Asymmetrical Information - Megan McArdle

01.08.13

AIG May Sue the Government For An Insufficiently Generous Bailout

Annals of Chutzpah

Another thing to add to the "mind boggles" list: the New York Times reports that AIG is considering suing the US government for offering insufficiently generous terms to the shareholders when the Treasury stepped in to keep AIG's bad financial bets from reducing the economy--and presumably, the personal fortunes of AIG shareholders--to rubble.  

This would be the most remarkable legal turn since the proverbial young man who murdered his parents and then asked the court for mercy on the grounds that he was, after all, an orphan.  It is tempting to go off on a rant, but it seems that the board actually is in something of a bind:  

Maurice R. Greenberg, A.I.G.’s former chief executive, who remains a major investor in the company, filed the lawsuit in 2011 on behalf of fellow shareholders. He has since urged A.I.G. to join the case, a move that could nudge the government into settlement talks.

The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain.

Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief, but would put A.I.G. in line for a potential payout.

Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street  

Presumably the board, who are not actually morons, know that it is a terrible idea to go forward with this lawsuit.  Morally, it's outrageous.  Practically, it would be far more trouble than it is worth: suing would (rightly) inflame its US customers against the company, and wouldn't do much for its relationship with regulators, either.  Insurance is one of the most heavily regulated businesses there is, and no insurer pisses of its supervisors without very good reason.  

But along comes Hank Greenberg, AIG's colorful former chief, pushing them to join his quixotic lawsuit.  The board has an obligation to pursue things that are in the shareholders' best interests.  To be sure, it's hard to see how such a lawsuit could possibly be in the actual best interests of any shareholder; a judge is unlikely to be sympathetic, and a jury would be even less so, so this seems like a bunch of pointless brand damage.  Nonetheless, shareholders who disagree with that judgement might sue.  

I assume that ultimately, AIG is going to do the sensible thing, as well as the morally correct one, and decline to join this lawsuit.  But given the friction this is already causing them, I'd say they lost anyway.