Starr International Company, Inc v. United States

In the United States Court of Federal Claims

No. 11-779C

(Filed: June 15, 2015)

*************************************

*

Government’s Financial Rescue and

STARR INTERNATIONAL COMPANY, *

Takeover of American International

INC., in its own right and on behalf of two *

Group (AIG); Fifth Amendment

classes of others similarly situated, *

Taking and Illegal Exaction Claims;

*

Shareholder Class Action; Demand

Plaintiff, *

for Corporate Equity and Voting

v. *

Control as Consideration for Loan;

*

Section 13(3), Federal Reserve Act;

THE UNITED STATES, *

Effect of AIG Board’s Approval of

*

Terms; Damages; Economic Loss

Defendant. *

Analysis.

*

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David Boies, with whom were Robert B. Silver, Robert J. Dwyer, Alanna C. Rutherford,

Amy J. Mauser, Abby Dennis, Julia C. Hamilton, Laura Harris, Ilana Miller, John

Nicolaou, Matthew R. Shahabian, David L. Simons, Craig Wenner, William Bloom, and

James A. Kraehenbuehl, Boies, Schiller & Flexner LLP, Armonk, New York, and John L.

Gardiner, R. Ryan Stoll, and Gregory Bailey, Skadden, Arps, Slate, Meagher & Flom

LLP, New York City, New York, for Plaintiff.

Brian A. Mizoguchi, Assistant Director, with whom were Benjamin C. Mizer, Acting

Assistant Attorney General, Robert E. Kirschman, Jr., Director, Kenneth M. Dintzer,

Deputy Director, Scott D. Austin, Claudia Burke, and Joshua E. Gardner, Assistant

Directors, John Roberson and John J. Todor, Senior Trial Counsel, Renee Gerber,

Matthew F. Scarlato, Mariana T. Acevedo, David D’Alessandris, Vincent D. Phillips, and

Zachary J. Sullivan, Trial Attorneys, Commercial Litigation Branch, Civil Division, U.S.

Department of Justice, Washington, D.C., for Defendant.

OPINION AND ORDER

WHEELER, Judge.

Plaintiff Starr International Company, Inc. (“Starr”) commenced this lawsuit

against the United States on November 21, 2011. Starr challenges the Government’s

financial rescue and takeover of American International Group, Inc. (“AIG”) that began

on September 16, 2008. Before the takeover, Starr was one of the largest shareholders of

AIG common stock. Starr alleges in its own right and on behalf of other AIG

shareholders that the Government’s actions in acquiring control of AIG constituted a

taking without just compensation and an illegal exaction, both in violation of the Fifth

Amendment to the U.S. Constitution. The controlling shareholder of Starr is Maurice R.

Greenberg, formerly AIG’s Chief Executive Officer until 2005, and one of the key

architects of AIG’s international insurance business. Starr claims damages in excess of

$40 billion.

On the weekend of September 13-14, 2008, known in the financial world as

“Lehman Weekend” because of the impending failure of Lehman Brothers, U.S.

Government officials feared that the nation’s and the world’s economies were on the

brink of a monumental collapse even larger than the Great Depression of the 1930s.

While the Government frantically kept abreast of economic indicators on all fronts, the

leaders at the Federal Reserve Board, the Federal Reserve Bank of New York, and the

U.S. Treasury Department began focusing in particular on AIG’s quickly deteriorating

liquidity condition. AIG had grown to become a gigantic world insurance conglomerate,

and its Financial Products Division was tied through transactions with most of the leading

global financial institutions. The prognosis on Lehman Weekend was that AIG, without

an immediate and massive cash infusion, would face bankruptcy by the following

Tuesday, September 16, 2008. AIG’s failure likely would have caused a rapid and

catastrophic domino effect on a worldwide scale.

On that following Tuesday, after AIG and the Government had explored other

possible avenues of assistance, the Federal Reserve Board of Governors formally

approved a “term sheet” that would provide an $85 billion loan facility to AIG. This

sizable loan would keep AIG afloat and avoid bankruptcy, but the punitive terms of the

loan were unprecedented and triggered this lawsuit. Operating as a monopolistic lender

of last resort, the Board of Governors imposed a 12 percent interest rate on AIG, much

higher than the 3.25 to 3.5 percent interest rates offered to other troubled financial

institutions such as Citibank and Morgan Stanley. Moreover, the Board of Governors

imposed a draconian requirement to take 79.9 percent equity ownership in AIG as a

condition of the loan. Although it is common in corporate lending for a borrower to post

its assets as collateral for a loan, here, the 79.9 percent equity taking of AIG ownership

was much different. More than just collateral, the Government would retain its

ownership interest in AIG even after AIG had repaid the loan.

The term sheet approved by the Board of Governors contained other harsh terms.

AIG’s Chief Executive Officer, Robert Willumstad, would be forced to resign, and he

would be replaced with a new CEO of the Government’s choosing. The term sheet

included other fees in addition to the 12 percent interest rate, such as a 2 percent

2

commitment fee payable at closing, an 8 percent undrawn fee payable on the unused

amount of the credit facility, and a 2.5 percent periodic commitment fee payable every

three months after closing. Immediately after AIG began receiving financial aid from the

Government on September 16, 2008, teams of personnel from the Federal Reserve Bank

of New York and its advisers from Morgan Stanley, Ernst & Young, and Davis Polk &

Wardwell, descended upon AIG to oversee AIG’s business operations. The

Government’s hand-picked CEO, Mr. Edward Liddy, assumed his position on September

18, 2008. Although the AIG Board of Directors approved the Government’s harsh terms

because the only other choice would have been bankruptcy, the Government usurped

control of AIG without ever allowing a vote of AIG’s common stock shareholders.

Out of this nationalization of AIG, Starr has identified two classes of common

stock shareholders that were affected by the Government’s actions: (1) a class comprised

of AIG shareholders who held common stock during September 16-22, 2008 when the

Government took 79.9 percent ownership of AIG in exchange for the $85 billion loan;

and (2) a reverse stock split class comprised of AIG shareholders who held common

stock on June 30, 2009 when the government-controlled board engineered a twenty-for-

one reverse stock split to reduce the number of AIG’s issued shares, but left the number

of authorized shares the same. The Court formally certified these two classes of

shareholders as plaintiffs on March 11, 2013. See Starr Int’l Co. v. United States, 109

Fed. Cl. 628 (2013). Under the Court’s Rule 23 “opt in” procedure to join in a class

action, 274,991 AIG shareholders have become class plaintiffs in this case.

The main issues in the case are: (1) whether the Federal Reserve Bank of New

York possessed the legal authority to acquire a borrower’s equity when making a loan

under Section 13(3) of the Federal Reserve Act, 12 U.S.C. § 343 (2006); and (2) whether

there could legally be a taking without just compensation of AIG’s equity under the Fifth

Amendment where AIG’s Board of Directors voted on September 16, 2008 to accept the

Government’s proposed terms. If Starr prevails on either or both of these questions of

liability, the Court must also determine what damages should be awarded to the plaintiff

shareholders. Other subsidiary issues exist in varying degrees of importance, but the two

issues stated above are the focus of the case.

The Court conducted a 37-day trial in Washington, D.C. spanning from September

29 through November 24, 2014. The Court heard the testimony of 36 witnesses, 21 for

Plaintiff’s case, and 15 for Defendant’s case. Plaintiff’s fact witnesses were, in the order

presented: Scott Alvarez, Thomas Baxter, Patricia Mosser, Henry Paulson, Timothy

Geithner, Ben Bernanke, Alejandro LaTorre, Susan McLaughlin, Margaret McConnell,

Sarah Dahlgren, Edward Liddy, Chester Feldberg, Douglas Foshee, Mark Symons,

Kathleen Shannon, James Head, and Donald Farnan. Plaintiff’s four expert witnesses

were: Luigi Zingales, Paul Wazzan, S.P. Kothari, and Michael Cragg. Defendant’s fact

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witnesses were, in the order presented: Andrew Colaninno, John Brandow, Marshall

Huebner, Robert Willumstad, Brian Schreiber, Robert Reeder, David Herzog, James Lee,

Peter Langerman, Morris Offit, and Howard Smith. Defendant’s four expert witnesses

were: Jonathan Neuberger, David Mordecai, Anthony Saunders, and Robert Daines. The

Court also received the video deposition testimony of John Studzinski, a witness who

lives abroad. The trial record consists of 8,812 transcript pages and more than 1,600

exhibits. 1

Certain waivers of the attorney-client privilege occurred during the course of the

proceedings. In the discovery phase, due to the Government’s assertion of a defense that

the Federal Reserve Bank’s taking of a borrower’s equity under Section 13(3) of the

Federal Reserve Act was legal, the Court ruled that any privileged communications

among the Department of the Treasury, the Federal Reserve Board, the Federal Reserve

Bank of New York (“FRBNY”), and their counsel relating to the issue of legality must be

produced. See Discovery Order No. 6, Nov. 6, 2013, at 2-3, Dkt. No. 182. During trial,

the Court expanded this ruling to include the production of prior legal memoranda relied

upon or relating to the propriety and legal limits of agency action under Section 13(3) of

the Federal Reserve Act. See Tr. 1950-55.2 The Court made this ruling upon learning of

the existence of an FRBNY “Doomsday Book” that contains guidance on the range of

permissible government actions in a time of crisis. The Court required FRBNY to

produce these additional documents during trial, and the FRBNY complied. See Boies,

Tr. 3548 (“Treasury has now provided all documents, broadly defined, which concern the

authority of the Federal Reserve or Treasury to acquire or hold equity in connection with

a 13(3) loan.”).

Other waivers of the attorney-client privilege resulted from Defendant’s counsel

calling two Davis Polk & Wardwell lawyers to testify, John Brandow and Marshall

Huebner, and asking them about legal advice they provided to FRBNY and the

Department of Treasury. See, e.g., Tr. 5801 (Mr. Scarlato: “[D]id you think that

disclosing the [New York Stock Exchange] ten-day rule would, in fact, provide a

roadmap to shareholders to seek an injunction?” Mr. Brandow: “No, because there was

no basis for an injunction. . . . [W]ith respect to Delaware law, there was no basis for the

shareholders to have a vote.”); Tr. 5851 (Mr. Scarlato: Did you “provide[] legal advice to

1

The Court has included a description of the relevant entities and persons in an Appendix to this opinion.

2

The Court will cite to the evidentiary record as follows: August 6, 2014 Stipulations – Stip. ¶ __; Trial

Testimony – Witness name, Tr. page; Joint Exhibits – JX __ at page; Plaintiff’s Exhibits – PTX __ at

page; Defendant’s Exhibits – DX at page. Some of the exhibits have a “U” in the exhibit number to

indicate that, although the documents were originally offered with redactions to protect privileged

material, they were later admitted in unredacted form due to Defendant’s waivers of the attorney-client

privilege, explained below.

4

the New York Fed or Treasury in connection with the exchange transaction?”); Tr. 6061-

62 (Mr. Gardner: “Why did Davis Polk advise that option B was the best yet identified

option?”); Tr. 6130 (Mr. Gardner: What was your “understanding as to why you were

being asked to consider the consequences of an AIG bankruptcy after September 16,

2008?”); Tr. 6135 (Mr. Gardner: “[W]hat advice, if any, did you provide on how

derivative counterparties would respond to a bankruptcy filing by AIG?”); Tr. 6139 (Mr.

Gardner: “[W]hat advice did you provide to the New York Fed or Treasury on the

likelihood that the New York Fed would be fully repaid in the event of a bankruptcy?”);

Tr. 6141 (Mr. Gardner: What was the advice you provided “to the New York Fed and

Treasury after September 2008 regarding the likelihood of policyholder cancellations if

AIG filed for bankruptcy?”).

Defendant’s waiver of the attorney-client privilege was so broad and covered so

many subjects that the Court found a waiver as to any previously privileged documents

relating to the Government’s economic rescue of AIG. Tr. 6249 (Court: “I have the

impression that any communication involving the law firm of Davis Polk & Wardwell

relating to AIG, that the privilege has been waived.”); Tr. 6251-52 (Court: “I think at this

point anything [relating to] AIG has been waived involving Davis Polk.”). The Court’s

ruling required Defendant to produce documents previously claimed to be privileged, and

to uncover redactions from documents offered into evidence. Significantly, the Court

also required the Davis Polk & Wardwell law firm to produce expeditiously internal and

client communications relating to the financial rescue of AIG. Tr. 7224-41 (discussing

the Davis Polk privilege issue and adopting the proposal of a law firm representative, Ms.

