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Summing Up the Latest Light Reading from the AIG Bailout Trial
By LESLIE SCISM

Hank Greenberg
Bloomberg News
Judge Thomas Wheeler, the Washington, D.C., jurist in charge of the lawsuit challenging the legality of the bailout of American International Group, has no shortage of reading material: He just got handed 1,100 pages of newly filed documents summing up how each side thinks he should rule.
From plaintiff Starr International, run by former, long-time AIG Chairman and Chief Executive Maurice R. “Hank” Greenberg,” some 700 pages arrived Thursday. Most of those pages seek to distill eight weeks of testimony last year into proposed findings of fact favoring Mr. Greenberg’s argument: that the U.S. government cheated Mr. Greenberg and other shareholders out of at least $35 billion when it demanded a 79.9% equity stake in AIG in exchange for providing $85 billion in an initial emergency loan.
Mr. Greenberg’s legal team asserts that the government’s demand for equity in the giant insurer—on top of a double-digit initial interest rate on its loan—overstepped the Federal Reserve’s statutory authority as it sought to punish AIG while favoring many banks with much more-lenient terms.


In its roughly 445 pages, the Justice Department presents a different set of proposed findings of facts. It maintains that the government acted lawfully. Moreover, it maintains that Mr. Greenberg and other AIG shareholders didn’t establish any economic loss, given the alternative to the bailout was a bankruptcy filing.
Each side will now have the opportunity to respond in writing to the latest filings by the other. Those responses are due March 23, and closing arguments in the lawsuit are set for April 22.
AIG fully repaid by the bailout, which reached to nearly $185 billion at its peak, by the end of 2012.
Below are some excerpts from the filings from each side.
Starr:
The U.S. government’s regulatory failings “substantially contributed to the 2008 financial crisis,” and contrary to common wisdom that AIG’s near collapse resulted from recklessly taking on large exposure to subprime-mortgage bonds, “AIG, like many financial institutions, faced a severe liquidity crisis… as a result of the market-wide financial crisis.”
AIG had quit selling insurance on risky subprime bonds three years before the crisis hit, though it remained exposed to risk in existing contracts, and was managing its liquidity needs until the second week in September 2008 when then-investment-bank Lehman began to fail and markets worsened.
The government “took a number of actions and made a number of statements that directly disadvantaged AIG compared to other financial institutions and contributed to AIG having no reasonable choice other than to accept a loan” on bad terms. Among other things, the government rejected AIG’s request for a financial guarantee that might have helped it raise private-sector money.
The credit agreement between the government and AIG was aimed at “penalizing AIG shareholders.” Yet the government didn’t “undertake any investigation or analysis, make any findings, or hold any hearing concerning whether AIG or its shareholders should be penalized and, if so, how.”
The government maneuvered to deprive Starr and other then-shareholders of an opportunity to vote on the credit agreement, the issuance of equity and other elements of the bailout.
“Many financial institutions engaged in much riskier and more culpable conduct than AIG” yet received government assistance “without the punitive equity confiscation required of AIG.”

Government:
The Federal Reserve hadn’t previously supervised AIG and it had “extremely limited” knowledge of the insurer’s financial situation, which helps explain why AIG’s bailout terms were tougher than those of banks that the Fed supervised.
The Fed wasn’t obligated to help a nonbank like AIG. The government’s demand for an equity stake wasn’t designed to “punish” AIG for its risk-management failures, as alleged by Starr, but to reduce “the enormous windfall AIG shareholders were receiving compared to shareholders of other fragile companies that failed without extraordinary assistance” from the government.
The tough terms also were aimed at compensating taxpayers for the substantial risks of lending to AIG, so that they could “share in any potential upside of a successful rescue.”
AIG”s board “voluntarily and independently agreed to the challenged loan terms” as being in the best interests of AIG and its shareholders at a dire time for the U.S. economy.
The AIG bailout was modeled on terms developed by private-sector bankers based on what they believed the market would require to lend to AIG—and those bankers concluded the risk of lending was too great to justify private-sector lending.
The Federal Reserve believed the AIG loan “posed enormous risk despite being secured” with collateral. While the Federal Reserve Bank of New York thought it “had a reasonable prospect of obtaining repayment of its loan over time, it also faced the genuine risk of losing” billions, if not tens of billions, of dollars.
The Fed had statutory authority to condition lending on the equity stake.

http://www.wsj.com/articles/BL-MBB-33524