Big Bailout Court Bout

The Court of Appeals for the Federal Circuit ruled yesterday against the former CEO of American International Group (AIG). During the crisis, AIG drank deeply at the bailout fountain. The Federal Reserve dusted off its emergency lending authority under section 13(3) of the Federal Reserve Act to lend many billions of dollars to AIG. In return, after a complicated set of transactions, the government owned just under eighty percent of AIG’s stock. AIG’s former CEO, Hank Greenberg, whose company Starr International was a big AIG shareholder before the government’s rescue, objected to being edged out by Uncle Sam. As the lead plaintiff in a set of class actions, Starr challenged the government’s alleged predatory exploitation of AIG as the company fought for its life during 2008 and 2009.

Yesterday’s decision turned largely on the procedural question of whether Starr had standing to pursue the claims related to the government’s acquisition of AIG stock directly. The court said no. Those claims belong not directly to the shareholders, but to AIG itself (which — cognizant of the public relations implications of suing the government that bailed the company out — declined to join the suit). The court also affirmed the lower court’s conclusion that the government did not engineer a reverse stock split with the goal of wresting control of the company away from AIG’s other shareholders and therefore those shareholders were not entitled to damages.

One of the judges on the three-judge panel would have ruled against Starr using different reasoning. But his opinion also focused on threshold jurisdictional and standing issues without looking much into the merits of the case.

The Federal Circuit’s ruling is therefore a bit unsatisfying. The interesting substantive questions about the legality of the government’s actions in rescuing AIG, a company that many believed to be insolvent, remain largely unresolved. (I wrote much more about AIG’s collapse here.) Legal or not, the non-bankruptcy rescue of an arguably insolvent company was a dangerous precedent to set. Careful revisions to the bankruptcy code could help to ensure that the next time a company of this size runs into trouble, the battles over the spoils will take place in bankruptcy court where they belong.

In the meantime, stay tuned for this fight to continue. Starr’s lawyer told Reuters that he’ll try to take the case to the Supreme Court.