Francis Bivens, for the production of internal Davis Polk documents). Davis Polk

complied with the Court’s request using reasonable time and search parameters, but the

documents produced were so extensive that Plaintiff could not review all of them prior to

the close of trial. Accordingly, the Court granted Plaintiff’s post-trial motion to

supplement the evidentiary record with 133 additional exhibits. Order, Jan. 6, 2015, Dkt.

No. 417.

Defendant planned to call as witnesses three other law firm lawyers who served as

outside counsel to AIG. These lawyers were Robert Reeder and Rodgin Cohen from

Sullivan & Cromwell, and Joseph Allerhand from Weil, Gotshal & Manges. Due to the

unequivocal position of AIG to preserve its attorney-client privilege under any

circumstances, tr. 7736-37 (Mr. Carangelo: “AIG’s position has been consistent

throughout this proceeding and throughout discovery to not waive the privilege”), the

Court ruled that these lawyers should not testify. Tr. 7738-39 (Court: “I give paramount

importance to the privilege concerns of AIG . . . I’m not going to hear testimony in open

court from any of these lawyers. So, that includes Mr. Cohen, Mr. Reeder, and Mr.

Allerhand.”). The Court reasoned that the relevant testimony of these persons could only

relate to the professional legal services they furnished to AIG, and therefore presented too

5

great a risk that AIG’s privilege might be violated. Mr. Reeder had provided preliminary

testimony in the trial, but the Court’s ruling obviated his need to appear further. In the

Court’s view, a stark contrast existed between Defendant’s conscious decision to waive

its own federal agency privilege, and calling AIG lawyers as witnesses that would imperil

AIG’s privilege. See Tr. 7054-55.

Following the completion of trial, the Court received post-trial briefs from the

parties on February 19, 2015, and post-trial response briefs on March 23, 2015. The

Court heard closing arguments from counsel on April 22, 2015.

The weight of the evidence demonstrates that the Government treated AIG much

more harshly than other institutions in need of financial assistance. In September 2008,

AIG’s international insurance subsidiaries were thriving and profitable, but its Financial

Products Division experienced a severe liquidity shortage due to the collapse of the

housing market. Other major institutions, such as Morgan Stanley, Goldman Sachs, and

Bank of America, encountered similar liquidity shortages. Thus, while the Government

publicly singled out AIG as the poster child for causing the September 2008 economic

crisis (Paulson, Tr. 1254-55), the evidence supports a conclusion that AIG actually was

less responsible for the crisis than other major institutions. The notorious credit default

swap transactions were very low risk in a thriving housing market, but they quickly

became very high risk when the bottom fell out of this market. Many entities engaged in

these transactions, not just AIG. The Government’s justification for taking control of

AIG’s ownership and running its business operations appears to have been entirely

misplaced. The Government did not demand shareholder equity, high interest rates, or

voting control of any entity except AIG. Indeed, with the exception of AIG, the

Government has never demanded equity ownership from a borrower in the 75-year

history of Section 13(3) of the Federal Reserve Act. Paulson, Tr. 1235-36; Bernanke, Tr.

1989-90.

The Government did realize a significant benefit in nationalizing AIG. Since most

of the other financial institutions experiencing a liquidity crisis were counterparties to

AIG transactions, the Government was able to minimize the ripple effect of an AIG

failure by using AIG’s assets to make sure the counterparties were paid in full on these

transactions.3 What is clear from the evidence is that the Government carefully

orchestrated its takeover of AIG in a way that would avoid any shareholder vote, and

maximize the benefits to the Government and to the taxpaying public, eventually

3

According to a chart available to the Government on September 16, 2008, the following financial

institutions were among those with significant economic exposure to AIG: ABN AMRO, Banco

Santander, Bank of America, Barclays, BNP, Calyon, Citigroup, Credit Suisse, Danske Bank, Deutsche

Bank, Goldman Sachs, HSBC, ING, JP Morgan, Merrill Lynch, Morgan Stanley, Rabobank, Société

Générale, and UBS. JX 60 at 3.

6

resulting in a profit of $22.7 billion to the U.S. Treasury. PTX 658. AIG’s benefit was to

avoid bankruptcy, and to “live to fight another day.” PTX 195 at 8; see also testimony of

AIG Board member Morris Offit, Tr. 7392 (“we were giving AIG the opportunity to, in

effect, live, that the shareholder would still have a 20 percent interest rather than being

wiped out by a bankruptcy.”).

The Government’s unduly harsh treatment of AIG in comparison to other

institutions seemingly was misguided and had no legitimate purpose, even considering

concerns about “moral hazard.”4 The question is not whether this treatment was

inequitable or unfair, but whether the Government’s actions created a legal right of

recovery for AIG’s shareholders.

Having considered the entire record, the Court finds in Starr’s favor on the illegal

exaction claim. With the approval of the Board of Governors, the Federal Reserve Bank

of New York had the authority to serve as a lender of last resort under Section 13(3) of

the Federal Reserve Act in a time of “unusual and exigent circumstances,” 12 U.S.C. §

343 (2006), and to establish an interest rate “fixed with a view of accommodating

commerce and business,” 12 U.S.C. § 357. However, Section 13(3) did not authorize the

Federal Reserve Bank to acquire a borrower’s equity as consideration for the loan.

Although the Bank may exercise “all powers specifically granted by the provisions of this

chapter and such incidental powers as shall be necessary to carry on the business of

banking within the limitations prescribed by this chapter,” 12 U.S.C. § 341, this language

does not authorize the taking of equity. The Court will not read into this incidental

powers clause a right that would be inconsistent with other limitations in the statute.

Long ago, the Supreme Court held that a federal entity’s incidental powers cannot be

greater than the powers otherwise delegated to it by Congress. See Fed. Res. Bank of

Richmond v. Malloy, 264 U.S. 160, 167 (1924) (“[A]uthority to do a specific thing

carries with it by implication the power to do whatever is necessary to effectuate the

thing authorized – not to do another and separate thing, since that would be, not to carry

the authority granted into effect, but to add an authority beyond the terms of the grant.”);

see also First Nat’l Bank in St. Louis v. Missouri, 263 U.S. 640, 659 (1924) (“Certainly,

an incidental power can avail neither to create powers which, expressly or by reasonable

implication, are withheld nor to enlarge powers given; but only to carry into effect those

which are granted.”); Suwannee S.S. Co. v. United States, 150 Ct. Cl. 331, 336, 279 F.2d

874, 876 (1960) (“No statute should be read as subjecting citizens to the uncontrolled

caprice of officials.”).

4

“Moral hazard” refers to the Government’s concern that the availability of Federal Reserve bailout loans might

motivate private companies to accept risky propositions, knowing that the Government will extend credit to them if

they fail. The Government’s policy is to discourage such corporate thinking. Geithner, Tr. 1763-64; Bernanke, Tr.

2215-16.

7

Moreover, there is nothing in the Federal Reserve Act or in any other federal

statute that would permit a Federal Reserve Bank to take over a private corporation and

run its business as if the Government were the owner. Yet, that is precisely what FRBNY

did. It is one thing for FRBNY to have made an $85 billion loan to AIG at exorbitant

interest rates under Section 13(3), but it is quite another to direct the replacement of

AIG’s Chief Executive Officer, and to take control of AIG’s business operations. A

Federal Reserve Bank has no right to control and run a company to whom it has made a

sizable loan. As FRBNY’s outside counsel from Davis Polk & Wardwell observed on

September 17, 2008 in the midst of the AIG takeover, “the [government] is on thin ice

and they know it. But who’s going to challenge them on this ground?” PTX 3283, Davis

Polk email. Answering this question, the “challenge” has come from the AIG

shareholders, whom the Government intentionally excluded from the takeover process.

A ruling in Starr’s favor on the illegal exaction claim, finding that the

Government’s takeover of AIG was unauthorized, means that Starr’s Fifth Amendment

taking claim necessarily must fail. If the Government’s actions were not authorized,

there can be no Fifth Amendment taking claim. See Alves v. United States, 133 F.3d

1454, 1456-58 (Fed. Cir. 1998) (Taking must be based on authorized government action);

Figueroa v. United States, 57 Fed. Cl. 488, 496 (2003) (If the government action

complained of is unauthorized, “plaintiff’s takings claim would fail on that basis.”); see

also Short v. United States, 50 F.3d 994, 1000 (Fed. Cir. 1995) (same). Thus, a claim

cannot be both an illegal exaction (based upon unauthorized action), and a taking (based

upon authorized action).

The Government defends on the basis that AIG voluntarily accepted the terms of

the proposed rescue, which it says would defeat Starr’s claim regardless of whether the

challenged actions were authorized or unauthorized. While it is true that AIG’s Board of

Directors voted to accept the Government’s proposed terms on September 16, 2008 to

avoid bankruptcy, the board’s decision resulted from a complete mismatch of negotiating

leverage in which the Government could and did force AIG to accept whatever punitive

terms were proposed. No matter how rationally AIG’s Board addressed its alternatives

that night, and notwithstanding that AIG had a team of outstanding professional advisers,

the fact remains that AIG was at the Government’s mercy. Case law is divided on

whether the death knell of bankruptcy represents a real board of directors’ choice in such

circumstances. Compare Swift & Courtney & Beecher Co. v. United States, 111 U.S. 22,

28-29 (1884) (“The parties were not on equal terms. . . . The only alternative was to

submit to an illegal exaction or discontinue its business.”) and In re Consolidated Pretrial

Proceedings in Air West Securities Litig., 436 F. Supp. 1281, 1290 (N.D. Cal. 1977)

(“[D]efendants’ claim that Trustees should be denied recovery . . . because they had an

alternative source of recovery (bankruptcy) has never been held to be an adequate

alternative under the law of business compulsion.”) with Starr Int’l Co. v. Fed. Reserve

8

Bank of N.Y., 906 F. Supp. 2d 202, 219 n.13 (S.D.N.Y. 2012) (“Even a choice between a

rock and a hard place is still a choice.”) and FDIC v. Linn, 671 F. Supp. 547, 560 (N.D.

Ill. 1987) (“Threatened bankruptcy is insufficient to create economic duress.”).

Voluntary acceptance, however, is not a defense to an illegal exaction claim. See the

“Legal Analysis” section, “Illegal Exaction Claim,” below.

With regard to Starr’s reverse stock split claim, the evidence supports a conclusion

that the primary motivation for the split was to ensure AIG was not delisted from the

New York Stock Exchange (“NYSE”). In June 2009, AIG was in jeopardy of having its

stock delisted because the stock value was teetering at or below $1.00 per share. The

NYSE will not list stocks that are valued at less than $1.00 per share. Indeed, Starr voted

its shares in favor of the reverse stock split resolution. Although it might be logical to

conclude that the twenty-for-one decrease in the number of issued shares, with no change

in the authorized shares, was designed to allow the Government’s preferred stock to be

exchanged for common stock, there is no evidence that this was the case. The Court

concludes that the motivation for the reverse stock split was to assure the continued

listing of AIG stock on the NYSE. Accordingly, Starr’s reverse stock split claim is

denied.

Turning to the issue of damages, there are a few relevant data points that should be

noted. First, the Government profited from the shares of stock that it illegally took from

AIG and then sold on the open market. One could assert that the revenue from these

unauthorized transactions, approximately $22.7 billion, should be returned to the rightful

owners, the AIG shareholders. Starr’s claim, however, is not based upon any

disgorgement of illegally obtained revenue. Instead, Starr’s claim for shareholder loss is

premised upon AIG’s stock price on September 24, 2008, which is the first stock trading

day when the public learned all of the material terms of the FRBNY/AIG Credit

Agreement. The September 24, 2008 closing price of $3.31 per share also is a

conservative choice because it represents the lowest AIG stock price during the period

September 22-24, 2008. Yet, this stock price irrefutably is influenced by the $85 billion

cash infusion made possible by the Government’s credit facility. To award damages on

this basis would be to force the Government to pay on a propped-up stock price that it

helped create with an $85 billion loan. See United States v. Cors, 337 U.S. 325, 334

(1949) (“[V]alue which the government itself created” is a value it “in fairness should not

be required to pay.”).

