Occasionally news from our industry breaks into the mainstream, and it rarely turns out well. So it was this week when it emerged AIG was considering joining its former CEO Hank Greenberg in a lawsuit against the US government that alleged that the terms of AIG’s infamous $182bn bail-out were unfair.
In November 2011, Starr filed a lawsuit seeking $25bn in damages in the United States Court of Federal Claims and the United States District Court for the Southern District of New York alleging that the government's 2008 receipt of a 79.9% equity interest in AIG constituted a wrongful "taking" without just compensation. The lawsuit makes claims on a derivative basis in the name of AIG and for its benefit, as well as on a direct basis on behalf of Starr and other similarly-situated shareholders.
The condemnation was as outraged as it was swift. Just as AIG had launched a nationwide advertising campaign to mark its return to independence with the slogan “Thank You, America”, the news broke that it was considering biting the hand that saved it from oblivion.
The timing was delicious, and copy-editors across the US rubbed their hands together. New York website Gothamist summed up the popular mood with its headline, “AIG: Thank You, And F*ck You, America”. Politicians rushed to condemn the insurer. And when The Onion starts spoofing you, you know you are in hot water.
And the critics were right. It is hard to get beyond the argument that this was akin to a patient who had their life saved suing their doctor.
Yet I feel some sympathy for AIG. The US insurer was in a bind. It was compelled by law to consider joining the lawsuit by the demand served on it by Starr International. As it said in a press release issued at the end of a long day of criticism on Tuesday, the insurer’s board had three choices: take over Starr's claims and prosecute on its own; refuse the demand and prevent the claims from being prosecuted by Starr, a decision AIG says Starr might challenge; or allow Starr to prosecute the claims on AIG's behalf.
The timing, too, was unfortunate to say the least. It turns out that the potential for AIG to join the lawsuit had been disclosed in a November 19 2012 court ruling. It took until now for this to blow up.
The insurer’s board was under fiduciary duty to at least consider joining the lawsuit. If Greenberg – who is perfectly entitled to pursue this action – went on to win, AIG’s shareholders would be justified to feel like they had missed out on profits. This was something AIG had to seriously consider.
But this is surely was an option AIG was never going to take. The insurer was the poster child for the financial crisis and received a fervent amount of abuse from the public and politicians at the height of the crisis, including death threats for those at the top. It is unthinkable that AIG would want to go through all that again.
AIG’s board quickly decided against it, announcing on Wednesday that it would not be joining the lawsuit. That was not quick enough to avoid a PR disaster.
AIG appears to have opted for a different option from the three it had previously outlined. "The AIG board has determined to refuse Starr’s demand in its entirety, and will neither pursue these claims itself nor permit Starr to pursue them in AIG’s name," said the insurer. Greenberg’s lawyer has been quoted as saying that he will not sue AIG over its decision.
Running AIG as a hard-nosed business and paying little mind to what the public or politicians may think has been a very successful strategy for its CEO Robert Benmosche, and one for which he deserves a lot of praise. But had AIG joined the lawsuit it would have redefined hard-nosed. It would have also crossed a line far beyond popular acceptability. In the end AIG not only made the right choice, it made the only choice it could.Another surreal debate that has been taking place in the US press this week is that of whether US President Barack Obama could circumvent the debt ceiling debate by simply minting a coin with a trillion dollar denomination and depositing it in the Federal Reserve. Both debates that sound completely ridiculous and outrageous at first blush but viewed in a certain light make some kind of sense.