Washington • The giant insurer American International Group is considering a step that would remind America why everyone got so mad at the company in the first place.
The board of AIG is weighing whether to join a $25 billion lawsuit against the U.S. government for forcing unacceptably high losses on shareholders in its bailout. The argument is that this violated the Fifth Amendment's prohibition on the government seizing private property without just compensation. There were howls of outcry in Washington, following a report in The New York Times late Monday on the deliberations and confirmation by AIG in a statement late Tuesday.
"Beginning in 2008, the federal government poured billions of dollars into AIG to save it from bankruptcy," said Sen. Elizabeth Warren, D-Mass., a longtime AIG critic, in a statement. "AIG's reckless bets nearly crashed our entire economy. Taxpayers across this country saved AIG from ruin, and it would be outrageous for this company to turn around and sue the federal government because they think the deal wasn't generous enough."
AIG has so far declined to join a lawsuit instigated in 2011 by former company chief executive Hank Greenberg, accusing the Treasury and Federal Reserve Bank of New York of extracting punitive terms from the insurer as conditions of its 2008 rescue. The weighing of the issue this week may be more about covering all the bases than a genuine effort to reopen old wounds.
Still, the possibility of the company suing a government that rescued it raised eyebrows Tuesday.
Here is a refresher on the events that led to the bailout. AIG's financial products division had been, in effect, selling guarantees against losses on highly rated securities tied to mortgages. When those securities plummeted in value, the losses in that division were so great that it brought one of the world's biggest financial firms to the brink of bankruptcy. When AIG executives turned to the government for help Sept. 16, 2008, the day after Lehman Brothers went bankrupt, they had no other options; no private entity would lend them money.
It is true that AIG executives wanted a sweeter deal than they got. They envisioned getting access to emergency Fed lending at some reasonably low interest rate, a privilege granted to banks (and also one of the reasons banks are intensively regulated). New York Fed President Timothy Geithner and Treasury Secretary Hank Paulson had other ideas. If the government was going to bail the company out, they were going to insist on more punitive terms.
The message the government was sending with the onerous terms was clear: If you run a company into the ground and have to come to Uncle Sam for help, we will help you only reluctantly and at a high cost. If you do not like it, well, you can join Lehman Brothers in bankruptcy court.
Greenberg apparently sees it differently. His company's lawsuit, filed in November 2011, said that "the government is not empowered to trample shareholder and property rights even in the midst of a financial emergency."
The AIG board will hear presentations Wednesday from Greenberg's Starr International, then from lawyers for the Treasury and New York Fed.