In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s

intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s

shareholders would most likely have lost 100 percent of their stock value. DX 2615

(chart showing that equity claimants typically have recovered zero in large U.S.

bankruptcies). Particularly in the case of a corporate conglomerate largely composed of

9

insurance subsidiaries, the assets of such subsidiaries would have been seized by state or

national governmental authorities to preserve value for insurance policyholders. Davis

Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for

AIG, like cascading champagne glasses where secured creditors are at the top with their

glasses filled first, then spilling over to the glasses of other creditors, and finally to the

glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926,

5930-31; see also Offit, Tr. 7370 (In a bankruptcy filing, the shareholders are “last in

line” and in most cases their interests are “wiped out.”).

A popular phrase coined by financial adviser John Studzinski, in counseling AIG’s

Board on September 21, 2008 is that “twenty percent of something [is] better than 100

percent of nothing.” Studzinski, Tr. 6936-37. Others, such as Mr. Liddy and Mr. Offit,

also embraced this philosophy, believing the top priority was for AIG to live to fight

another day. If the Government had done nothing, the shareholders would have been left

with 100 percent of nothing. In closing arguments, responding to Starr’s allegation that

FRBNY imposed punitive terms on AIG (which it did), Defendant’s counsel Mr. Dintzer

observed, “[i]f the Fed had wanted to harm AIG in some way, all it had to do was

nothing.” Dintzer, Closing Arg., Tr. 151.

The Federal Circuit’s guidance in a case of this type requires that Starr show its

economic loss. “[P]roving economic loss requires a plaintiff to show what use or value

its property would have but for the government action.” A&D Auto Sales, Inc. v. United

States, 748 F.3d 1142, 1157 (Fed. Cir. 2014). The analysis here leads to the conclusion

that, if the Government had done nothing to rescue AIG, the company would have gone

bankrupt, and the shareholders’ equity interest would have been worthless. Accordingly,

the Court finds that the first plaintiff class prevails on liability because of the

Government’s illegal exaction, but recovers zero damages. The Court finds that the

second plaintiff class, basing its claim on the reverse stock split, is not entitled to

recovery for either liability or damages.

As the Court noted during closing arguments, a troubling feature of this outcome

is that the Government is able to avoid any damages notwithstanding its plain violations

of the Federal Reserve Act. Closing Arg., Tr. 69-70. Any time the Government saves a

private enterprise from bankruptcy through an emergency loan, as here, it can essentially

impose whatever terms it wishes without fear of reprisal. Simply put, the Government

often may ignore the conditions and restrictions of Section 13(3) knowing that it will

never be ordered to pay damages. With some reluctance, the Court must leave that

question for another day. The end point for this case is that, however harshly or

improperly the Government acted in nationalizing AIG, it saved AIG from bankruptcy.

Therefore, application of the economic loss doctrine results in damages to the

shareholders of zero.

10

Findings of Fact

A. The September 2008 Financial Crisis

In September 2008, the American economy faced the worst financial crisis since

the Great Depression in the 1930s. Bernanke, Tr. 1958 (“[T]he country at that time was

in the most severe financial crisis since the Great Depression.”); PTX 548 at 24

(Bernanke). The crisis that began in August 2007 had the world “at the edge of the

abyss.” “It was the worst financial shock in more than a century.” In the United States,

the initial loss to household wealth was five times as severe as compared to the initial loss

of wealth during the Great Depression. PTX 671 at 2 (Geithner).

This crisis was so widespread that it affected the viability of nearly every financial

firm, including institutions that were solvent at the time. PTX 663 at 11; Geithner, Tr.

1445, 1556 (noting that a solvent company may fail if it becomes illiquid). During a

panic, liquidity freezes up and firms are forced to sell off assets in a fire sale, which

“bring[s] asset prices down below their long-run value, which then harms everybody

else’s ability to borrow against assets.” This condition creates a vicious cycle where

people with liquid assets no longer extend liquidity to others, and it causes a significant

contraction to the financial markets, affecting even solvent institutions. Cragg, Tr. 5424-

25; PTX 663 at 11 (Geithner: If a solvent entity becomes “caught up in the run, even the

strongest will not survive.”). Officials in Government and private enterprise were

working around the clock. Baxter, Tr. 840 (“I can’t tell you which day it was, Mr. Boies,

because I was pretty much working 24/7 at that time. The days were nights; the nights

were days.”).

The crisis that would come to a head in September 2008 “arrived in force on

August 9, 2007.” PTX 706 at 78 (Paulson). Foreclosures in the housing market began to

rise, credit spreads widened, and the amount of liquidity available to firms decreased

substantially. PTX 709 at 156. By March 2008, the Federal Reserve found there were

“unusual and exigent circumstances” sufficient for it to lend outside the banking system.

Baxter, Tr. 656-57, 659. On March 14, 2008, the Federal Reserve authorized an

emergency loan to Bear Stearns under its Federal Reserve Act Section 13(3) authority.

PTX 1201 at 2-3. On March 16, 2008, the Federal Reserve created the Primary Dealer

Credit Facility (“PDCF”) for primary dealers to obtain overnight liquidity. Stip. ¶ 51 (the

PDCF loaned as much as $40 billion a night); PTX 728 at 1-2. Between March and

September 2008, the financial markets continued to deteriorate. Alvarez, Tr. 136-37

11

(stating that “[l]iquidity was becoming difficult to get with any kind of haircut on a

secured basis, and unsecured credit was becoming all but unavailable.”).5

By September 2008, panic among financial institutions had caused the private

market to freeze and stop functioning altogether. This panic also led to a run on money

market funds that, in turn, began to dump commercial paper, and the “commercial paper

market went into shock.” PTX 708 at 90 (Bernanke). Financial institutions stopped

lending to each other and every financial institution faced enormous pressure and strain.

Offit, Tr. 7920, 7927. Of the thirteen most important financial institutions in the United

States, twelve “had either failed or were at risk of failure.” Bernanke, Tr. 1960.

There were five major causes of the September 2008 financial crisis: (1) the so-

called “housing bubble”; (2) the floating interest rates of subprime mortgages; (3) the

rating agencies’ misrepresentations of the riskiness of certain securities such as

collateralized debt obligations (“CDOs”); (4) the “originate-to-distribute” business

model; and (5) the collapse of the alternative banking system. The “housing bubble” was

caused by low interest rates and poor lending practices by mortgage originators and

banking and financial institutions. Following September 11, 2001, the Government kept

interest rates artificially low to encourage home buying. Saunders, Tr. 8379 (The roots of

the financial crisis are traceable to “when interest rates were lowered after 9/11 and then

there was a buildup of subprime mortgages.”). The low interest rates in turn over-

stimulated the housing market and resulted in the over extension of credit. In addition to

the artificially low interest rates, banks and financial institutions had adopted poor

lending practices extending mortgages to borrowers for housing that they could not

actually afford. These mortgages, especially the subprime mortgages, included floating

interest rates. When interest rates began to rise during 2006 and home prices began to

drop, many low income homeowners could no longer meet their mortgage commitments

and either became delinquent or defaulted on their loans. Saunders, Tr. 8380; PTX 599 at

5 (Bernanke).

Another major cause of the financial crisis was the “originate-to-distribute”

business model developed by financial institutions. Under the “originate-to-distribute”

model, “originators would transfer mortgages to other entities instead of holding them to

maturity.” PTX 624 at 117-19, 130-54. Mortgage originators would first transfer or sell

mortgages to a special purpose vehicle (“SPV”). This process would then lead to the

creation of CDOs, which are securities or tranches representing tiered rights to be paid

from the revenue of the pool. The originator of the SPV then either marketed the CDOs

5

A “haircut” in the financial industry is a percentage discount applied to the market value of a security or

the face value of a bond to account for the risk of loss that an investment in the security or bond poses.

See Alvarez, Tr. 130-32; PTX 2856 at 171 (Cragg Expert Report).

12

to investors or retained them on the balance sheet. Cragg, Tr. 4952-55. Between 2004

and 2007, “nearly all of the adjustable rate subprime mortgages written were packaged

into residential mortgage-backed securities (“RMBS”) and a large share of these

subprime RMBS were purchased by managers of CDOs of asset backed securities.” Stip.

¶ 37; PTX 11 at 10; PTX 583 at 8 (by 2006, subprime mortgages accounted for 20

percent of the total mortgages on the market whereas in 1994, they only accounted for

five percent of the total market). This “originate-to-distribute” model increased the

amount of money available for housing loans and resulted in mortgage originators paying

less attention to a borrower’s credit and making loans without “sufficient documentation

or care in underwriting” because the risk of non-payment had been transferred to others.

PTX 607 at 11 (Bernanke). Rating agencies downplayed the riskiness of the CDOs and

related securities, and the Government later charged some of these agencies with fraud

for their misrepresentations regarding the safety of CDOs and related securities. PTX

661 at 2-3.

Finally, the alternative or “shadow” banking system collapsed, further worsening

the September 2008 financial crisis. The alternative banking system had developed as a

way to provide trillions of dollars of short-term liquidity to financial firms. Between

2003 and 2006, the alternative banking system grew at an exponential rate and by the

time the housing bubble burst in 2006, it was larger in size than the traditional banking

sector. Cragg, Tr. 4942, 4945. At its peak, the size of the shadow banking system was

approximately $13 trillion. Cragg, Tr. 4943; PTX 5302. But the shadow banking system

was not regulated in the same way that traditional banks are regulated. Instead, this

alternative system consisted primarily of investment banks and broker dealers that

extended credit in competition with traditional banks. These investment banks and

broker dealers originated loans, packaged those loans into securities, and created

institutions that would buy those securities and distribute them to investors. Cragg, Tr.

4941-43. In this “shadow” system, “what was most important was the ability to do deals,

because it was fees that generated profits.” Cragg, Tr. 4947. By contrast, in the

traditional banking system, most of the income comes from what is called spread income.

Spread income is “the difference between the cost of money coming into the bank versus

. . . the interest that [the bank is] able to charge on mortgages and other loans.” Cragg,

Tr. 4946-47.

Significantly, the alternative system also included the “repo” market which

provided short-term funding for companies by “funding through repurchase agreements

where the investment banks would put out assets overnight and use that as collateral.”

PTX 548 at 13 (Bernanke). The repo market was particularly important to the broker

dealers of the alternative banking system because “half of their balance sheet was

supported by repo.” Cragg, Tr. 5005-06. Before the crisis began, bankers considered

repos safe. But starting in 2007, the repo lenders grew concerned they would receive

13

collateral instead of cash and these lenders responded by imposing higher haircuts or

pulling away and causing some borrowers to lose access to repo entirely. PTX 650 at 12-

13 (Bernanke). Repo financing was particularly susceptible to a financial crisis because

it was overnight financing which had to be renewed every day. PTX 706 at 115-16

(Paulson) (“Most of this money was lent overnight.”). By September 2008, the size of

the repo market had dropped precipitously, falling from $4.5 trillion in March 2008 to

$3.5 trillion, a decrease of 20 percent. Cragg, Tr. 5006.

B. AIG’s Financial Condition in 2008

The bursting of the housing bubble and the collapse of the alternative or shadow

banking system exposed nearly every major financial institution to significant liquidity

risks beginning in 2007 and into September 2008. Cragg, Tr. 5031-32 (“Lehman,

Morgan Stanley, Goldman Sachs, Merrill Lynch . . . were all, you know, in fear of

failure, because of liquidity.”). Financial institutions such as AIG, Lehman, Morgan

Stanley, Goldman Sachs, and Merrill Lynch faced these liquidity risks due, in part, to

their massive CDO and CDS6 portfolios. See Cragg, Tr. 4987-89; Saunders, Tr. 8074-75,

DX 1356 at 28; DX 1883 at 23 (“[AIG’s] super senior CDS portfolio began in 1998 and

had a total net exposure of $465 billion at June 30, 2007.”). Though AIG, unlike other

major financial firms, had “stop[ped] writing credit protection on multi-sector CDOs” in

2005, stip. ¶ 42, its securities lending program in its Financial Products Division

(“AIGFP”) still faced substantial risks from its existing CDS portfolio.7 First, AIG’s

CDS agreements contained substitution provisions which allowed CDO managers to

swap pre-2006 RMBS with “more suspect” 2006 and 2007 subprime RMBS that

presented “more problematic credit issues.” Cragg, Tr. 5304, 5307. Second, AIG had

failed to hedge against the risk it faced from its multi-sector CDS contracts. Schreiber,

Tr. 6541-44; Saunders, Tr. 8086. Starr itself concluded that a significant portion of

AIG’s 2008 liquidity problems was the result of its failures in risk management. Smith,

Tr. 7687-90; DX 211 at -10576.

