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AIG, saved by US bailout, now considers suing US government

AIG may join a lawsuit alleging that the terms of the US government bailout were unfair to investors, but such a move risks infuriating the taxpayers whose money saved it from ruin.

By Staff writer / January 8, 2013

The American International Group (AIG) building is seen in New York's financial district in this file photograph. AIG, the insurer rescued by the US government in 2008 with a bailout that ultimately totaled $182 billion, may join a lawsuit against the government alleging the terms of the deal were unfair.

Brendan McDermid/REUTERS/File

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The directors of insurance giant AIG plan to meet Wednesday to consider joining a lawsuit against the US government, arguing that federal officials imposed unfair terms on the company while rescuing it from collapse during the financial crisis.

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On its face, the idea sounds preposterous.

Had American International Group (AIG) not been the beneficiary of a federal bailout in 2008, it would have entered bankruptcy and seen shareholder value wiped out, financial experts generally say. To raise legal quibbles over the bailout terms sounds like a stranded hiker, post-rescue, complaining that he was carried to safety in a truck rather than a high-speed train.

The potential lawsuit comes as the company has reached a positive milestone for itself and for US taxpayers: It has managed to pay off the bailout funds and emerge as a firm fully in the private sector once again.
 
The members of AIG's board are surely aware that involvement in a lawsuit won't win any awards in the public eye for political savvy or self-awareness. Not to mention that it would contradict the "Thank you, America" slogan of TV ads in which the insurer expresses gratitude for the rescue while also touting its payback of taxpayer funds.
 
But company directors are also charged with looking out for shareholder interests. It's possible they might decide those interests are best served by joining one of two lawsuits under way against the federal government.

 
One legal action is led by former AIG chief Maurice "Hank" Greenberg, alleging that shareholder rights were violated by the government – such as by charging exorbitant interest on credit extended to keep the firm afloat. After a federal judge in Manhattan dismissed Mr. Greenberg's suit in November, it is being appealed, while a similar suit is still pending in the US Court of Federal Claims, Reuters reports.
 
The bailouts of specific corporations during the financial crisis were deeply unpopular with American public. AIG became the poster child for the problem, because of the firm's large executive bonuses and because more than $180 billion in taxpayer funds were deployed to prop up the company and its business partners.
 
By some standard theories of finance, any rescue of private banks and corporations during a crisis should not be too soft on investors and managers of those firms. Government officials are acting as a "lender of last resort," providing credit that helps the firms when no one else will. Whether that service is provided by taxpayers or by a central bank, the government deserves to be well compensated for providing that service, the argument goes.
 
Imposing terms such as high interest rates may also help to deter risky behavior by financial firms in the future.

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