In 2008, there were many complaints surrounding the US government bailout of AIG when it was on the verge of collapse and the disagreement as to whether that was the right course of action continues today. On Monday, March 11, US Court of Federal Claims Judge Thomas Wheeler approved two classes in what was initially a $25 billion lawsuit, now a $55.5 billion lawsuit, against the US government for alleged losses caused by the US government’s bailout of the company and the subsequent reverse split of its stock.
Led by former Chief Executive Maurice Greenberg, the first class includes AIG shareholders from the time when the government took the 79.9% stake in the company and the second class includes shareholders of the company who weren’t given a chance to vote on a reverse stock split of AIG’s stock.
The lead counsel for the classes is David Boies, of Boies, Schiller & Flexner. The claim is being presented under the 5th Amendment prohibition against illegal taking:
“…nor shall private property be taken for public use, without just compensation.”
The assertion that there was damage associated with a failure to provide “just compensation” is based on two main points:
A) AIG shareholders became extremely diluted when the company exchanged warrants granted to the US government providing it a 79.9% stake in the company for actual shares of the company
B) The 1 for 20 reverse-split of AIG’s stock reduced the number of shares each shareholder held by 20 times
To fully appreciate the first issue with respect to dilution, one would need to compare the number of AIG shares outstanding prior to the government stepping in to the number of new shares issued as a result of the bailout. Subject to adjustment, owners of each outstanding AIG share were diluted according to the following formula:
Number of New Shares Issued
Total Number of Shares Outstanding After New Shares Are Issued
There is no doubt that the owners of AIG stock owned less of the company than they had prior to the government bailout in exchange for ownership. If one assumes the government action was wrongful, the next question is what would have happened to these shares had the government not stepped in? The possibilities include:
A) AIG may have been able to acquire the financing it required from the private markets and continue operations
B) AIG may have been forced into Chapter 11 bankruptcy and:
- forced to unwind its operations and settle its obligations, or
- placed into a receivership and subsequently bought by an outside consortium
Even if the government is found to have violated the 5th Amendment, an award of damages will require the class to prove that the stockholders would have fared better had the government not acted.