6

A CDS is a “credit default swap contract” and is akin to financial insurance, whereby the CDS seller

collects premium payments in exchange for guaranteeing the performance of a debt obligation. Cragg,

Tr. 4964; PTX 549 at 7; Saunders, Tr. 8071-72.

7

At a time when AIG was exiting the CDO market, other financial firms such as Goldman Sachs,

Citigroup, and Merrill Lynch were dramatically increasing their CDO transactions. From 2005 to 2006,

Goldman Sachs’ CDO transactions doubled, going from $12.6 billion to $25.4 billion. Merrill Lynch

tripled the size of its CDO transactions from 2005 to 2006, issuing approximately $14 billion in 2005 to

$40.9 billion in 2006. Citigroup more than doubled the size of its CDO transactions going from $11.1

billion in 2005 to $28.3 billion by 2007. Cragg, Tr. 4987-89. As evidenced by a May 17, 2007 speech at

the Federal Reserve Bank of Chicago, Mr. Bernanke had a favorable view of the home mortgage market

two years after AIG had stopped accepting additional CDO risk. PTX 1041 at 6; Bernanke, Tr. 2142-43.

14

AIG began to face liquidity issues from both its CDS portfolio and securities

lending program starting in 2007. The CDS contracts “carried substantial liquidity risks

for AIG” because they required AIG to post cash collateral in three circumstances: (1) a

default in a covered CDO; (2) a decline in the CDOs’ market value; (3) a downgrade of

an individual CDO tranche; or (4) a rating downgrade for AIG itself. Saunders, Tr. 8072-

73. If AIG’s credit rating declined, AIG would be forced to post billions of dollars in

collateral due to the terms of its CDS contracts. Cragg, Tr. 5036-37 (noting that

“[e]ventually the credit rating agencies [got] concerned about AIG’s liquidity” which led

to more liquidity problems and then the run on AIG).

Under AIG’s securities lending program, AIG could borrow money by lending

securities to third parties in exchange for cash collateral. This program created a liquidity

risk by allowing borrowers to return the borrowed securities and demand the return of

their cash collateral in as little as a few days, whereas the average maturity of the RMBS

investments or assets that AIG purchased with the security borrowers’ cash collateral was

about five years. Saunders, Tr. 8145-46; Cragg, Tr. 5287-90. If securities borrowers did

not roll over their existing borrowings, AIG would have to respond to securities returns

by either selling the investments it had purchased or providing cash from other sources.

Saunders, Tr. 8147. AIG continued to expand this program in 2006 and 2007, investing

the cash collateral in risky subprime and alternative “Alt-A” RMBS. Saunders, Tr. 8097-

98; Kothari, Tr. 4870. By September 2008, 84 percent of the collateral obtained through

the securities lending program had been invested in either subprime mortgages or Alt-A

mortgages. Saunders, Tr. 8099-8100.

In order for AIG to manage its liquidity needs from the CDS portfolio and the

securities lending program, the company, starting in 2007, created a Liquidity Risk

Committee to “measure, monitor, control and aggregate liquidity risks across AIG” and

began to build liquidity. Willumstad, Tr. 6477; DX 939 at 99. To build liquidity, AIG

decided to raise additional capital from the market. In May 2008, AIG raised “$20

billion in new capital by issuing a mix of common stock, equity units, and junior

subordinated debentures,” which was the largest private capital raise in history at that

time. Stip. ¶ 56; PTX 587 at 13-14; Willumstad, Tr. 6481. AIG continued to try to

strengthen its balance sheet, raising another $3.25 billion in capital in August 2008. JX

188 at 3; Stip. ¶ 66; Offit, Tr. 7917 (“I had made a statement to the board and I said I

didn’t know whether we were the most overcapitalized company in this country or the

most undercapitalized. I said it all depends on housing prices. And that was really the

variable.”). To conserve cash, AIG also halted merger discussions with a number of

entities that it had been contemplating acquiring. Willumstad, Tr. 6483. In addition,

“AIG hired JP Morgan Chase to help develop funding options” and “approached

Berkshire Hathaway about providing a $5 billion backstop to AIG’s guaranteed

15

investment contracts.” Stip. ¶¶ 67, 69. As of August 2008, AIG’s outside auditors from

PricewaterhouseCoopers (“PWC”) concluded that AIG’s liquidity needs did not rise “to

the level of concern that required disclosure.” Farnan, Tr. 4243; DX 175 at 233 (as of

June 30, 2008, AIG’s cash and short-term investments totaled $82.2 billion). By

September 2008, AIG had reduced its securities lending balance by 25 percent from its

peak. PTX 625 at 4.

Despite the capital raises and AIG’s other efforts to conserve cash, AIG’s liquidity

problems continued in August and September 2008 due to the further deteriorating

condition of the financial markets, the lack of available liquidity, and similar difficulties

facing other financial institutions. See Offit, Tr. 7920, 7928; Bernanke, Tr. 1960; Cragg,

Tr. 4942, 4945; Liddy, Tr. 3183-84 (“I thought the company faced a very complex

liquidity squeeze, in line with that which was affecting many other financial

institutions.”). Many market participants such as AIG also “found it difficult to derive

fair market values for their securities based on market transactions.” PTX 221 at 4; see

also Willumstad, Tr. 6484-86. Accordingly, AIG was forced to post collateral to its

counterparties that “way exceeded any reasonable estimate of the actual risk of

nonpayment on the CDS contracts” and this circumstance further strained AIG’s

liquidity. Cragg, Tr. 5016-17.

C. September 13-14, 2008 – “Lehman Weekend”

In the weeks leading up to “Lehman Weekend,” FRBNY’s Mr. Geithner met twice

with AIG’s Chief Executive Officer, Mr. Willumstad. On July 8, 2008, Mr. Geithner

held a meeting as a courtesy because Mr. Willumstad had just become AIG’s new CEO,

and on July 29, 2008, they met again at Mr. Willumstad’s request. Mr. Willumstad did

not indicate in either of these meetings that AIG was facing significant liquidity issues,

and he did not request any FRBNY assistance. Geithner, Tr. 1720-21; PTX 715 at 1. Mr.

Willumstad asked during the July 29 meeting if AIG might borrow from FRBNY if the

need arose in the future. Willumstad, Tr. 6342-44; Geithner, Tr. 1721. In response, Mr.

Geithner explained that providing AIG with access to FRBNY lending facilities would be

unlikely for “moral hazard” reasons because AIG was an insurance company, not a bank.

Geithner, Tr. 1721-22. “Moral hazard” refers to the concern that Federal Reserve loans

might encourage companies to assume undue risk in the hope of receiving government

support on favorable terms if they fail. Geithner, Tr. 1763-64; Bernanke, Tr. 2215-16

(when deciding whether to authorize FRBNY to offer a rescue loan to AIG, the Board of

Governors discussed the “moral hazard . . . that would attend such a loan.”). The Federal

Reserve began to monitor AIG more closely in August 2008. PTX 24, 26, 27, 29, 30, 33.

Mr. Geithner and Mr. Willumstad met a third time on Tuesday, September 9,

2008, where Mr. Willumstad raised AIG’s interest in becoming a primary dealer to gain

16

access to FRBNY’s Primary Dealer Credit Facility (“PDCF”). Willumstad, Tr. 6370-71;

Geithner, Tr. 1722-24. Mr. Willumstad was aware that the process for becoming a

primary dealer would require at least two months for AIG to establish a primary dealer

affiliate. Willumstad, Tr. 6359-61; JX 43 at 3 (Sept. 5, 2008 AIG Board minutes).

Ultimately, AIG did not apply to become a primary dealer. Willumstad, Tr. 6373.

In August 2008, AIG learned that credit rating agencies were considering

downgrading AIG because of continued earnings volatility and financial deterioration.

DX 178 at -1005 (Fitch Ratings). AIG retained JP Morgan as a financial adviser to

develop funding options and strategic alternatives. Willumstad, Tr. 6350. In early

September 2008, AIG’s management remained optimistic about raising up to $20 billion

in capital to address liquidity needs, and considered using asset sales and a dividend cut

to increase available funds even more. Willumstad, Tr. 6360; JX 43 at 3. Mr.

Willumstad met with credit rating agencies during the week of September 8-12, 2008

“with the hope and expectation that they would wait until the end of September” before

deciding to downgrade AIG. Willumstad, Tr. 6366-67; DX 227 at -5283. During this

one-week period, AIG’s stock price fell from $22.76 to $12.14 per share. Willumstad,

Tr. 6369; JX 188 at 4 (AIG 2008 Form 10-K).

By Friday, September 12, 2008, AIG was caught in a “downward spiral” due to its

likely credit rating downgrades, increased CDS collateral calls, the decline of its

mortgage-related assets, the absence of market liquidity, and the decline of its stock price.

Mr. Willumstad spoke to Mr. Geithner on Friday morning, September 12, indicating that

AIG had urgent and severe liquidity needs in the range of $13 to $18 billion to meet its

collateral demands. Geithner, Tr. 1726-27; Willumstad, Tr. 6374-75. As a result of an

afternoon meeting with AIG representatives on September 12, FRBNY reported that

“AIG is facing serious liquidity issues that threaten its survival viability.” Mosser, Tr.

1292; PTX 42 at 1.

Upon learning of AIG’s liquidity needs on September 12, 2008, the Federal

Reserve encouraged AIG and other private-market participants to pursue a private

solution over the coming weekend. During September 13-14, 2008, FRBNY and Board

of Governors representatives met or spoke repeatedly with AIG and its representatives to

understand AIG’s needs and to explore potential options to address the financial

pressures. Mr. Geithner commissioned teams of FRBNY staff to study AIG’s financial

profile and assess AIG’s financial condition and needs. Over this weekend, the role of

these teams expanded to include consideration of the pros and cons of lending to AIG,

analysis of the consequences of an AIG bankruptcy, and an overall evaluation of AIG’s

importance to the national and world economies. Geithner, Tr. 1729; Mosser, Tr. 1334;

LaTorre, Tr. 2300-01; DX 307 at -6652-53; DX 398 at -9979.

17

In meetings and other communications with AIG, FRBNY and Board of

Governors representatives encouraged AIG’s efforts to borrow money or raise capital

from the private sector. Geithner, Tr. 1730 (“[T]he purpose of those meetings [was] for

[AIG] to give us a better feel for the nature of their financial difficulties, the scale of the

assistance they may need, and to lay out for us or provide a report on progress they were

making or not making in their efforts to raise private assistance.”); Bernanke, Tr. 2203 (“I

understood that there were some private sector negotiations going on with at least one

and maybe more private equity firms.”).

The meetings on Saturday, September 13, 2008 also included discussions of

possibly freeing up collateral held by AIG’s New York insurance subsidiaries to provide

liquidity to the parent company. Willumstad, Tr. 6380-81. On Saturday evening, Mr.

Geithner and Secretary of the Treasury Henry Paulson met with Mr. Willumstad and

other AIG executives and advisers for an update on AIG’s private sector efforts. Mr.

Willumstad explained that AIG was pursuing possible commercial deals, but he thought

some liquidity support from the Treasury Department or the Federal Reserve might be

necessary to assist AIG in achieving a private sector solution. Willumstad, Tr. 6380-82;

Geithner, Tr. 1730-31.

