with a long career. The judge in the case has allowed Boies to depose a lot of very big names, people like former treasury secretary Tim Geithner and at the end you know the judge is expected to go away and take maybe months to decide whether Greenberg has a case. And if he has a case, how much of anything shareholders should get.

SIEGEL: Jim thanks.

ZARROLI: You're welcome.

SIEGEL: That's NPR's Jim Zarroli. Transcript provided by NPR, Copyright NPR.