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Marketplace Morning Report

AIG bailout trial: a partial moral victory

Tracey Samuelson Jun 15, 2015
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The former chief of American International Group Inc. has been handed a victory of sorts.

In a class action lawsuit, Maurice “Hank” Greenberg argued that when the government bailed out insurance giant AIG in 2008 during the financial crisis, the terms of that $85 billion loan were unfair to shareholders. A federal judge in New York agreed Monday, finding that those terms were “unduly harsh” when compared to its treatment of other institutions.

However, while Greenberg may been vindicated by this decision, it was only a partial win, says Ernie Patrikis, a partner at White & Case who previously worked at both AIG and the Federal Reserve Bank of New York.

“A Pyrrhic victory is, you win the battle but you still lose the war,” he says. “Here, he won the battle of ‘was it an unconstitutional taking?’ but he lost the battle of ‘does he get damages?’ “

Greenberg had been seeking up to $40 billion in compensation, but the judge wrote in his decision that without the government’s intervention, AIG would have filed for bankruptcy and therefore didn’t award any damages, even as he agreed the government overstepped when it took 80 percent of AIG’s equity in exchange for the loan.

“Remember [the government was] making an $85 billion loan, an extraordinary loan to one financial institution that had seemingly been run in reckless fashion,” says John Coffee, a professor at Columbia Law School. “They were buying a pig and a poke. They didn’t know just the full major liabilities they were going to encounter when they took over the company. They wanted complete control.”

The big question, in light of this decision, is what this means for how the next financial crisis is handled, if there is one. Carl Tobias, a law professor at the University of Richmond in Virgina, says the government could likely still make emergency loans, just not take equity, as it did with AIG.  

“It may be if this stands that Congress would have to revisit the authority of the federal government and try to expand it so that it does have the flexibility to move in financial crises,” he says.

But first, Tobias says this decision will almost certainly be appealed.

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