During the weekend of September 13-14, 2008, AIG increased its estimate of how

much money it needed to survive. The increasing AIG projections raised concerns about

whether it was possible to pinpoint AIG’s actual needs and exposure. AIG’s initial $18

billion liquidity projection increased to $45 billion on Sunday (DX 1882 at 106-07), and

to at least $75 billion on Monday (JX 74 at 21).

On Sunday, September 14, 2008, Mr. Willumstad reported to government officials

that AIG’s efforts to secure private sector funding had been unsuccessful. Willumstad,

Tr. 6389-90. AIG had not found any private firm or sovereign wealth fund that was

willing to provide sufficient financing to stabilize the company, and in time to meet

AIG’s needs. AIG’s Chief Financial Officer, David Herzog, testified “[w]hatever ideas

[investment bank consultants] came up with just simply weren’t executable.” Herzog, Tr.

6957.

In the early hours of Monday, September 15, 2008, Lehman Brothers filed for

bankruptcy. Stip. ¶ 93; Willumstad, Tr. 6390-91; Alvarez, Tr. 493. Before its

bankruptcy, Lehman Brothers had been a prominent investment bank and a primary

dealer. Baxter, Tr. 1101-02; LaTorre, Tr. 2312. Mr. Paulson agreed that, “right after

Lehman failed, the country was plunged into . . . the most wrenching financial crisis since

the Great Depression.” Paulson, Tr. 1200-01. The Lehman Brothers’ bankruptcy made

AIG’s financial crisis much worse. The marketplace reacted to the Lehman

announcement by tightening liquidity, which made conventional financing sources more

18

difficult to access. AIG’s counterparties began withholding payments to AIG and

refusing to transact with AIG even on a secured, short-term basis. Willumstad, Tr. 6396-

97; JX 188 at 4.

By Monday, September 15, 2008, FRBNY concluded that AIG could not raise

private capital. Mr. Geithner asked JP Morgan and Goldman Sachs to organize a private

consortium of lenders to try to rescue AIG. Mr. Willumstad recommended these two

entities because they were most knowledgeable about AIG, and best suited to arrange a

syndicated rescue loan. Geithner, Tr. 1744 (“I asked two banks, after consulting with Mr.

Willumstad, to undergo an effort to assess whether they could arrange a substantial

source of private financing.”).

During Monday and early Tuesday, September 15-16, 2008, senior bankers from

Goldman Sachs and JP Morgan consulted with other banks, including Morgan Stanley, to

assess AIG’s immediate liquidity needs and economic value. Lee, Tr. 7073; Head, Tr.

3768-69. JP Morgan’s James Lee was one of the country’s leading arrangers of

syndicated loans. Lee, Tr. 7078. A group from Goldman Sachs and JP Morgan worked

through the night to develop terms that might be attractive to other banks. Mr.

Willumstad kept AIG’s Board apprised of these efforts, including an “expectation that

banks [would] ultimately be paid in some form of equity.” JX 74 at 2. These efforts

proved unsuccessful principally because of the perception that AIG’s borrowing needs

exceeded AIG’s value by tens of billions of dollars. Lee, Tr. 7075.

During the lead-up to “Lehman Weekend” and the following Monday, government

officials were not prepared to let AIG file for bankruptcy because of the catastrophic

consequences an AIG bankruptcy would have had on other financial institutions and the

economy. Def.’s Resp. to Pl.’s 2nd RFAs No. 206 (“The failure of AIG could easily

have led to a worldwide banking run and a severe financial meltdown, devastating

millions of people financially along the way.”); Id. No. 233 (“The Federal Reserve made

its decision to lend based on a judgment that a failure of AIG would cause dramatically

negative consequences for the financial system and the economy, consequences worse

than what occurred in the aftermath of the failure of Lehman Brothers.”); Baxter, Tr. 676

(On September 16, Messrs. Bernanke, Geithner, and Paulson “all concluded that if AIG

filed for bankruptcy, that would have catastrophic effects for financial markets.”).

Further on this point, in his book “Stress Test,” Mr. Geithner observed:

The U.S. financial system seemed even more exposed to AIG

than it had been to Lehman. Europe and Asia were also more

exposed to AIG. And not only was AIG larger than Lehman,

with a more complex derivatives book, its decline had been

19

much swifter, which would be even scarier to markets. “If

they default, you’ll see default probabilities explode on all

financial firms,” I said. In other words, mass panic on a

global scale.

PTX 709 at 208.

Mr. Bernanke also shared these views. PTX 599 at 77 (“AIG’s demise would be a

catastrophe.”); PTX 708 at 92, Collection of Mr. Bernanke’s Lectures in “The Federal

Reserve and The Financial Crisis,” (“In our estimation, the failure of AIG would have

been basically the end. It was interacting with so many different firms. It was so

interconnected with both the U.S. and the European financial systems and global

banks.”); Bernanke, Tr. 1970 (AIG was “a case where action was necessary.”).

Mr. Paulson concurred with his colleagues. PTX 564 at 142 (AIG’s collapse

“would have buckled our financial system and wrought economic havoc on the lives of

millions of our citizens.”); Id. at 141 (“An AIG failure would have been devastating to

the financial system and to the economy.”); Paulson, Tr. 1206 (“[I]t would be

catastrophic if AIG filed for bankruptcy.” While “the system could withstand a Lehman

failure, if AIG went down, the country faced a real disaster.”).

D. September 16, 2008 Loan and Term Sheet

Once the Federal Reserve concluded that it could not allow AIG to file for

bankruptcy, it drafted a term sheet for the Board of Governors’ approval. The Board of

Governors convened a meeting on September 16, 2008 to approve the term sheet as

required under Section 13(3) of the Federal Reserve Act. Alvarez, Tr. 509-10. This

meeting was the only one that the Board of Governors held before the AIG Credit

Agreement was executed. Bernanke, Tr. 1974-75.

The term sheet approved by the Board of Governors is included in the record as

JX 63. Alvarez, Tr. 188; Bernanke, Tr. 1974. This term sheet expressly stated that the

form of equity would be “[w]arrants for the purchase of common stock of AIG

representing 79.9% of the common stock of AIG on a fully-diluted basis.” JX 63 at 6.8

8

The objective of the Board of Governors in setting a 79.9 percent rate was to keep the Government’s

equity ownership of AIG below 80 percent, because at an 80 percent or higher level, the Federal Reserve

or the Treasury Department would be considered the controlling owner of AIG. See Alvarez, Tr. 515-16.

At an ownership level above 80 percent, principles of “push down” accounting would have likely required

FRBNY to recognize AIG’s assets and liabilities on its own books and records. JX 146 at 23-28 (PwC

analysis, Nov. 9, 2008); Farnan, Tr. 4408-13.

20

Warrants are a “contract by which the corporation gives an irrevocable option to the

holder to purchase authorized corporate stock within a period of time at a price and upon

terms specified in the contract.” Tribble v. J.W. Greer Co., 83 F. Supp. 1015, 1022 (D.

Mass. 1949). For the AIG term sheet presented to the Board of Governors, the members

understood that the warrants would be non-voting until they were exercised, would have

an exercise price, and required shareholder approval9 before the warrants could be issued.

Bernanke, Tr. 1975; Baxter, Tr. 816; see also JX 63 at 10. Other key provisions of the

term sheet voted on by the Board of Governors included a drawn interest rate of 12

percent (3.5 percent London InterBank Offered Rate10 (“Libor”) floor + 850 basis points),

an undrawn fee of 8.5 percent, meaning that any amount not drawn by AIG would be

charged an interest rate of 8.5 percent, a commitment fee of 3 percent of the total facility,

and a periodic commitment fee of 2.5 percent “payable in kind every [three] months after

closing.” JX 63 at 6. The five Board of Governors members unanimously voted to

approve the term sheet. JX 63 at 4. This was the only term sheet the Board of Governors

ever saw or approved. Alvarez, Tr. 188.

Following the Board of Governors meeting on September 16, 2008, the Davis Polk

lawyers began to circulate a term sheet time-stamped 1:44 PM to FRBNY and Treasury

officials. PTX 86 at 1. This term sheet, like the one presented to the Board of

Governors, stated that warrants would be the form of equity granted to the Federal

Reserve. Id. at 4. At 2:15 PM that day, Mr. Baxter sent Mr. Alvarez a term sheet

providing for “Warrants for the purchase of common stock of AIG representing 79.9% of

the common stock of AIG on a fully-diluted basis.” JX 64-A at 1; Alvarez, Tr. 262;

Baxter, Tr. 695. Later, at 3:21 PM, a black-lined term sheet was distributed, showing

changes from earlier drafts. However, the warrants provision in the term sheet remained

unchanged. JX 378 at 1, 8-12.

In the afternoon of September 16, 2008, Mr. Geithner called Mr. Willumstad to

tell him that FRBNY would be sending him a term sheet and that he had two hours to

convince AIG’s Board of Directors to accept. PTX 673 at 24 (Geithner: “[W]e’re going

9

Under New York Stock Exchange Listed Company Manual Rule 312.03, “shareholder approval is

required prior to the issuance of warrants exercisable into twenty percent or more of the voting power of a

corporation’s common stock unless a company invokes an exception to Rule 312.03 that waives the

requirement of a shareholder vote when (1) the delay in securing shareholder approval would seriously

jeopardize the financial viability of the Corporation’s enterprise and (2) reliance by the Corporation on

such exception is expressly approved by the Audit Committee of the Board.” JX 75 at 2. On September

16, 2008, the AIG Audit Committee approved the issuance of warrants without shareholder approval,

invoking Rule 312.03. Id. at 3.

10

LIBOR is an interest rate benchmark that has been called “the world’s most important number.” In re

LIBOR-Based Fin. Instruments Antitrust Litig., 935 F. Supp. 2d 666, 676 (S.D.N.Y. 2013).

21

to send you a term sheet, you’re not going to like it, but you have an hour to get your

Board to approve it, two hours, we gave them a deadline, and you are not going to be

running the company.”). According to Mr. Baxter, the Federal Reserve’s offer to AIG

was “take it or leave it. Nothing could be negotiated.” PTX 126; see also Liddy, Tr.

3200 (“The only game in town was the Federal Reserve.”); Paulson, Tr. 1444 (“Federal

Reserve was the only fire station in town.”). The AIG Board meeting to discuss the

proposed Federal Reserve loan commenced at approximately 5:00 PM that day. JX 74 at

1. At the start of the meeting, Mr. Richard Beattie of Simpson Thacher & Bartlett

informed the directors about key aspects of the $85 billion credit facility. Id. at 3. Mr.

Willumstad also relayed to the Board of Directors what Mr. Geithner had said: that as

one of the conditions to accepting the Federal Reserve’s loan facility, he would be

replaced as CEO of AIG. Id. at 3-4.

The law firms of Simpson Thacher & Bartlett, Sullivan & Cromwell, and Weil

Gotshal then gave the AIG directors comprehensive legal advice on whether they should

accept the loan or file for bankruptcy. Id. at 4-5; Offit, Tr. 7349-50, 7373. After hearing

from these advisers and engaging in a lengthy discussion regarding the pros and cons of

filing for bankruptcy, the AIG Board of Directors decided that accepting the loan was a

better alternative than bankruptcy. JX 74 at 9-11 (Offit: “AIG, as a financial institution

based on trust, cannot survive in bankruptcy;” Sutton: “[t]he risks of bankruptcy are

simply too high and there is too great a likelihood that the value of AIG would drop very

quickly, hurting all the constituencies about whom the Board must be concerned.”); Offit,

Tr. 7392 (“[B]y accepting the terms . . . shareholder[s] would still have a 20 percent

interest rather than being wiped out by a bankruptcy, and . . . one day [AIG] could again

be a very vibrant company.”). Of the twelve AIG board members, all but Mr. Bollenbach

voted in favor of the Federal Reserve loan. JX 74 at 14. The AIG directors believed

doing so was in the best interests of AIG and its shareholders and that it was a better

alternative to bankruptcy. Willumstad, Tr. 6432; Offit, Tr. 7402-03; JX 74 at 11. AIG’s

directors were independent of FRBNY and the Government, with no affiliation with or

dependence on FRBNY or the Government for their livelihood. Willumstad, Tr. 6435-

36.

