Hank Greenberg won his fight to hold the U.S. responsible for a bitter pill it forced down the throat of American International Group Inc. But that’s about it.

The judge who called illegally onerous the terms of AIG’s $85 billion bailout — hatched during the depths of the financial crisis — also ruled that without it investors would probably have gotten nothing. As a result, he awarded Greenberg’s Starr International Co., AIG’s biggest investor at the time, no money.

“In the end, the Achilles’ heel of Starr’s case is that, if not for the government’s intervention, AIG would have filed for bankruptcy,” U.S. Court of Claims Judge Thomas Wheeler said Monday. “AIG’s shareholders would most likely have lost 100 percent of their stock value.”

Still, the scathing nature of Wheeler’s government critique may chasten regulators in future crises. The split-decision sets up the possibility that both sides will appeal, prolonging for months or years to come their battle over the U.S. response to the 2008 economic calamity.

Long Shot

What began as a long-shot case by Greenberg and Starr gained credibility as the government repeatedly failed to get it dismissed.

Last year’s trial in Washington was a showpiece for Starr’s lead lawyer, David Boies. He grilled Ben Bernanke, Hank Paulson and Timothy Geithner on government decision-making, as the judge repeatedly ruled in Greenberg’s favor. A key ruling allowed internal e-mails to come out at trial showing Fed lawyers trying to avoid an AIG shareholder bailout vote “we don’t control.”

One attorney for the Fed at Davis Polk & Wardwell observed on Sept. 17, 2008, in the midst of theAIG takeover, that the government “is on thin ice and they know it. But who’s going to challenge them on this ground?”

Greenberg had sought as much as $40 billion in damages for shareholders. Though the absence of an award may temper Wheeler’s dramatic rebuke of the government handling of the bailout, the ruling may still limit the Federal Reserve’s ability to deal with the next crisis.

“It is a huge loss for the government because it calls into question its actions in the crisis, and more importantly, calls into question what it will have latitude to do in future crises,” said Erik Gordon, a business professor at the University of Michigan in Ann Arbor.

AIG Rises

Starr sued the U.S. in November 2011, claiming the government broke the law by insisting on 80 percent of AIG stock and imposing a 12 percent interest rate on the loan. Wheeler agreed, saying that while the Fed had authority to make an emergency loan to AIG, it didn’t have the authority to take shares in exchange for it.

The government countered the demands were justified since the loan was high-risk. As evidence, government lawyers cited similar terms in a private rescue that fell through over doubts about AIG’s ability to repay.

Though the bailout ballooned to $182 billion, AIG returned to the black and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.

Current AIG shareholders were worried the insurer would be “on the hook for payment to reimburse the Treasury and Greenberg,” said Josh Stirling, an analyst with Sanford C. Bernstein. “The judge found a way of splitting the baby.”

AIG rose 68 cents to $62.57 in New York stock market trading. Jennifer Hendricks Sullivan, a spokeswoman for AIG declined to comment on the ruling.


The Fed defended the bailout, saying in a statement the court decision recognizes “the extension of credit to AIG prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG’s collapse.”

Nevertheless, Stirling said, the government may still appeal.

“They don’t want the precedent to stand that the courts are going to second-guess bailouts,” he said. “Public policy is generally that bailouts are necessary to preserve safety, security and economic order.”

He concluded that Wheeler’s decision “should lead investors to be more skeptical about implicit government backstop.”

An appeal by Starr is also possible. According to Dennis Kelleher, head of the financial advocacy group Better Markets, Greenberg wasn’t looking to win without something to show for it.

“They weren’t suing for a moral victory,” Kelleher said. “They were suing for cold hard cash.”

The Justice Department said it’s reviewing the decision and declined to comment on whether it would appeal. Edward Evans, a spokesman for Boies, Greenberg’s lawyer. declined to immediately comment.

Starr Requests

Wheeler, who presided over the trial without a jury, was often skeptical of government arguments against Starr, which was AIG’s largest shareholder at the time of the bailout.

In a preliminary ruling in 2012, he wrote that he didn’t accept the U.S. position that the Fed’s emergency powers allowed it to demand stock.

Bernanke, the former Fed chairman, and former Treasury Secretaries Paulson and Geithner all testified that the bailout was an extraordinary measure to avoid a collapse that would have been disastrous for the economy.

Geithner headed the New York Fed at the time of the bailout.

Despite reaching the conclusion that no money was owed, Wheeler said he found it “troubling” that the government was able to “avoid any damages notwithstanding its plain violations of the Federal Reserve Act.”

Greenberg “had a compelling argument that things happened so quickly that the shareholders didn’t really get an opportunity to evaluate the rescue,” Cliff Gallant, an analyst at Nomura Holdings Inc., said in a phone interview. “I assume there will still be lots of legal wrangling.”

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

–With assistance from Tom Schoenberg, Ian Katz and David McLaughlin in Washington and Noah Buhayar in Seattle.