Plan B Forum

FRESH from paying back a $US182 billion bailout, the American International Group has been running a nationwide advertising campaign with the tagline, ''Thank you America''.


But behind the scenes, the restored insurance company is weighing whether to tell the US government agencies that rescued it during the financial crisis: Thanks, but you cheated our shareholders.

The AIG board will meet on Wednesday to discuss a $US25 billion shareholder lawsuit against the government. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue - the taking of what became a 92 per cent stake in the company, the deal's high interest rates and the funnelling of billions to the insurer's Wall Street clients - deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for ''public use, without just compensation''.

Maurice Greenberg, AIG's former chief executive, who remains a major investor in the company, filed the lawsuit in 2011 on behalf of fellow shareholders. He has since urged AIG to join the case, a move that could nudge the government into settlement talks.

The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr Greenberg could challenge its decision to abstain.

Should Mr Greenberg snare a major settlement without AIG, the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief but would put AIG in line for a potential payout.

Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street.

Some government officials are already upset with the company for even seriously entertaining the lawsuit, people briefed on the matter said. They noted that without the bailout, AIG shareholders would have fared far worse in bankruptcy.

''On the one hand, from a corporate governance perspective, it appears they're being extra cautious and careful,'' said Frank Partnoy, a former banker who is now a professor of law and finance at the University of San Diego School of Law. ''On the other hand, it's a slap in the face to the taxpayer and the government.''



Read more: http://www.smh.com.au/business/aig-may- ... z2HR0xSOiZ

The American International Group’s former chief executive, Maurice R. Greenberg, is contending in a lawsuit that the government treated the company’s shareholders too harshly when carrying out its 2008 rescue of the insurance giant. But a closer look at the $182 billion rescue suggests a different outcome.

Soon after the bailout, the Treasury Department substantially softened the terms of its support. This lenience made life a lot easier for A.I.G. – and arguably benefited shareholders like Mr. Greenberg.

A.I.G. is weighing whether to join the lawsuit, filed by Mr. Greenberg’s investment firm, Starr International Company. A.I.G. most likely will not end up joining forces with Mr. Greenberg, but, as a duty to shareholders, it has to at least give his suit a thorough assessment.

One of Starr International’s major arguments is that A.I.G.’s bailout terms were far tougher than those granted to other large financial firms. But A.I.G.’s cash needs and internal failings were in many ways far more serious than those of other institutions. In fact, the company was in such dire straits after the rescue that the government chose to loosen the terms of its aid.

The concessions were considerable.

In early 2009, the Federal Reserve cut the interest rate on a big loan to A.I.G. At the time, the company said that would save it $1 billion a year in interest.

The Treasury Department made another favorable change. It exchanged $40 billion of preferred shares for new ones that effectively paid no cash dividends to taxpayers. If it had paid the originally agreed 10 percent dividend on all these and other preferred shares, the insurer would have paid roughly $20 billion from the beginning of 2009 to the end 2012.

Instead, the preferred shares were converted into common stock, which the government later sold. The Treasury Department made a $5 billion return on its investments.

The government could have made more, if it had chosen to.

For example, the Treasury Department could have demanded an even bigger stake in A.I.G. in return for the dividends it did not get. This would have further diluted existing shareholders like Mr. Greenberg. If the Treasury Department had decided on further dilution, A.I.G.’s shares could have become effectively worthless, like those of Fannie Mae and Freddie Mac, the mortgage firms also bailed out by taxpayers in 2008.

Fannie and Freddie’s rescue also required that the companies pay a 10 percent dividend on its government money. But the Treasury Department never let them off the hook on that commitment. The result was that taxpayers have received more than $50 billion of dividends so far from Fannie and Freddie.

In short, A.I.G.’s shareholders may contend they got a raw deal, but it’s not that simple.