Closing arguments begin Wednesday in the American International Group bailout case. AIG shareholders claim the government overstepped its authority when it seized the company in a financial rescue.
Copyright NPR. View this article on npr.org.
ROBERT SIEGEL, HOST:
The U.S. government's takeover of AIG during the financial crisis has been the subject of a federal trial since last fall - today, closing arguments. The questions - was that takeover illegal, and if so, are company shareholders entitled to $40 billion in compensation? NPR's John Ydstie was in the Washington D.C. courtroom and joins me now. John, first of all, this trial has been going on since last fall. Bring us up to date.
JOHN YDSTIE, BYLINE: Well, the force behind the suit is the former AIG chairman, Hank Greenberg. He was the biggest shareholder in AIG when it faced collapse in the financial crisis. You'll remember it was hemorrhaging from its involvement in mortgage-backed securities. Its management came to the U.S. government for help in September of 2008, and the Federal Reserve agreed to lend it $85 billion because the Fed thought if AIG collapsed, it would bring down the whole financial system. But the Fed demanded 14 percent interest and an 80 percent share in the company. And before it was all over, the Fed lent the company a total of $182 billion.
SIEGEL: As I recall, Hank Greenberg says that the Federal Reserve just didn't have the authority to take an equity stake in the company.
YDSTIE: That's right. And today in his closing arguments, Greenberg's lawyer, David Boies, repeated that over and over. Boies said section 13, paragraph three of the Federal Reserve Act says the Fed can only charge interest on its emergency loans. And in fact, Boies said the record shows that Fed officials were unsure whether they had the authority to get equity in return for a loan. Boies also charged that the Fed singled out AIG shareholders for punishment by charging an interest rate that was four times the rate it was charging other ailing firms.
SIEGEL: And what was the government's response to that?
YDSTIE: Well, the government's lawyer, Kenneth Dintzer, said the Federal Reserve Act does not rule out the Fed acquiring an equity stake in a firm. In fact, it allows policymakers to use their discretion. He also argued that AIG shareholders suffered no losses and in fact, the value of their shares more than doubled within days of the Fed's rescue. And Dintzer said without a rescue, those shareholders would have been wiped out in bankruptcy. As for the high interest rate, Dintzer said it wasn't punitive, it was prudent. He quoted testimony by former Federal Reserve chair Ben Bernanke who said the high interest rate was necessary because it was a huge loan in the middle of financial crisis to a firm the Fed knew very little about.
SIEGEL: John, just to clarify here, this is a suit brought by shareholders of AIG, but AIG the company itself is not actually involved in this suit?
YDSTIE: Correct. Correct. The company is not involved. In fact, the company, which is now stable and profitable, says it benefited from the government's rescue.
SIEGEL: And what do the experts think about who's likely to prevail in this case - the government or Hank Greenberg and the other shareholders?
YDSTIE: Well, at the beginning of the trial, most people thought Mr. Greenberg had very little chance to win. But some rulings by the judge, who has the final say in the trial - there's no jury - and, you know, his demeanor in court today suggests that Greenberg could win. The judge, Thomas C. Wheeler, has ruled against the government in several crucial areas and today, his questions and statements in court seemed more sympathetic to Greenberg's case than to the government's case.
SIEGEL: And when do you expect the judge to hand down his decision?
YDSTIE: Well, most likely, it won't be until summer and of course whoever loses will likely appeal, so we may not know the final outcome for years.
SIEGEL: OK, thank you. That's NPR's John Ydstie.
MELISSA BLOCK, HOST:
Stay with us - you're listening to ALL THINGS CONSIDERED from NPR News. Transcript provided by NPR, Copyright NPR.