Greenberg: AIG, Wall Street bailout a 'government ripoff'

"There's a huge point of principle that he's been pursuing for a long time," said David Skeel, a law professor at the University of Pennsylvania. "He feels like he was unfairly pushed out of AIG, he feels like the government unfairly intervened. Ultimately, what is driving him is this point of principle, it's vindication in his claim that he was unfairly treated."

Steve Aiello, a spokesman for Greenberg, declined to comment on the trial.

The government "loaned billions of dollars to foreign and domestic institutions at interest rates that were a fraction of those charged to AIG," Boies wrote in Starr's complaint. AIG paid 8.5% annual interest plus the 3-month London interbank offered rate on money it drew from the bailout loan.

Likewise, the New York Fed guaranteed "hundreds of billions of dollars in loans to various institutions, including Citigroup Inc.," without taking any ownership in those companies, Boies wrote.

That may be Starr's strongest argument, Skeel said.

"The way the government did the transaction, by taking stock rather than making a loan to AIG, was borderline illegal," Skeel said. "I think it could be defended, but the Fed's emergency powers ordinarily require that they make loans, not that they buy the assets." 

'Considerable deference'

The U.S. may argue, in turn, that "different companies present different risks to the economy," said Echeverria, the Vermont Law School professor. By acting in a crisis, government officials were "entitled to considerable deference as to whether they made the best decision."

The U.S. has pushed back hard, arguing in a court filing that Starr has built the case on "a misperceived entitlement" to government assistance.

"Starr contends that, because of AIG's size" and the damage its bankruptcy likely would have caused the national economy, the New York Fed "had to make a rescue loan on the terms that Starr argues AIG should have received, no matter the policy implications or moral hazard or risk of loss to the taxpayers," according to the government filing.

'Enormous windfall' 

"Under Starr's theory, the government was required not only to rescue AIG with better terms than the company could obtain from private parties in the marketplace, but also to confer an enormous windfall on the shareholders," U.S. lawyers wrote.

Greenberg secured backing for the suit from his peers in finance, raising about 15% of the tens of millions of dollars in litigation costs from three Wall Street investors who would be entitled to a share of any damages, said a person familiar with the arrangement who didn't want to be identified because it wasn't public.

For Boies, 73, who represented the U.S. in its landmark 1999 Microsoft Corp. antitrust trial and Al Gore in presidential recount litigation of 2000 that ended with Bush taking office, the Starr case is part of a larger challenge to the bailout.

His firm also represents investors in Fannie Mae and Freddie Mac, the mortgage giants taken over by the U.S. The investors accuse the government of depriving them of the value of their shares when it changed the terms of the takeover in August 2012.

Judge's criticism

Wheeler, the judge who will decide Starr's case, upheld AIG's decision not to join the suit, while criticizing the government's conduct in opposing the insurer's participation.

The prospect of AIG joining with Greenberg drew rebukes from lawmakers including Democratic Senators Elizabeth Warren of Massachusetts and Robert Menendez of New Jersey, as well as Representative Elijah Cummings, a Maryland Democrat who said AIG suing the U.S. would be an insult to taxpayers who rescued the company.

In his June 2013 ruling, Wheeler said he was "troubled" that the Treasury Department's lawyer "made threatening statements to AIG board members" as they fulfilled their legal obligation to weigh participating in the suit.

Wheeler said he was also bothered by "the low evaluation of Starr's potential success on the merits," presented to the AIG board by its lawyers. The judge said he didn't understand "how anyone could have made a precise assessment of this fact- dependent case without knowing what all of the evidence ultimately will show."

The case is Starr International Co. v. U.S., 11-cv-00779, U.S. Court of Federal Claims (Washington).