Former American International Group Inc Chief Executive Maurice “Hank” Greenberg lost his appeal Wednesday in a lawsuit accusing the Federal Reserve Bank of New York of unlawfully bailing out the insurer at the height of the 2008 financial crisis.
The 2nd U.S. Circuit Court of Appeals in New York said the New York Fed’s authority to address major threats to the economy justified the dismissal of Delaware breach of fiduciary duty claims by Greenberg’s Starr International Co, which once held a 12 percent AIG stake.
Writing for a unanimous three-judge panel, Circuit Judge John Walker said a contrary ruling would compromise the New York Fed’s authority to take action in “unusual and exigent circumstances”, including “to rescue AIG from bankruptcy at the height of the direst financial crisis in modern times”.
He said permitting state law claims such as Greenberg’s to go forward would force the New York Fed to shirk its obligation to act in the public interest, and instead to act in the best interests of corporate shareholders, like the AIG shareholders on whose behalf Starr sued.
“In this case,” Walker wrote, “Delaware fiduciary duty law cannot be applied to FRBNY’s rescue activities consistently with adequate protection of the federal interests at stake in stabilizing the national economy.”
AIG is based in New York but incorporated in Delaware and was once the world’s largest insurer by market value.
Starr had accused the New York Fed of engineering a “backdoor” bailout for Goldman Sachs Group Inc and other Wall Street banks at the expense of AIG shareholders, by forcing the insurer to unwind bets on mortgage debt through hundreds of billions of dollars of credit default swaps.
The 2nd Circuit did not address whether the New York Fed exceeded its authority in rescuing AIG, whose $182.3 billion bailout began on Sept. 16, 2008, one day after Lehman Brothers Holdings Inc went bankrupt.