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The U.S. extorted American International Group Inc. shareholders when it extended a $182 billion taxpayer bailout at the height of the 2008 financial crisis, a lawyer for Maurice “Hank” Greenberg said.

Greenberg’s Starr International Co., AIG’s largest shareholder when the financial crisis struck, sued the government, calling its assumption of 80 percent of the insurer’s stock an unconstitutional “taking” of property that requires at least $25 billion in compensation.

A trial over his claims began Monday in Washington, where David Boies, Greenberg’s famed litigator, will question the architects of the bailout, including Ben Bernanke, Henry Paulson and Timothy Geithner. Boies said the Federal Reserve Bank of New York punished AIG by demanding equity and charging 14 percent interest to borrow, far more than major banks paid.

“They charged an extortion rate,” Boies said in his opening statement in the U.S. Court of Federal Claims. “They tried to demonize AIG and suggest somehow that AIG was a poster child for problems during the financial crisis.”

Greenberg, who built AIG into the world’s biggest insurer before leaving in 2005, claims the government trampled the rights of shareholders. Boies said the banks, including Morgan Stanley and Citigroup Inc., got bailout loans at rates of less than 4 percent without surrendering equity.

Civil Settlements

Some, including Citigroup, later settled civil claims that they fraudulently marketed mortgage-backed securities.

“They didn’t take Citibank’s equity” as a condition of getting a loan, Boies told Judge Thomas Wheeler. “They said Citibank was a fraudster.”

In outlining the government’s defense, Justice Department attorney Kenneth Dintzer said the U.S. acted lawfully through the bailout of AIG to avert a world economic collapse. Without the deal, AIG would have faced bankruptcy, he said.

“It was so big and so entrenched in the world’s economic system that its failure threatened the world’s economy,” Dintzer said in his opening statement. “The goal was to save the world from AIG.”

Starr is improperly seeking “a $40 billion windfall,” said Dintzer, who called the bailout was “the largest package of assistance in human history.” Even though AIG shareholders owned less of the company for a period, they still received a benefit, Dintzer said.

“This enormous benefit was a benefit that shareholders were not entitled to, they didn’t earn, and apparently they don’t appreciate,” Dintzer said.

‘A Catastrophe’

It would have been “a catastrophe” for AIG to go bankrupt, but “it would have been worse to allow the insurer to hold itself hostage” to seek better terms that other companies also would have demanded, he said.

The 80 percent equity stake the New York Fed took mirrored an effort by private investors to save the company before the government stepped in, Dintzer said. He cited an AIG board adviser who said: “Twenty percent of something is worth more than 100 percent of nothing.”

The loan was legal and voluntarily accepted by AIG’s board, Dintzer said. He said Starr can’t show that AIG shareholders were injured by the government’s actions, or that they would be better off if the government hadn’t acted.

The 85 names on Starr’s witness list include, among other top Wall Street regulators, Bernanke, the former Federal Reserve chairman; Paulson, the treasury secretary under Republican President George W. Bush; and Geithner, the head of the Federal Reserve Bank of New York in 2008 and Democrat President Barack Obama’s treasury secretary.

First Witness

The first witness called by Boies, Scott Alvarez, the general counsel of the Federal Reserve Board of Governors, testified about the credit terms extended by the government to financial institutions earlier in 2008 and about the terms offered to AIG.

Under questioning by Boies, Alvarez insisted that when the bailout began on Sept. 16, 2008, the government had not decided that its equity interest in AIG would take the form of warrants for common stock.

Boies argued in his opening that the government imposed a demand for warrants and then changed the deal, insisting on preferred stock to avoid shareholder challenges to its control.

He pointed to Sept. 21, 2008, AIG board minutes stating that a bailout involving warrants was “now proposed to be convertible preferred stock.” Alvarez’s hand-written meeting notes from Sept. 18 said “there may be issues with warrants at AIG.”

‘Something Other’

On the witness stand, Alvarez clung to his position that “equity could be something other than warrants.”

Alvarez gave carefully parsed answers and repeatedly asked Boies to rephrase questions. The judge admonished him to answer the questions.

His testimony is slated to continue tomorrow.

The complaint by Starr International, Greenberg’s Swiss- based investment company, doesn’t question the necessity of a rescue that began under Bush and continued under Obama. Rather, Starr claims AIG was singled out for punitive treatment that violated shareholders’ constitutional rights to due process and just compensation for their property.

Boies, of Boies Schiller & Flexner LLP, said that AIG was the only major company during the financial crisis required to surrender equity in exchange for federal loans.

Nonjury Trial

He is arguing on behalf of AIG shareholders in a nonjury trial. Judge Wheeler, a Bush appointee, rebuffed government bids to dismiss the 2011 suit and also criticized the U.S. for pressuring the AIG board to forgo joining the case.

The trial will shed light on closed-door decision-making that led the New York Fed to initiate the bailout a day after the bankruptcy of Lehman Brothers Holdings Inc. The central bank’s position was adjusted four times, eventually reaching 92 percent.

AIG returned to profitability, and repaid the assistance in 2012, leaving the government with a $22.7 billion profit. AIG, with a market capitalization of $32.6 billion the week before the bailout, fell to $12.8 billion in value the day before the government stepped in. It’s now valued at $77.3 billion.

In March 2009, AIG reported a quarterly loss of more than $60 billion as mortgage-backed securities slumped. By 2012, the bailout included a $60 billion credit line from the Federal Reserve Bank of New York, a Treasury investment of as much as $69.8 billion and as much as $52.5 billion from the Fed to buy mortgage-linked assets once owned or backed by the insurer.

Personal Vindication

The case offers a chance at personal vindication for Greenberg, 89, who led AIG for almost 40 years before resigning in 2005 during an accounting investigation by Eliot Spitzer, then New York’s attorney general. A lawsuit filed by Spitzer against Greenberg was narrowed by a judge and is set for trial in New York State Supreme Court in Manhattan in January.

Steve Aiello, a spokesman for Greenberg, declined to comment on the trial.

Greenberg got backing for the suit from peers in finance, raising about 15 percent of tens of millions of dollars in legal costs from three Wall Street investors who could share in any recovery, said a person familiar with the arrangement who didn’t want to be identified because it wasn’t public.

For Boies, 73, who represented the U.S. in its landmark 1999 Microsoft Corp. antitrust trial and Al Gore in presidential recount litigation of 2000 that ended with Bush taking office, the Starr case is part of a larger challenge to the bailout.

Government’s Conduct

Wheeler upheld AIG’s decision not to join the suit, while criticizing the government’s conduct in opposing the insurer’s participation. In a June 2013 ruling, Wheeler said he was “troubled” that the Treasury Department’s lawyer “made threatening statements to AIG board members” as they fulfilled their legal obligation to weigh participating in the suit.

Wheeler said he was also bothered by “the low evaluation of Starr’s potential success on the merits,” presented to the AIG board by its lawyers. The judge said he didn’t understand “how anyone could have made a precise assessment of this fact- dependent case without knowing what all of the evidence ultimately will show.”

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

–With assistance from Peter Cook in Washington.

Topics Lawsuits USA Claims New York Washington AIG