Before the conclusion of the board meeting on September 16, 2008, the AIG

Board of Directors adopted two resolutions. The first authorized AIG “to enter into a

transaction with the Federal Reserve Bank of New York (the ‘Lender’) to provide a

revolving credit facility of up to $85 billion on terms consistent with those described at

this meeting, including equity participation equivalent to 79.9 percent of the common

stock of the Corporation on a fully-diluted basis.” The second resolution authorized AIG

“to enter into a $14 billion demand note with the Lender” and to “enter into such

additional demand notes . . . as any Authorized Officer determines is necessary or

appropriate to meet the liquidity needs of the Corporation prior to the execution of the

22

definitive documentation of the Credit Facility.” JX 74 at 13-14. After the Board of

Directors approved the loan facility, FRBNY immediately advanced funds to AIG. Offit,

Tr. 7938.

Someone presented a two-page term sheet to Mr. Willumstad prior to the AIG

Board meeting. It is unclear from the evidence exactly what version of the term sheet he

saw. Willumstad, Tr. 6515. Mr. Huebner testified that Mr. Wiseman of Sullivan &

Cromwell handed out hard copies of a term sheet to AIG’s Board members, stating the

form of equity would be “79.9 percent equity equivalent to common stock, form to be

determined.” Huebner, Tr. 5945-46 (emphasis added). However, this evidence

contradicts the testimony of Mr. Willumstad and Mr. Offit who both testified that they

did not see a term sheet during the September 16, 2008 board meeting. JX 76 at 1;

Willumstad, Tr. 6515; Offit, Tr. 7936. The Court cannot determine what version of the

term sheet Mr. Willumstad actually received or whether any hard copies, much less what

version, of the term sheet were shown to AIG’s Board of Directors. All the term sheets

circulated on September 16, 2008 did state, however, that “[t]his Summary of Terms is

not intended to be legally binding on any person or entity.” JX 63 at 5 (time-stamped

7:42:23 AM); JX 64-A at 3 (time-stamped 3:50:06 AM); JX 64-A at 9 (time-stamped

1:54:10 PM); JX 71 at 2.

According to various press releases issued on the night of September 16, 2008 or

the following day, the public would have understood that the form of equity to be

acquired by the Federal Reserve would be common stock warrants. PTX 2736 at 1 (New

York Times press release) (“Fed Staffers, who briefed reporters at 9:15 tonight, don’t

even want us to say the government will control AIG. The government will name new

management, and will have veto power over all important decisions. And it will have a

warrant allowing it to take 79.9 percent of the stock whenever it wants.”); PTX 131 at 3

(New York Times) (“Under the plan, the Fed will make a two-year loan to AIG of up to

$85 billion and, in return, will receive warrants that can be converted into common stock

giving the government nearly 80 percent ownership of the insurer, if the existing

shareholders approve.”); PTX 1593 at 3 (A.M. Best) (“Current AIG shareholders will see

their equity diluted 79.9% by the issuance of warrants to the federal government.”).

Though some press releases issued on September 16-17, 2008 stated the Government

would receive a 79.9 percent equity interest in AIG without stating the form of equity,

“no published report prior to the evening of September 23, 2008, explicitly stated that the

Government would receive voting preferred stock.” See PTX 234 at 1; DX 419 at -1425;

JX 79 at 2.

After the board meeting concluded on September 16, 2008, Mr. Willumstad signed

a single signature page that had nothing attached. JX 76 at 1-2; Willumstad Tr. 6438-39,

6441-42. An AIG representative faxed a copy of the signature page to FRBNY’s Mr.

23

Baxter at 8:44 PM. PTX 94 at 1-2. The final version of the term sheet was sent at 8:51

PM after the Government received the signed signature page. Def.’s Resp. to Pl.’s 3rd

Interrog. No. 2 (identifying DX 437 as the final version). The key terms included in the

final version of the term sheet were nearly identical to those approved by the Board of

Governors except that the equity term stated “[e]quity participation equivalent to 79.9%

of the common stock of AIG on a fully-diluted basis. Form to be determined.” DX 437

at -025.

E. Development of the September 22, 2008 Credit Agreement

During September 16-19, 2008, the Government lent significant funds to AIG

pursuant to fully secured demand notes. These demand notes were separate agreements

and they were cancelled on September 23, 2008 after the execution of the Credit

Agreement. JX 84 (demand notes); JX 107 at 12, 23, 38-39, 74-75; Baxter, Tr. 761;

Liddy, Tr. 3044. Under the demand notes, AIG was obligated to pay the principal, fees

and interest on the demand of FRBNY or on September 23, 2008, whichever came

earlier. Stip. ¶ 150.

FRBNY representatives, with the assistance of their outside counsel, Davis Polk,

drafted the Credit Agreement. Brandow, Tr. 5887; Baxter, Tr. 935-36. At AIG’s

September 18, 2008 board meeting, “Mr. Litsky [Vice President of Corporate

Governance] noted that a number of directors had raised questions regarding the process

by which the various agreements with the Federal Reserve and Treasury would be

approved. Mr. Wiseman [Sullivan & Cromwell] explained the process in detail, and

noted that the documents were still being drafted by counsel for the Federal Reserve and

that counsel for the Corporation hoped to receive them shortly.” JX 94 at 6.

During September 17-21, 2008, discussions occurred between FRBNY and AIG

representatives, but the Government unilaterally imposed the key terms of the Credit

Agreement on AIG. None of the key terms were subject to negotiations. Liddy, Tr.

3293-94 (AIG had several discussions about the terms with Sarah Dahlgren, but was told

“there was not going to be any change.”); Dahlgren, Tr. 2779-80 (Mr. Liddy “expressed

unhappiness with respect to the equity piece of the deal between September 16th and

September 21st.”). AIG’s September 21, 2008 board minutes state that “[c]oncern was

raised about the Corporation’s inability to conduct further negotiations with the Bank.”

JX 103 at 6; see also PTX 195 at 7 (handwritten note) (“Fed gets it both ways not purely

negotiated.”).

The Government changed some of the key terms of the Credit Agreement from

those that the Federal Reserve’s Board of Governors had approved on September 16,

2008. The September 21, 2008 AIG board minutes state: Although “the Board had

24

originally been led to believe that the form of equity participation by the Treasury

Department would be warrants, the form of equity participation to be issued in

connection with the Credit Agreement is now proposed to be convertible preferred stock,

the terms of which were reflected in a term sheet delivered to Board members prior to the

meeting.” JX 103 at 3. Mr. Liddy confirmed “[w]e had been anticipating that it would

be warrants. It was, in fact, preferred stock. So, it was a change from what was

anticipated.” Liddy, Tr. 3129-30; see also Liddy, Tr. 3136 (“the clear expectation of AIG

management was that there would be warrants with no vote” but the final Credit

Agreement “provided preferred stock with a 79.9 percent vote.”).

There are two major differences between warrants and convertible preferred

voting stock. First, with convertible preferred voting stock, the Government would

acquire voting rights from the moment the preferred stock was issued. Warrants would

have voting rights only after the warrants were exercised. Geithner, Tr. 1492-93;

Alvarez, Tr. 261. Second, in order to exercise the warrants, the Government must pay a

strike price. Zingales, Tr. 3826-27; Kothari, Tr. 4824. The strike price to exercise

warrants in this instance would have been approximately $30 billion, calculated at 12

billion shares times the par value of $2.50 per share. Zingales, Tr. 3827-28; Cragg, Tr.

5107-08. The Government avoided the $30 billion strike price payment and obtained

immediate voting control of AIG through the issuance of convertible preferred voting

stock.

FRBNY first presented a proposal for convertible preferred voting stock to AIG at

6:31 PM on September 21, 2008, prior to an AIG Board meeting to be held that night.

PTX 196 at 1. The summary of terms described the form of equity as “Convertible

Participating Serial Preferred Stock” that “will vote with the common stock on all matters

submitted to AIG’s stockholders” and will be entitled to control “79.9%” of the vote. Id.

at 3. The document available at the board meeting was a term sheet, not a draft of the

complete Credit Agreement. JX 103 at 2 (“Mr. Reeder reviewed a summary of the

principal terms of the facility that had been prepared for review by the members.”); Offit,

Tr. 7965-66 (Mr. Offit never saw anything but the term sheet).

Between the evening of September 21st and the morning of September 23rd, more

changes were made to the Credit Agreement. Brandow, Tr. 5878. On September 22,

2008 at 9:37 PM, Davis Polk sent a draft of the Credit Agreement “requesting that all

parties review and sign off within the hour.” PTX 1645 at 2. This version added to

Section 5.11, “Trust Equity,” the following language: “The Borrower shall use best

efforts to cause the composition of the board of directors of the Borrower to be, on or

prior to the date that is 10 days after the formation of the Trust, satisfactory to the Trust

in its sole discretion.” Id. at 49-50.

25

Changing the form of equity from warrants to voting convertible preferred stock in

the Credit Agreement yielded important benefits to the Government. Avoiding a

shareholder vote was a key government objective. PTX 3272 (Sept. 17, 2008 Davis Polk

email: “avoiding a SH vote we don’t control is a primary goal.”); PTX 3129 at 7 (Nov. 5,

2008 Davis Polk email: “We succeeded in finding a structure that allows the trust to gain

control of the company without a shareholder vote.”); PTX 349 (Treasury counsel

Stephen Albrecht, discussing need to “fend off the shareholder attempts to ‘reclaim’ the

company.”).

The Federal Reserve’s Board of Governors did not consider or approve any of the

changes that FRBNY made to the Credit Agreement. The Board of Governors had

approved the term sheet on September 16, 2008 that contemplated an equity component

of non-voting warrants with a strike price (exercise price). JX 63 at 10. The Chairman of

the Board of Governors “understood that the warrants would not have a vote until they

had been exercised.” Bernanke, Tr. 1975. There also was no mention of creating a trust

during the Board of Governors meeting. Bernanke, Tr. 2028 (“[T]he provision for a

trust” was never “presented to the Board of Governors for approval.”). The Board of

Governors never voted to approve the Credit Agreement. Bernanke, Tr. 2025.

On September 21, 2008, AIG’s Board, without shareholder vote or approval,

passed a resolution authorizing the execution of the Credit Agreement. JX 103 at 1, 7.

The key players in the Credit Agreement events immediately understood the effect of this

agreement. On September 23, 2008, Davis Polk’s Mr. Huebner observed to FRBNY’s

Mr. Baxter “[t]he real joy comes when we get back the $85 [billion], with $10 +++ in

fees and interest, and make the [T]reasury tens of billions it deserves (and needs!) on the

equity.” PTX 3228 at 1. On September 22, 2008, AIG’s Dr. Jacob Frenkel stated to a

colleague, Oakley Johnson, “the [G]overnment stole at gunpoint 80 percent of the

company.” PTX 228 at 1.

F. The Government’s Control of AIG

When the Government began lending money to AIG on September 16, 2008, it

promptly took control of the company. Offit, Tr. 7938, 7964-65, 7968. FRBNY’s Sarah

Dahlgren prepared “an immediate punch list for taking control of AIG.” Dahlgren, Tr.

2640-41. On September 17, 2008, Ms. Dahlgren told a group of high-level AIG

executives, we “are here, you’re going to cooperate.” PTX 581 at 2; Dahlgren, Tr. 2817-

18. Mr. Paulson testified that the Government in effect nationalized AIG. Paulson, Tr.

1445.

On September 16, 2008, prior to any discussions with the AIG Board, the

Government terminated Mr. Willumstad as AIG’s Chief Executive Officer, and replaced

26

him with a new CEO of the Government’s choosing. Secretary of the Treasury, Henry

Paulson, “worked on finding a new CEO for the company. We had less than a day to do

it – AIG’s balances were draining by the second. I asked Ken Wilson [Treasury] to drop

everything and help. Within three hours he had pinpointed Ed Liddy, the retired CEO of

Allstate.” Mr. Paulson “called Ed Liddy and offered him the position of AIG chief on the

spot.” Paulson, Tr. 1227-28; PTX 706 at 263. The Treasury’s Dan Jester told Ms.

Dahlgren that Mr. Liddy is “the person who is going to be the new CEO of AIG.”

