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Appeals Court Rules Former AIG CEO Had No Legal Right to Challenge Bailout
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Summary: After the government and former CEO were unhappy with the original ruling, an appeals court has completely flipped the ruling in favor of the government.

A court ruling that the U.S. government illegally bailed out American International Group Inc (AIG) during the financial crisis in 208 was overturned by a federal appeals court. The Federal Circuit Court of Appeals in Washington ruled that the only one that could bring suit against the government was AIG.


Former AIG chief executive officer Maurice Greenberg’s Starr International Co was the one to challenge the bailout. He led AIG for nearly forty years before being removed in March 2005. The appeals court stated that they had no legal right to do such since Starr would not receive any award and any damages would go to AIG.

Maurice Hank Greenberg

The decision by the three-judge panel was a valuable victory for the government even though Starr intends to continue fighting the ruling. The company’s lawyer David Boies said, “We respectfully disagree” and will appeal to the U.S. Supreme Court. Starr was challenging the government’s power to bail out companies, even those seen as “too big to fail” under the Fifth Amendment.

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In September 2008, AIG was incurring huge losses from insurance on faulty mortgage securities. Starr argues that the government hurt shareholders with an unconstitutional “exaction” in taking 79.9 percent stake in the insurer in exchange for a high-interest $85 billion loan from the Federal Reserve Bank of New York. Chief Judge Sharon Prost wrote on behalf of the appeals court, AIG “has exercised its business judgment and declined to prosecute this lawsuit. While punitive measures against a corporation may ultimately be borne by its shareholders, a finding that those measure targeted shareholders directly is a wholly different matter. The alleged injuries to Starr are merely incidental to injuries to AIG, and any remedy would go to AIG, not Starr.” She further explained that Starr failed to prove how they were directly harmed by the taxpayer bailout.

Starr was AIG’s largest shareholder with a 12 percent stake. They were seeking over $40 billion in damages for shareholders. Court of Federal Claims Judge Thomas Wheeler sided with Starr. He ruled that the New York Federal Bank overstepped its authority to arrange the loan but would not award the damages because doing so would result in AIG being bankrupt. He also rejected any damages from a subsequent reverse stock split.

Wheeler based his ruling on testimony from former Fed chairman Ben Bernanke and former Treasury secretary Henry Paulson and former New York Fed President Tim Geithner during an eight-week trial in 2014. Greenberg’s Starr appealed the damages ruling while the government appealed the standing and exaction rulings.

The bailout ultimately reached $182.3 billion but was repaid. Taxpayers picked up a roughly $23 billion profit from the deal.

Do you think the government has the right to step in to help a company when its downfall could have more devastating effects on the financial system? Tell us in the comments below.

To learn more about AIG’s bailout, read these articles:


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