Is AIG going to sue the government for bailing it out? Hahaha no of course not, come on, that would be nuts. So what is this?
The board of A.I.G. will meet on Wednesday to consider joining a $25 billion shareholder lawsuit against the government, court records show. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.”
I say unto you that this meeting is not for "consider[ing] joining" that lawsuit, which is one part of former AIG CEO Hank Greenberg's so-far-not-particularly-successful campaign to get his $25 billion back from the government. (This part, in the Court of Federal Claims, is still going, unlike the part in a New York federal court that was dismissed.) Rather, it is for humoring Hank Greenberg, and the way you humor people who have lots of high-priced lawyers is by giving their high-priced lawyers a chance to talk to other high-priced lawyers for a long time, with PowerPoint. This paragraph in AIG's court filing is less "we may join the suit" and more "see Hank we are listening to you really carefully and care deeply about what you have to say now, please, go on, this is a safe space":
The process contemplated by AIG’s Board includes requests for written presentations from Starr, the Government and FRBNY addressing specific questions from AIG and written replies, and then oral presentations to AIG’s Board by Starr, the Government and FRBNY. These written presentations and replies will be provided to AIG’s Board by Starr, the Government and FRBNY this fall, and the oral presentations are expected to be made at the Board’s meeting on January 9, 2013. Following further deliberation, a decision by AIG’s Board is expected by the end of January 2013. This process is designed to ensure to the maximum extent possible that AIG’s Board will have the information and time necessary to make an informed decision on the difficult issues raised by Starr’s demand, under the unusual circumstances presented by this case, and in light of the fact that 9 of AIG’s current 12 directors did not serve on AIG’s Board during the events underlying this lawsuit. Starr, the Government and FRBNY have all advised AIG that they intend to participate in the Board’s process, subject to further discussion concerning details.
The "further discussion concerning details" is particularly safe-spacey; I suspect that the highlight of the holiday season for some of these lawyers was arguing over the procedural rules for the mock trial of Greenberg vs. The World that will be held in an AIG conference room tomorrow.
Another way you can tell that AIG's heart isn't in this is that if AIG's board wanted to sue the government they would have sued the government. There is nothing stopping them, other than the usual combination of (1) they would probably lose and (2) they would look like assholes. Hank Greenberg has been suing the government for over a year, and his arguments are pretty much right out in the open and anyone can read them. If AIG felt they were compelling, it was free to get in on them with its own lawsuit. The fact that it didn't suggests that current AIG management is more sensitive to looking like assholes than its predecessors.
So why consider it now? Because it's being forced to by the rules surrounding shareholder derivative lawsuits, an area of Delaware corporate law that is soul-crushingly dull even if you generally get geeky amusement out of Delaware corporate law. In brief, Greenberg is mostly suing the government not for stuff that the government did to Greenberg and his fellow shareholders, but rather for stuff that the government did to AIG: that is, the government's illegal "taking" of property was not so much shareholder property (shares - after all, AIG shareholders got to keep their shares) but rather AIG property (e.g., money going out the door to pay off counterparties, securities going to Maiden Lane vehicles at distressed prices, too-high interest rates on bailout loans).1 So Greenberg, and his investment company Starr International, really have no right to sue the government for those things: in the first instance, only AIG does. Of course, Greenberg/Starr are interested in what AIG does, since they're shareholders and have an equity interest in any money AIG can get back, but legally they're limited to:
- demanding that AIG sue the government,
- explaining to a court why they won't make that demand because AIG's board is too corrupt and in bed with the government, or
- if AIG rejects their demand, explaining to the court that it was because the board is too corrupt.
Greenberg has already made the "ooh AIG's board is corrupt" argument to the court,2 and the bones of that argument are easy enough to make out.3 But Greenberg has by now given up on it, and will make his demand on the board, which seems to be due in no small part to AIG's good work in setting up a safe space for him to kvetch at them and try to convince them to join in. Unfortunately for AIG, though, that means that they have to actually answer his demand. Which leaves them the choice of enraging Greenberg by saying no, or enraging everyone else on earth by saying yes.
What will AIG do here? Meh, I'll go with "not join Greenberg's lawsuit." What would AIG like to do? Well in a perfect world I imagine the answer would be "nothing": let Greenberg to take all the heat for being a bailout ingrate, and then, if he wins any money, have that money to go to AIG and shareholders. In other words, they'd be perfectly happy to see Greenberg sue the government on their behalf, without them getting involved.
And that's actually what they've been doing up to now. DealBook notes:
Until now, the insurance giant has sat on the sidelines. But its delay in making a decision, some officials say, has drawn out the case, forcing the government to pay significant legal costs.
You can get a sense of that from the court's opinion deciding not to dismiss the case:
AIG have asked the Court to defer ruling on the demand issue [i.e. whether AIG has to join the case] until after the Government’s motion to dismiss has been resolved. ... The purpose of the demand requirement is to protect the “directors’ power to manage the affairs of the corporation.” ... Here, AIG — the party the demand requirement was meant to protect — has not sought to enforce its right to a demand but instead, has requested that the Court defer ruling on the issue. Under such circumstances, the Court is not compelled to address the demand issue at this time.
The government argued - rightly! - that this reverses the normal procedure: normally you see if the person suing is the person who has the right to sue, and then you see if their suit is any good. But AIG was able to go along for the ride with Greenberg, waiting to see if his lawsuit was dismissed before making up their minds on whether to join it. They would have been relieved if it was dismissed - no need to make a decision! - and I suppose they're stressed that it wasn't.
Not too stressed, though. There's less drama here than it seems. If AIG board says no to joining Greenberg's suit - hint: it will! - there's not a whole lot Greenberg or other disgruntled shareholders can do about it. As long as the procedures the board uses to decide are appropriately lawyered-up - hint: they will be! - the board is pretty safe. This line from DealBook is code:
“The A.I.G. board of directors takes its fiduciary duties and business judgment responsibilities seriously,” said a spokesman, Jon Diat.
And the code is "boards basically can't be sued for things they decide under the 'business judgment rule.'"4 As long as this meeting is long and PowerPointy enough, they're fine.
Also, even if the board says no, Greenberg and AIG shareholders aren't entirely out of luck. Greenberg has brought some class-action claims purely on behalf of AIG shareholders - i.e. not "derivative" claims on behalf of AIG - and the court has not dismissed them yet. If the DC court does end up finding that AIG's shareholders were the victims of a massive swindle by the government, those shareholders still stand to get back plenty of money. I imagine the board would be fine with that. Just leave them out of it.
1.There is one exception, which is that the issuance of a controlling interest in AIG to the government may give rise to a direct shareholder suit - or so the Court of Federal Claims found, though the government is asking to reconsider. The discussion of this gets interesting starting on page 14 of the court's decision on the motion to dismiss; feel free to read it but you're on your own, feh.
2.See footnote 16 on page 19 here.
3.Viz: The government told AIG what to do. AIG's current board owes its existence and position to the bailout czars. Three of the current board members were actually on the board when the bailout was approved. Greenberg is accusing the board of failing in its fiduciary duties to shareholders. You can see why the board would resist suing even if in their corrupt heart of hearts they knew that the lawsuit was right. Etc.
4.The further code is "... and we'll be relying on the business judgment rule if we're sued," which also means that they won't be joining Greenberg's lawsuit. If they actually join the lawsuit, they won't have to rely on the business judgment rule: no one will have anything to sue them about. Hate them, sure, but not sue them.