Dahlgren, Tr. 2639. Mr. Liddy accepted the position, and at his request, Ms. Dahlgren

“prepared some bullet points that we thought he should focus on in his initial interactions

with the company.” Dahlgren, Tr. 2645, 2917-18.

On the morning of September 17, 2008, Mr. Liddy met with Ms. Dahlgren, and

other AIG senior managers, “including the CFO, the chief risk officer, [and] the general

counsel.” Dahlgren, Tr. 2641-42. Mr. Liddy “was clearly the one in charge” during that

meeting. Dahlgren, Tr. 2643. Mr. Liddy and Ms. Dahlgren conveyed the message to

AIG senior managers that “[t]he Fed is coming in and now we are going to talk about

what we are going to do.” Dahlgren, Tr. 2644. AIG senior managers at this meeting

were “shell-shocked and at other times terrified.” Id.

The AIG Board convened a meeting on September 18, 2008. The Government

informed key Board members, Mr. Bollenbach and Mr. Offit, that Mr. Liddy would fill

the dual role of Chairman and CEO of AIG. Liddy, Tr. 3040-41; Offit, Tr. 7930. At the

board meeting, the board’s counsel, Mr. Beattie, explained that “these are uncharted

waters for any board, but that Mr. Liddy was accepted as Chief Executive Officer as part

of the agreement to accept government financing on September 16 and that the board was

acting in accordance with its duties to formally implement that agreement by appointing

Mr. Liddy as Chief Executive Officer.” JX 94 at 2; Offit, Tr. 7929-30. Mr. Paulson

“assumed the board would approve” Mr. Liddy’s installation. Paulson, Tr. 1228.

Beginning on September 16, 2008, “the government in the form of the Federal

Reserve, working with the Treasury, became very deeply involved in the overall strategy”

of AIG. PTX 449 at 15-16. When Mr. Geithner appointed Ms. Dahlgren to head the

AIG monitoring team, he told her “[y]ou’re going to take on AIG, we are going to make

them a loan, and you are going to run it.” Dahlgren, Tr. 2601; Geithner, Tr. 1565-66.

According to FRBNY’s counsel, Mr. Baxter, “we had a team that we sent to AIG to

monitor AIG on a continuous basis.” Baxter, Tr. 935. This team spent “an enormous

amount of time over at AIG,” including “people who spent much of their time at AIG

[Financial Products] up in Connecticut.” Dahlgren, Tr. 2602. Ms. Dahlgren “spent at

least part of every day at AIG” during the early stages of the Federal Reserve’s

monitoring of AIG. Dahlgren, Tr. 2603. By October 2008, Ms. Dahlgren was leading an

effort to replace current AIG board members with new members of the Government’s

27

choice. PTX 310 (Oct. 19, 2008 email, Dahlgren to Geithner, recommending new board

members, and stating “Morris Offit is prepared to hand his resignation to Ed [Liddy]

when he asks.”). Even at earlier stages, FRBNY’s plan was to replace all of AIG’s Board

members. PTX 3248 at 2 (Sept. 20, 2008 Davis Polk email: “We plan to take out the

board and insert our own people. . . .”); PTX 3290 (Sept. 16, 2008 Davis Polk email:

“The Fed wants the entire board to resign and be replaced.”).

The AIG monitoring team consisted of hundreds of government officials and

outside advisers. Dahlgren, Tr. 2605. The monitoring team included professionals “from

Ernst & Young, from Morgan Stanley, and from Davis Polk.” Dahlgren, Tr. 2603-04;

PTX 524 (containing a “working group list” of team members from FRBNY, Morgan

Stanley, Davis Polk, Blackstone, and Ernst & Young). Morgan Stanley had

approximately “[one] hundred individuals throughout the firm in different disciplines”

who worked on the AIG engagement “on behalf of” FRBNY. Head, Tr. 3722. Morgan

Stanley’s scope of work was very broad, and encompassed virtually every important

decision and activity. JX 222 at 3-4; PTX 303 at 1, 8. Ernst & Young also had “upwards

of [one] hundred people” assisting on the monitoring team. Dahlgren, Tr. 2605.

Blackrock worked to value AIG’s assets (JX 379 at 2) and to devise, structure, and

manage Maiden Lane II and Maiden Lane III (explained in section J below). Dahlgren,

Tr. 2647; Head, Tr. 3743-44; JX 382 at 1, 25. Approximately ten to twenty Davis Polk

lawyers were working with Ms. Dahlgren on AIG. Dahlgren, Tr. 2606.

AIG was required to reimburse FRBNY for all expenses incurred by FRBNY’s

advisers. Dahlgren, Tr. 2606-08; JX 251 at 316-17 (AIG 2009 10-K Report

acknowledging AIG’s obligation to reimburse FRBNY for the monitoring team

expenses). There was no budget for all of the persons and firms helping the Federal

Reserve, but it was “very expensive.” Geithner, Tr. 1569.

Based upon statements made by government officials, there can be little doubt that

the Government controlled AIG. Mr. Bernanke testified before Congress on March 23,

2009 that “AIG is effectively under our control.” PTX 447 at 50. Donald Kohn, Vice

Chair of the Federal Reserve, stated on September 23, 2008 that the Fed is “definitely

acting like we own the company [AIG]. Will need to consolidate on our balance sheet.”

PTX 233. Ms. Dahlgren told Standard & Poor’s on October 1, 2008 that she was

speaking on behalf of the “largest creditor and 80% equity holder of the company

[AIG].” PTX 270 at 2; Dahlgren, Tr. 2676. Ms. McConnell’s handwritten notes from

September 15, 2008 state “loan comes with conditions, plan to run the company [AIG].”

PTX 68 at 14. On September 16, 2008, FRBNY’s Christopher Calabria stated in an

email “We own [AIG], essentially. I can’t believe it.” PTX 97. On September 17, 2008,

FRBNY’s Michael Silva, Chief of Mr. Geithner’s staff, wrote in an email that Mr.

28

Greenberg “should have said he WAS one of the largest shareholders in the company

[AIG]. The Federal Reserve is now the largest shareholder in the company.” PTX 109.

On September 19, 2008, prior to executing the Credit Agreement, FRBNY’s

Joseph Sommer recommended that Ms. Dahlgren attend the National Association of

Insurance Commissioners Conference, “[n]ow that you are the proud new owner of an

insurance company.” PTX 1607-U at 1; Dahlgren, Tr. 2789 (Ms. Dahlgren attended the

conference).

G. The Creation of a Trust

In mid-September 2008, the Government recognized that the Treasury and

FRBNY might not have the legal authority to take the Series C Preferred stock given to

the Treasury under the terms of the September 22, 2008 Credit Agreement. See, e.g.,

PTX 320-U at 1 (“we agree that there is no power” for the Federal Reserve to “hold AIG

shares.”); PTX 370 at 3 (“Treasury lacks the legal authority to hold directly voting stock

of AIG.”); PTX 409 at 177 (Geithner: “Under section 13(3) of the Federal Reserve Act,

the Fed is prohibited from taking equity or unsecured debt positions in a firm.”); PTX

443 at 1 (“Nice try on the preferred stock investments! We still don’t have that

authority.”). Thus, government officials began to look for ways to avoid the legal

restriction preventing the U.S. Treasury and FRBNY from holding AIG’s voting

preferred stock.

During the period September 16-20, 2008, Mr. Baxter conceived of the idea of

putting the Series C Preferred stock in a trust as a way to circumvent FRBNY’s and the

Treasury’s lack of authority to own AIG shares directly. Baxter, Tr. 791; PTX 580 at 3

(Baxter); see also JX 90. Mr. Baxter asked Davis Polk to consider various options to

avoid direct ownership by FRBNY and Treasury of a majority voting interest in AIG,

including “warrants that are exercisable upon sale” and “holding shares in a voting trust.”

JX 90.

Davis Polk developed two proposals, Options A and B. Option A contemplated a

combination of preferred shares with limited voting rights and warrants exercisable only

on transfer to a third party. Option B consisted of preferred shares with full voting rights

to be held by an independent trust. PTX 159-U at 6-7. The Government ultimately

selected Option B and began to draft a term sheet to reflect that the form of equity would

now be voting preferred stock, as opposed to the warrants originally approved by the

Board of Governors. See PTX 183 at 3-4; JX 63 at 6. On September 21, 2008, during a

noon conference call, the Government formally decided to issue the Series C Preferred

Stock to an AIG Credit Facility Trust, established for the benefit of the Treasury. JX 101

at 1-3; JX 107 at 137 (stating the AIG Credit Facility Trust was “established for the

29

benefit of the United States Treasury” and changing the “purchaser” of the stock from

FRBNY to the Trust).

To administer the trust, FRBNY, in consultation with the Treasury, selected three

trustees who had close ties to the Federal Reserve System. Baxter, Tr. 986. Chester

Feldberg worked at FRBNY for 36 years and “had a close relationship with many Federal

Reserve employees and officials.” Feldberg, Tr. 3334-35. Jill Considine “had chaired

the audit and risk committee of the board of directors of the Federal Reserve Bank” and

had previously served a six-year term as a member of the board of the FRBNY. Baxter,

Tr. 988-89; Def.’s Resp. to Pl.’s 2nd RFAs No. 770. Douglas Foshee was the chair of the

Board of Directors of the Federal Reserve Bank of Dallas, Houston Branch, and Central

Houston, Inc. during the time he served as trustee. Foshee, Tr. 3453; Def.’s Resp. to Pl.’s

2nd RFAs No. 772.

Ms. Dahlgren and the trustees signed the final AIG Credit Facility Trust

Agreement on January 16, 2009 and the Trust received the Series C Convertible Preferred

Stock in March 2009. JX 172 at 1, 25; JX 191 at 2. There were at least eight key

provisions of the Trust Agreement. First, the trust was established for the “sole benefit of

the Treasury.” JX 172 at 5. Second, FRBNY had the power to appoint the trustees. Id.

Third, only the Board of Governors could terminate the trust or amend its authorization.

Id. at 6. Fourth, the trustees, in exercising their discretion with the trust stock, were

advised they were to “maximize[e] the Company’s (AIG’s) ability to honor its

commitments to, and repay all amounts owed to, the FRBNY or the Treasury

Department.” Id. at 10. Fifth, FRBNY was to control the defense of “any actual or

threatened suit or litigation of any character involving the Trust” and the trustees could

not make “any admissions of liability . . . or agree to any settlement without the written

consent of the FRBNY.” Id. at 13. Sixth, FRBNY, in consultation with the Treasury,

had the power to remove a trustee. The trustees also could only be removed in

exceptional circumstances such as those involving dishonesty, untrustworthiness, or

dereliction of duty. Id. at 14. Seventh, the trustees were required to act “in or not

opposed to the best interests of the Treasury.” Id. at 15 (providing indemnification rights

to the trustees). Last, the Trustees were to ask FRBNY for clarification regarding the

Trust Agreement and the Government had the right to seek specific performance from the

Trustees for compliance with their obligations. Id. at 19-20, 23. AIG representatives

had no involvement in the preparation or approval of the Trust Agreement, and no

participation in any trustee meetings. PTX 435 at 8-9 (lack of any notice to AIG);

Dahlgren, Tr. 2760-64 (no AIG involvement in trustees’ meetings).

In their capacity as trustees, Mr. Feldberg, Ms. Considine, and Mr. Foshee

understood they had fiduciary duties to the Treasury, and not to AIG’s common stock

shareholders. Feldberg, Tr. 3442; Huebner, Tr. 6272-73; PTX 372 at 1; PTX 3286 at 1.

30

The trustees also knew they could not sell or dispose of the trust stock unless FRBNY

approved, and they questioned their level of independence. Feldberg, Tr. 3442; 3566-7l;

DX 630 at -312 to -313. On October 30, 2008, the trustees sent a memorandum to Mr.

Baxter seeking to clarify their level of independence. DX 630 at -312-13. The trustees

were concerned with Section 2.04(d) of the Trust Agreement which set forth two

potentially conflicting goals for the trustees to consider when exercising their discretion.

