The Federal Circuit Must Now Decide the Fate of AIG’s Largest Shareholder

federal circuit*Michelle Stilwell, the Mary G. Waterman Fellow at WLF, significantly contributed to this post.

In what is poised to become an extremely influential case, the US Court of Appeals for the Federal Circuit is currently deciding what to do after the federal government unlawfully took over the equity and leadership of one of America’s largest private insurance companies, American International Group, Inc. (AIG), during the 2008 financial crisis.  The government, in order to prevent AIG from declaring bankruptcy, offered it the customary Federal Reserve Act § 13(3) loan in the extraordinary sum of $85 billion.  However, in a virtually unprecedented move, the government conditioned this loan on receiving 80% of AIG’s equity via preferred stock.  This was an offer AIG couldn’t refuse, and it effectively diluted AIG’s shares and all but eliminated the voting and equity rights of the existing shareholders.  So what did AIG’s shareholders receive in return for the extreme devaluing of their shares? Nothing.  Not yet anyway.  The lower court below held, in a lawsuit brought by AIG’s largest shareholder at the time, that the government’s action was illegal, but that no damages would be awarded.  It is now up to the Federal Circuit to provide justice for AIG’s shareholders—and to make sure that the government has an incentive to obey the law in future financial crises. Continue reading “The Federal Circuit Must Now Decide the Fate of AIG’s Largest Shareholder”