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September 30, 2014

Get Ready for the Great Circus of The AIG Bailout Lawsuit


Get ready for the Greatest Show on Earth. I’m not kidding!

The circus opens today in Washington at the big-top U.S. Court of Federal Claims.

That’s where insurer Starr International is suing the United States for essentially ripping off American International Group Inc. (NYSE: AIG) and its shareholders. Starr is an insurance company controlled byMaurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.

Starr International Co. Inc. v. United States will feature clowns, both the frightening variety and the funny kind… lions and tigers and bears, oh my… death-defying high-wire acts… human cannonballs… and bare-naked ladies.

Here’s what it comes down to. Did the Federal Reserve and the U.S. Department of the Treasury have the right to confiscate 80% of AIG’s common stock during the 2008 bailout, in the process costing AIG shareholders $40 billion?

You heard me right.

Starr is suing for $40 billion. No wonder the circus is coming to town…

Grab Some Popcorn

Everyone knows AIG got an almost $180 billion bailout. But what very few people know is what the Fed and the Treasury actually did to AIG to cause it to need $180 billion.

No doubt the New York-headquartered but London-based AIG Financial Products Group was stupid to sell insurance in the form of credit default swaps to a whole bunch of giant banks, guaranteeing them payment in full if the mortgage-backed securities they were stockpiling ever defaulted.

While they were stupid, they were most likely also duped. But that’s another story.

When the mortgage crisis hit, the credit default swaps AIG wrote came back to haunt them.

Here is not the place to get into the particulars, though I know them intimately. Why not here? Because if we’re lucky – and we may get lucky this time – the truth about the particulars will come out at the trial.

If you know some of what really happened, you’ll be following the trial to find out why Goldman Sachs Group Inc. (NYSE: GS) did what it did to AIG in the first place and why AIG had to pay Goldman $14 billion when at the time it owed it $8 billion, at most.

Why did other banks, including several giant foreign banks, get paid 100 cents on the dollar on claims they made against AIG when they were only entitled to market-value amounts of what was owed to them? And that’s assuming they even had a right to collect in the first place, which was in dispute at the time.

Why did the Fed charge AIG 14% on the money it lent it and 8.5% on the money it was going to lend to it but it didn’t need, when it was charging big banks between 2.5% and 5%?

Why did the government take almost 80% of AIG’s equity and controlling voting shares when it didn’t take any voting shares from any other bailout customers it coddled?

There are a lot more questions to be answered.

Some of the clowns who were deposed privately (on videotape) will also testify in open court. They include then-Federal Reserve Bank of New York President Timothy Geithner; then-Treasury Secretary Henry Paulson (another Hank), formerly the head of Goldman Sachs; then-Fed Chairman Ben (aka “Benny” the jet helicopter pilot) Bernanke; and lot of other movers and shakers who bobbed and weaved behind the scenes to extract money from AIG to send to faltering favored sons to save them.

This really is going to be the Greatest Show on Earth because it’s going to expose the criminality of the system that bailed out some of the biggest crooks in the world, who then leveraged taxpayers and economies to make ungodly sums of money with the de facto understanding that the Fed and the Treasury had their backs.

Hurry, hurry, hurry – step right up!

I’ll be twice a week to let you know how it’s all unfolding. I’m going to slice and dice this theatrical spectacular for you, one julienne fry at a time.

Courtesy Shah Gilani at Wall Street Insights & Indictments (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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