Facing the loss of its $22.7 billion claim against the federal government for illegally exacting—or perhaps extorting—79.9 percent of American International Group Inc.’s equity in exchange for emergency credit, Starr International Company, Inc., is almost certainly looking for appeal possibilities. One possibility could lie in how the judge determined that AIG shareholders suffered no harm.
In the June 15, 2015, decision in Starr International Co., Inc. v. U.S., the judge decided that while the Federal Reserve Board had no authority to take an equity interest in AIG, the company’s shareholders were not harmed because, in the absence of the Fed’s emergency loan, the company would have filed for bankruptcy. Bankruptcy presumably would have wiped out the shareholders’ interests. While the shareholders’ interests in the company were greatly reduced by the Fed’s demand, the shareholders were better off than they would have been had the company filed for bankruptcy, he reasoned. Essentially, the shareholders were benefitted, not harmed.
However, the opinion does not consider that the Fed perhaps could have arranged credit legally, without taking an equity interest. This could perhaps have saved AIG without reducing the shareholders’ ownership percentages.
The opinion noted that the AIG loan was the only time in the history of emergency credit activities that the Fed took an equity interest in the borrower, and that the Fed treated AIG much more harshly than it treated any of the other financial institutions it bailed out. The opinion’s description of the factual situation at the height of the financial crisis makes clear that regulators had determined that AIG had to be saved because the consequences of its failure could have been catastrophic.
The opinion looked at the damages issue from two points of view—the position that shareholders would have been in had the Fed not acted, and the position the shareholders were in after the Fed acted illegally. Should a third possibility have been considered—the shareholders’ position had the Fed taken legal action?
Legal action—extending credit without taking an equity interest—would only have been possible if the credit could have been “secured to the satisfaction of the Federal Reserve bank” that was making the loan, which was the New York Fed. AIG’s problem was lack of liquidity. If providing the needed liquidity would have preserve the value of the company’s assets, would they have been sufficient to secure the credit? This was not addressed in the opinion.
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