Supreme Court rejects suit by AIG ex-CEO

The U.S. Supreme Court today turned down an appeal by Maurice "Hank" Greenberg, the former head of AIG, that accused the federal government of illegally bailing out the insurer at the height of the 2008 financial crisis.

The suit against the Federal Reserve Bank of New York was filed in 2011 by Starr International, which is run by Greenberg and which was AIG's largest shareholder at the time of the bailout. It claimed the New York Fed engaged in several transactions that hurt AIG and its shareholders after it took control of the company, allegedly causing the insurer to breach its fiduciary duty to shareholders.

The Second U.S. Circuit Court of Appeals ruled in January that the Delaware law didn't apply to the New York Fed because of the "uniquely federal interests at stake in stabilizing the national economy" at the time.

In appealing its case to the High Court Starr, said the lower court rulings gave the government sweeping power to trump "ordinary rules of corporate and financial behavior" during an unusual emergency. The New York Fed said in response that its authority in the AIG case focused on the particular circumstances surrounding AIG, whose near-collapse in 2008 helped trigger the financial crisis.

The Fed took over AIG in an $85 billion bailout in September of that year, a week after the collapse of Lehman Brothers. AIG had issued billions of dollars in insurance on bonds consisting of subprime mortgages, and it was unable to pay off the claims made after it became clear the bonds were worthless.

Greenberg was no longer CEO of AIG at the time of the government's rescue. He had resigned in 2005 when, as Bethany McClean and Joe Nocera recount in their history of financial crisis "All The Devils Are Here," "accountants from PWC told the [AIG] board that it would no longer vouch for the firm's books if Greenberg stayed on as CEO."

Greenberg and Starr have a related case pending before the U.S. Court of Federal Claims in Washington, which handles lawsuits seeking money from the government. The plaintiffs argue that the AIG bailout violated the Fifth Amendment of the U.S. Constitution.

The case centers on the value AIG shareholders allegedly lost when the government took over the company. On Sept. 15, 2008, when the bailout was announced, AIG's stock price opened at $119 and closed at $79. In September of 2007, it traded for $1,099 a share.