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Greenberg's AIG Case Is Intriguing, but Doomed

Greenberg's account, however, could not be more different from that of Barney Frank, the former Democratic Congressman from Massachusetts, who was Chairman of the House Financial Services Committee at the time of the AIG bailout.

"There was not the hint of a suggestion of any coercion. They did this very voluntarily, very gratefully," Frank told Reuters in January. Frank said at the time it would be "outrageous," for AIG to join Greenberg's lawsuit against the government, a move its board considered but ultimately chose not to make. (Earlier this month, AIG took things a step further by trying to bar Greenberg from suing on its behalf.)

Greenberg's version of events sounded pretty convincing, and didn't differ greatly from other published accounts. Did Frank really believe there was no coercion? In a separate interview with TheStreet earlier this month, Frank said he was referring to the original decision of AIG to accept an $85 billion loan -- support that would quickly grow to roughly twice that amount.

"There was no coercion whatsoever in extending the original quite large amount of money," Frank said. "After that of course it was -- it wasn't coercion. We owned the goddamned company! That was management rights not -- er -- shareholder rights. But there was no coercion -- no pressure that I understood -- to take it."

Not surprisingly, Greenberg did not see eye-to-eye with Frank on this point.

"I don't give a f*** what he says. What do you think he's gonna say?" Greenberg said when told about Frank's comments.

According to Sorkin's Too Big to Fail, which would seem to be fairly neutral on this point, there was clear pressure on AIG to accept the original bailout money. Assuming Sorkin's reporting is accurate, Frank is wrong.

Nonetheless, Greenberg's point about Liddy signing the bailout agreement is an oversimplification. It was AIG's board that accepted the original terms of the bailout Sept. 16, according public records, two days before replacing Willumstad with Liddy and six days before Liddy signed off on the official documents.

So while Greenberg appears correct in saying the government put pressure on AIG to accept the deal, AIG had at least one other option before following Treasury's order to install Liddy as CEO. That was to file for bankruptcy.

Greenberg would not acknowledge this point, but his attorneys at Boies, Schiller & Flexner do. As a result, they argue the government's taking of a 79.9% ownership in AIG was what is known as an illegal exaction, similar to a fireman insisting he be paid by a homeowner before putting out a fire. The fireman may argue the homeowner gave up the money voluntarily, while the homeowner argues the fireman had no legal right to demand the payment.

Legal experts can debate about whether the government's taking of a 79.9% stake in AIG constituted an illegal exaction, but that argument is clearly less powerful than Greenberg's oversimplified one. And even the oversimplified one appears to be attracting fairly little sympathy from the public.

Even though Greenberg appears unlikely to win his case, it seems quite plausible that he would have saved AIG if he hadn't been forced out by then-New York Attorney General Eliot Spitzer in 2005. Roddy Boyd's book, Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide, gives lots of ammunition to those who want to argue that Spitzer killed AIG. (Full disclosure: Boyd is a friend and former colleague of mine.)

Greenberg possessed "raw animal instinct," enabling him to sense risk as a shark can sense a struggling fish, according to Boyd. Greenberg maintains that AIG dramatically upped its exposure to the credit default swaps that would help take down the company only after he was forced to resign. While he was in charge, in other words, the risks were under control.

What's more, as a former New York Fed Chairman and a master salesman who opened AIG's first offices in Beijing in 1980, Greenberg had the kind of clout and contacts that would have put him in a good position to arrange a rescue of the company in 2008.

However skilled Greenberg may have been, though, or however unjustly forced to resign, those issues have no bearing upon whether the government stole AIG from shareholders.

Hank Paulson's Treasury and Tim Geithner's Federal Reserve Bank of New York could have dealt with AIG's shareholders less harshly, just as they could have dealt with Goldman Sachs more severely. Their treatment of AIG appears to have caused them considerable discomfort.

For example, according to Too Big To Fail, just before Willumstad and AIG legal advisers Rodgin Cohen of Sullivan & Cromwell and Simpson Thacher & Bartlett Chairman Dick Beattie accepted the government bailout terms from Geithner, the then-Fed Chairman was vague about whether AIG was free to find its own financing.

According to the book, Beattie told Geithner, "'the board wants to know whether, if the company can come up with its own financing to take the Fed's place, would that be acceptable.'

"Geithner hesitated and then replied: 'Nobody would be happier than I if the company, you know, would pay the Fed back.'"

Was that a yes or a no? It appears to have been a no, though it also appears Geithner was concerned about running up against the limits of his authority.

Maybe he did run up against the limits, but it isn't at all clear that he breached them.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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