AIG Founder Suing For Not Being Allowed To Fail, Demanding Billions

In the Pixar movie The Incredibles one of the opening scenes involves the hero, named Mr. Incredible, saving a man who was jumping off of a building. Following that, the man then sues Mr. Incredible for the act, saying, “You didn’t save my life, you ruined my death, that’s what you did!”

In the same vein, we have Maurice “Hank” Greenberg, the founder of AIG, suing the U.S. government. Why, you may ask? For saving his company from financial ruin.

His argument is that the U.S. government had seized AIGs assets illegally, and that as such, the U.S. Treasury needs to now pay him and the other AIG shareholders at the time the original value of the company.

He was already railing against the deal in 2008, when he claimed that had he still been chairman the company would not have been in the dire straits it was in. This, of course, is laughable, as he created the very tools which brought AIG down. He also neglects to note that he was forced out due to his use of off-the-books schemes to fake profitability, something he paid a $15 million fine for some years back, with AIG itself paying $1.6 billion in penalties. So, perhaps he is right; it would not have been in the dire straights it was in — it would have been far, far worse.

James Millstein, the Treasury official who oversaw AIG’s restructuring, had this to say on the bailout of AIG:

“The AIG which came begging to the Fed’s doorstep was the AIG that Hank Greenberg built. It’s capital structure was opaque, it was heavily dependent on short-term funding, with a highly leveraged financial products subsidiary that had been organized to evade effective regulatory oversight. [Greenberg] ran the parent company like a hedge fund with a triple A rating.”

The deal itself was not the U.S. Treasury’s own design. AIG’s board had been approaching various lenders with the deal for over a week when they approached the U.S. government. The deal which AIG came to the table with is, for an 80 percent stake in the company, an initial $85 billion with the option for additional lending in the future. The U.S.. Treasury accepted the offer given by AIG, and as a result, the company was saved.

So, realize, Mr. Greenberg is suing the U.S. government for accepting AIG’s own proposal, a proposal which it had been shopping around between various lenders. And his argument for the suit is that the U.S. government could not accept the deal without directly paying the shareholders, despite the board itself creating the deal independent of any government intervention. And to do this, Greenberg had tapped David Boies, a notable lawyer who has dealt with unusual legal theories before in the courtroom.

Still, the judge in this case, Judge Thomas Wheeler, has demonstrated a willingness to indulge the theories. The argument which caught on, and may actually give this case legs to stand on, is a very narrow one. Counsel Boies is arguing that the law authorizing the Treasury Department to make emergency loans to private firms fails to give explicit authority to take compensation in the form of stock, while it does mention charging interest.

If this argument sticks, it could undo the entire financial bailout. The U.S. Treasury would then have several options, including forcing every bank it bailed out into receivership even if they are currently profitable. Greenberg does not appear to care for the consequences of his suit. however, so long as he gets to pocket the billions he feels owed.

Featured image by Matt Stoller. Licensed under CC BY 2.0 via Flickr