That didn't take long: AIG decides not to sue US over bailout terms

Mr. Greenberg alleges another problem with the bailout as well. His lawsuit via Starr International argues that the AIG rescue represented an illegal taking of private property without just compensation. Greenberg isn't arguing that AIG needed no help. But the lawsuit, at a minimum, underscores that setting the terms of a bailout can be an imprecise and controversial art. 

The Starr lawsuit against the US government and the Federal Reserve Bank of New York now appears set to go forward, but without AIG’s willing participation.

AIG aims to prevent Starr from prosecuting any claims on AIG's behalf, but on Tuesday it characterized Starr as "likely to challenge" such an effort.

To outsiders, the idea that AIG, the recipient of a highly unpopular bailout, might turn around and sue its benefactor seemed the height of insensitivity.

On Tuesday, AIG's chief executive, Robert Benmosche, sought to navigate the delicate situation.

"AIG has paid back its debt to America with a profit, and we mean it when we say thank you to the American people,” he said in a statement on the lawsuit. “At the same time, the Board of Directors has fiduciary and legal obligations to the Company and its shareholders to consider."

The board reached a decision quickly. The company must still file a formal statement of its position in court in coming weeks.

Some finance experts argue that the AIG rescue, while disappointing in many ways, represented a generally successful response in a dire predicament. Rightly or wrongly, the terms deal did evolve over time, with more bailout money being added and the interest rate on loans falling from the initial 14 percent that Greenberg has called "punitive."

To the surprise of many, the government recouped the money it put into AIG, posting a profit on the final sale of stock announced last month.

Sheila Bair, who headed the Federal Deposit Insurance Corp. during the crisis, argues in a recent book that AIG and some large banks were insolvent, but that their risk to the financial system couldn't practically be addressed through bankruptcy at the time.

"The Lehman experience demonstrated that bankruptcy was not an option for the orderly resolution of large, interconnected financial institutions," she writes.

The Dodd-Frank financial reform law tried to remedy that problem. The law tries to set up a framework in which the FDIC could take over a large financial firm on the brink of failure, like AIG. It seeks to impose losses on creditors of the failing firm, rather than letting them be paid in full.

But finance experts disagree about how well such a process will work – including on the important matter of staving off a meltdown in financial markets – during the next crisis.

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