Was the Government Bailout of AIG Illegal?

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Scott Eells / Bloomberg / Getty Images

Maurice "Hank" Greenberg, former chairman and chief executive officer of American International Group Inc., pauses during an interview in New York, Nov. 10, 2011.

Here’s what we have learned for sure during the past three years: No one likes bailouts. Not even, apparently, the people being bailed out.

In two lawsuits filed on Monday against the government and the Federal Reserve, a company controlled by AIG’s former CEO Hank Greenberg claims that when the government came to the rescue of the insurance giant, which was facing huge losses in late 2008, it did it illegally. Why so? Greenberg essentially accuses the government of the equivalent of snatching a person’s house to build a highway, and then giving the owners a fraction of what the house was actually worth. Greenberg says the government stiffed him and other AIG shareholders at least $25 billion. (That’s the minimum, he says, the government should pay out to him and others.) So can it be that the government, which shelled out $130 billion to rescue the soon to go under insurance giant, underpaid?

Greenberg ran AIG for nearly forty years before resigning in 2005 during a scandal that pre-dated the financial crisis. Nonetheless, he remained a huge shareholder. In late 2009, Greenberg won a huge court case against AIG, in which he was able to walk away with $4 billion dollars that AIG claimed was property of the insurance company. Now he is back for more – this time from the government.

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Here’s the oddity of the AIG case. No one disagrees that AIG was in bad financial straits in late 2008, and without the help of the government would have gone under. Not even Greenberg is making that claim this time around, even though he has said in the past that AIG was in much better shape than many have said. The question is about how much AIG should have to have paid for that bailout.

According to the lawsuit, AIG had a $130 billion market cap at the beginning of 2008. That figure looks like the government overpaid, not underpaid, for the insurance giant. The government only got an 80% ownership stake for its $130 billion, not 100%. But of course market cap is not the only measure of a company’s worth, and most takeovers (if that’s the way you should think about this, and I am not sure you should) do happen at a premium.

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Still, Greenberg argues that another reason it’s clear the government underpaid is that Citigroup and others got a much better deal. One of the Greenberg lawsuits’ claims is that the interest rate AIG was charged – over 14% – on the emergency loans it got from the government was excessive given that the Federal Reserve was charging other banks a much lower rate. But to me 14% seems like a pretty good rate for a deeply troubled company at the height of the credit crunch. No one other than the government would have made the same loan. What’s more, it’s not that Citigroup’s deal was at market price. The government had the power to seize all of Citigroup’s shares, and probably should have, based on the $45 billion in direct investment and $300 billion in loan guarantees the government had to shell out to save Citigroup. But it made a policy decision not to take over the bank. Still, just because Citigroup or another bank got a too-sweet deal, doesn’t mean that AIG got a raw one.

Many have long argued that the government erred when it paid off AIG’s mortgage bond insurance contracts in full. And Greenberg’s lawsuit brings that up as well. My own reporting suggests that a number of AIG’s trading partners would have taken less. But I don’t think the blunder was a $5 to $10 billion one. Not a $25 billion one. Even so, it’s not clear that money should go back to AIG shareholders and not the government.

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But perhaps the best sign that the government didn’t under pay is this – AIG, even three years after the financial crisis, is still worth less than the money the government put into to save it. The government’s remaining $50 billion stake is only worth about $30 billion.

But what Greenberg’s case clearly shows is that bailouts are messy. And even if the government doesn’t end up shelling out any money to Greenberg and his group, the legal battle will cost something. And it’s all another reason we should want to have the regulations in place to avoid bailouts in the future. The real misjustice of the financial crisis is that it’s still not clear that is the case.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.

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