Trial begins on AIG claims from bailout

WASHINGTON - The U.S. extorted American International Group Inc. shareholders when it extended a $182 billion taxpayer bailout at the height of the 2008 financial crisis, a lawyer for Maurice "Hank" Greenberg said.

Greenberg's Starr International Co., AIG's largest shareholder when the financial crisis struck, sued the government, calling its assumption of 80 percent of the insurer's stock an unconstitutional "taking" of property that requires at least $25 billion in compensation.

A trial over his claims began Monday here. David Boies, Greenberg's famed litigator, will question the architects of the bailout, including Ben Bernanke, Henry Paulson, and Timothy Geithner. Boies said the Federal Reserve Bank of New York punished AIG by demanding equity and charging 14 percent interest to borrow, far more than major banks paid.

"They charged an extortion rate," Boies said in his opening statement in the U.S. Court of Federal Claims. "They tried to demonize AIG and suggest somehow that AIG was a poster child for problems during the financial crisis."

Greenberg, who built AIG into the world's biggest insurer before leaving in 2005, claims the government trampled the rights of shareholders. Boies said the banks, including Morgan Stanley and Citigroup Inc., got bailout loans at rates of less than 4 percent without surrendering equity.

Some, including Citigroup, later settled civil claims that they fraudulently marketed mortgage-backed securities.

"They didn't take Citibank's equity" as a condition of getting a loan, Boies told Judge Thomas Wheeler. "They said Citibank was a fraudster."

In outlining the government's defense, Justice Department attorney Kenneth Dintzer said the U.S. acted lawfully through the bailout of AIG to avert a world economic collapse. Without the deal, AIG would have faced bankruptcy.

"It was so big and so entrenched in the world's economic system that its failure threatened the world's economy," Dintzer said in his opening statement. "The goal was to save the world from AIG."

Starr is improperly seeking "a $40 billion windfall," Dintzer said. The bailout was "the largest package of assistance in human history," he said. Even though AIG shareholders owned less of the company for a period, they still received a benefit, Dintzer said.

"This enormous benefit was a benefit that shareholders were not entitled to, they didn't earn, and apparently they don't appreciate," Dintzer said.

It would have been "a catastrophe" for AIG to go bankrupt, but "it would have been worse to allow the insurer to hold itself hostage" to seek better terms that other companies also would have demanded, he said.