NEW YORK ( TheStreet) -- Former AIG ( AIG) chief Hank Greenberg should lose his lawsuit against the U.S. Treasury Dept. over what he argues was effectively the theft of the company he spent 37 years building, though his case is better than you think.

Greenberg was forced to resign from AIG in 2005 amid an accounting investigation the company eventually settled for $1.6 billion. He remained a large AIG shareholder, however, when the insurer was bailed out in 2008, and is suing on the grounds that the transaction violated the rights of shareholders.

In The AIG Story, a book he published earlier this year with co-author Lawrence Cunningham, Greenberg argues the U.S. Treasury essentially nationalized the giant insurer so it could pursue a "back-door bailout" of the rest of the financial system.

As Greenberg tells it, AIG's main problem in Sept. 2008 was a lack of liquidity -- an issue faced by many domestic and foreign institutions at that time. But while nearly everyone -- even a bank 29% owned by Libya -- got a loan at the Federal discount rate of roughly 2.5%, AIG was forced to pay a whopping 14% interest rate for its $85 billion loan, while giving the government a 79.9% stake in the company to boot.

Some of Greenberg's argument is familiar. The decision by the New York Federal Reserve to pay 100 cents on the dollar to Goldman Sachs ( GS) and 15 other financial companies that had credit default swaps agreements with AIG has already been subjected to considerable scrutiny. Which is not to say it doesn't deserve more scrutiny, but Greenberg makes other valid points that have gotten less attention in the post-crisis analysis we have seen to date.

One of those points has to do with Ed Liddy, a former Allstate Corp. ( ALL) CEO who then-Treasury Secretary Hank Paulson appointed to run AIG immediately after firing Robert Willumstad, according to various accounts, including Greenberg's book, Paulson's book, On The Brink: Inside the Race to Stop the Collapse of the Global Financial System, and Andrew Ross Sorkin's Too Big To Fail. (None of these accounts, incidentally, square with AIG's 8-K filing, but that is a subject for a separate article.)

As Greenberg points out, Liddy was still on the board of Goldman Sachs at the time he signed off on a bailout that would lead to the transfer of the $63 billion in assets out of AIG and into Goldman and the other banks. He resigned from Goldman's board five days later, on Sept. 23 according to a Sept. 26 filing by the investment bank. Liddy's resignation came "in light of his new role as Chairman and Chief Executive Officer of American International Group, Inc.," the filing states.

Running a company that is in a multibillion dollar dispute with another one on whose board you sit is a big conflict. Even putting that problem aside, however, Liddy was a surprising choice among AIG insiders at the time of his appointment, according to Sorkin's Too Big To Fail. Willumstad couldn't even recall who Liddy was when Paulson informed him of his selection, and at least two AIG board members were quite surprised by the choice, according to the book. One of those board members, insurance industry executive James Orr , announced that -- forget about the short list -- Liddy "wouldn't have been on the long list," of potential candidates to replace Willumstad if the board had been left to come up with its own CEO.

But to former Goldman chief Paulson and top advisor Ken Wilson -- also from Goldman -- Liddy was the perfect person to run AIG.

"He was the Goldman board member to whom everyone turned for advice whenever they discussed whether the firm should acquire it," Sorkin wrote.

The Liddy conflict isn't Greenberg's main complaint, though it is important, and it hasn't received much attention in other accounts of the AIG bailout. Liddy didn't return a call to Clayton Dubilier & Rice, where he is a partner.

The larger question is whether the government truly forced AIG to accept such tough terms.

In a recent telephone interview with TheStreet, Greenberg certainly made it sound that way.

"Paulson, then Secretary of the Treasury, calls up Bob Willumstad who was then CEO of AIG," Greenberg asserts. "He said 'You're only going to get one deal from us. Now take it or leave it. And incidentally, you're fired.' The first question you have to ask yourself is since when does the Secretary of the Treasury call the CEO of a public insurance company and fire him? I've never heard of that. He doesn't have that authority. So he fires him and says 'Now you sign that bailout agreement.'
Willumstad said 'No, you just fired me I'm not going to sign the agreement.' So he sends in his successor which is Ed Liddy, who is on the board of Goldman Sachs, and Ed Liddy while on the board of Goldman Sachs signs this agreement, then resigns from the Goldman board three days later retroactively. I've never heard of anything like that. How do you resign from a board retroactively, after taking action that's going to benefit Goldman Sachs?"

If it were true, this version of events would certainly be troubling. Greenberg says he got most of this information from Willumstad, a call to whom was not returned.

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.