First, the trustees were to maximize AIG’s ability to repay advances under the Credit

Agreement. Second, the trustees were to manage AIG so as not to disrupt financial

market conditions as it was in the “best interests of the stockholders of the Company

[AIG].” Id. The Government never removed Section 2.04(d) from the Trust Agreement,

but did specify the two goals were “non-binding” on the trustees’ discretionary power to

vote the trust stock. JX 172 at 10. This position satisfied the trustees that they would be

independent in performing their fiduciary duties as trustees. Feldberg, Tr. 3407.

During their time as trustees, Mr. Feldberg, Ms. Considine, and Mr. Foshee

received information about AIG through FRBNY representatives, because the trustees

did not attend AIG’s board or committee meetings. Baxter, Tr. 1006; PTX 516 at 49-50.

The trustees engaged Spencer Stuart, an executive recruitment firm, to assist in

identifying potential new candidates for AIG’s board of directors. In June 2009, at the

annual shareholder meeting, the trustees proposed the candidates for election. Feldberg,

Tr. 3419-26; Foshee, Tr. 3521, 3524-26. Before voting on matters and selecting the

board of directors for AIG, however, the trustees consulted with FRBNY. Baxter, Tr.

842-43. The trustees also did not participate in matters affecting the Trust’s ownership

rights, including the reverse stock split. Feldberg, Tr. 3364, 3373-74.

H. The Restructuring of AIG’s Loan in November 2008

After FRBNY and AIG entered into the September 22, 2008 Credit Agreement,

AIG needed more liquidity support. Geithner, Tr. 1761 (“Over the course of the

succeeding weeks, really almost immediately, AIG was . . . facing escalating losses and a

dramatic escalation in their needs for liquidity.”). Ultimately, AIG received nearly $100

billion in additional support, including nearly $50 billion in new capital. On October 6,

2008, the Federal Reserve created an additional $37.8 billion lending facility to address

liquidity pressures AIG was facing from its securities lending program. PTX 696 at 16-

18.

Officials at FRBNY and AIG recognized that a restructuring of the Credit

Agreement would be necessary. Dahlgren, Tr. 2772-73 (“[T]he terms of the AIG Credit

Facility were viewed by the ratings agencies and ultimately by [Dahlgren] as being too

onerous and counterproductive.”). On October 4, 2008, the Treasury Department’s Dan

Jester asked FRBNY to “rethink the terms of the deal; deal was onerous.” PTX 279 at 2.

31

On October 15, 2008, representatives of FRBNY and the Board of Governors met to

discuss the “need[] to press forward” with regard to restructuring the AIG deal. PTX 297

at 1.

From as early as September 16, 2008, many officials within the Government

recognized that the interest rate charged to AIG on FRBNY’s rescue loan was too high.

PTX 2211 at 10 (Mr. Baxter thought the interest rate assessed against AIG was “[m]ore

of a loan shark” rate.); PTX 318 (Ms. McConnell expressed dismay to Mr. Geithner

regarding the “crazily high” interest rate forced on FRBNY.); PTX 145 (Ms. McLaughlin

stated in a September 18, 2008 email that “[w]e should have been charging 3.5% . . . not

12% . . . it is wrong that this was done w/o [FRBNY’s] input.”). Financial analysts at

UBS felt that the terms for AIG were harsh. PTX 1665 at 3 (Sept. 25, 2008 report: “If

the [G]overnment wanted to help existing AIG shareholders, the terms of the [C]redit

[F]acility [A]greement would have been less onerous and dilutive in the first place.”).

Morgan Stanley made similar observations. PTX 246 at 1 (Sept. 24, 2008 report: “terms

are even more punitive than we originally expected, making us question the risk-reward

profile of the company.”). Mr. Geithner, recalling the AIG events in 2012, observed:

“We replaced the management and the boards of directors. We forced losses on

shareholders proportionate to the mistakes of the firm.” PTX 648 at 8.

Despite the initial $85 billion rescue loan and the October 2008 $37.8 billion

securities lending facility, AIG’s financial condition worsened. In November 2008, the

ratings agencies again threatened to downgrade AIG due to an expected $24.5 billion

quarterly loss. Baxter, Tr. 1016. AIG filed its SEC Form 8-K/A on November 10, 2008,

announcing a $24.47 billion loss for the third quarter of 2008. JX 149 at 4. That same

day, the Federal Reserve and the Treasury Department announced a restructuring of the

credit facility, and provided a package of new assistance to stabilize AIG. Id. at 16-18.

The restructuring package contained elements intended to avert an AIG

downgrade and bankruptcy, including: (a) $40 billion of TARP (“Troubled Asset Relief

Program”)11 capital support; (b) modifications to the original loan terms including a

reduction in interest rate by 5.5 percent, a reduction in the undrawn funds interest rate to

0.75 percent, and an extension of the loan term from two years to five years; (c) transfer

of AIG’s RMBS investments from its securities lending portfolio to a newly created

special purpose vehicle called Maiden Lane II; and (d) creation of another special

purpose vehicle called Maiden Lane III to eliminate AIG’s CDS posting obligations and

CDS-related liquidity risks. JX 147 at 2; JX 149 at 16-18; PTX 5362 (Cragg chart).

11

TARP was a program authorized under the Emergency Economic Stabilization Act of 2008 (“EESA”)

that permitted the Treasury Department to, among other things, purchase equity investments in troubled

companies. See 12 U.S.C. §5211(a)(1) (2008); see also Alvarez, Tr. 162-63.

32

With the $40 billion in TARP assistance, the Treasury Department purchased

AIG’s Series D Preferred Stock, a newly created class of stock that had terms more

onerous than other TARP equity purchased by Treasury. JX 158 at 2. The Series D

Preferred Stock had an annual dividend rate to the Government of 10 percent. Id. at 10.

In contrast, the $125 billion in preferred stock purchased by Treasury under the Capital

Purchase Program from “eight of the country’s largest financial institutions” had an

annual dividend rate of 5 percent. PTX 622 at 30; see also PTX 422 at 57-59. The $40

billion purchase price paid by Treasury under the Capital Purchase Program was

immediately “used to pay down the current outstandings on the Fed loan,” also reducing

the maximum borrowing limit from $85 billion to $60 billion. Dahlgren, Tr. 2875-76;

PTX 622 at 34; PTX 5200.

I. The Walker Lawsuit

On November 4, 2008, a group of AIG shareholders filed a lawsuit in the

Delaware Chancery Court complaining that the Government’s Series C Preferred Stock

should not be converted into AIG common stock without a shareholder vote. Walker v.

AIG, Inc., Case No. 4142-CC (Del. Ch., Nov. 4, 2008). On November 5, 2008, Michael

Leahey, Associate General Counsel at AIG, forwarded the Walker complaint to AIG

General Counsel Stasia Kelly and to AIG’s outside counsel at Weil Gotshal, stating,

“[h]ere is a copy of the new shareholder complaint filed last night in Delaware seeking,

among other things, an order declaring that the Super Voting Preferred is not convertible

into common stock absent a class vote by the common stock to increase the number of

authorized shares.” PTX 3259 at 1.

Less than 20 minutes later, Davis Polk received the Walker complaint. Mr.

Huebner of Davis Polk observed “this is potentially serious.” PTX 3259 at 1. Within the

next 30 minutes, Ms. Beamon of Davis Polk notified FRBNY’s Ms. Dahlgren and Mr.

Baxter, “[p]lease find attached a new complaint filed last night against AIG that has some

potentially serious ramifications.” PTX 343 at 1. Defendant monitored the Walker

lawsuit and received updates from AIG’s outside counsel, Weil Gotshal, on the status of

the Walker lawsuit. PTX 377 at 1-2; PTX 3164 at 1-2; PTX 3302 at 1; PTX 3316 at 1-2;

PTX 3223 at 1-3.

On November 6, 2008, the Board of Governors legal staff prepared a

memorandum analyzing the Walker lawsuit and whether Delaware law would require

AIG to hold a separate class vote on the charter amendments. PTX 3221. The

memorandum concluded that “[t]he face of the Delaware statute cited above seems to

indicate that common shareholders would have the right to vote separately from the

33

preferred shareholders both to increase the number of common shares and to decrease the

common shares’ par value.” Id. at 3.

Defendant made suggestions to AIG on how to litigate the Walker case. Davis

Polk’s Mr. Huebner stated on November 7, 2008: “I asked them to – if they think it

logical – point out to the plaintiffs that the lien claim is likely equally frivolous and

should be dropped from any amended complaint.” PTX 3164 at 2. AIG counsel

consulted with Defendant’s counsel about settling the lawsuit on November 20, 2008:

“Plaintiff is prepared to drop the lawsuit, but we may have a fight with respect to legal

fees. We would like to discuss with you before responding.” PTX 3223 at 1-2. Mr.

Huebner then forwarded the settlement proposal to Mr. Baxter. Id. at 1; see also PTX

376 at 1; Baxter, Tr. 1132-33.

Defendant provided approval to AIG to pay the Walker plaintiffs’ attorneys’ fees:

“The original ‘ask’ by the plaintiffs was $350,000, which has since been reduced to

$175,000. Weil believes that AIG should pay this amount, and that it would cost more to

litigate the issue further. They said that they plan to do so ‘unless the Fed objects.’ We

haven’t previously to my recollection, been asked to sign off on settlements of this

nature, but I think that, given the circumstances, Weil wants us to run this past you.”

PTX 3128, Beamon to FRBNY, at 2. Mr. Baxter responded: “No objection to the

compromise on [attorneys’] fees.” Id. at 1.

AIG, with Defendant’s agreement, represented to the Delaware Court on

November 7, 2008 that “there’s no dispute between the parties” on the question of

whether a separate class vote of the common stock shareholders would be required to

amend the certificate of incorporation to increase the number of authorized shares or to

change the stock’s par value (JX 143 at 7), which was reflected in the Consent Order

issued by the court (JX 176 at 2). Also on November 7, 2008, counsel for AIG informed

the Delaware Court that: “It is AIG’s position that any amendment to its certificate of

incorporation to increase the number of authorized shares of common stock or to change

the par value of that stock requires a class vote of holders of record of a majority of the

shares of common stock outstanding on the record date for that vote. . . . I think in view

of that representation, there’s no dispute between the parties.” JX 143 at 7.

On February 5, 2009, the Delaware Chancery Court entered a Consent Order

which included the following findings:

WHEREAS, during a conference with the Court on

November 7, 2008, AIG’s counsel stated that any amendment

to the Restated Certificate of Incorporation to increase the

number of authorized common shares or to decrease the par

34

value of the common shares would be the subject of a class

vote by the holders of the common stock, and, based on this

representation, plaintiff’s counsel agreed that the plaintiff’s

request for an order granting this relief is moot;

WHEREAS, AIG publicly disclosed on November 10, 2008,

in its Form 10Q filing for the third quarter of 2008, that the

holders of the common stock will be entitled to vote as a class

separate from the holders of the Series C Preferred Stock on

any amendment to AIG’s Restated Certificate of

Incorporation that increases the number of authorized

common shares and decreases the par value of the common

shares.

JX 176 at 2-4. Kathleen Shannon, AIG’s Senior Vice President, Secretary, and Deputy

General Counsel, submitted an affidavit to the Delaware Chancery Court in February

2009 confirming AIG’s position from as early as September 2008 that a class vote of

common shareholders was required under Delaware law to increase the number of

authorized shares or to decrease the par value of common stock shares. JX 181.

On November 9, 2008, as a result of the Walker lawsuit, Defendant amended the

Credit Agreement to note that “common stockholders voting as a separate class” will vote

on “amendments to AIG’s certificate of incorporation to (a) reduce the par value of

AIG’s common stock to $0.000001 per share and (b) increase the number of authorized

shares of common stock to 19 billion. JX 147 at 9; JX 150 at 193. This amendment to

the Credit Agreement was intended “to implement the representation that had been made

to the Delaware court two days earlier.” Brandow, Tr. 5861-62.

Despite the representations to the Delaware Court, the entry of the Consent Order,

and the amendment to the Credit Agreement, there never was a shareholders’ meeting at

which the AIG common stockholders, voting as a class, had an opportunity to vote on

whether to reduce the par value of AIG’s common stock or to increase the number of

AIG’s authorized shares. Liddy, Tr. 3163-64.

J. Maiden Lane II and III

Soon after AIG and FRBNY executed the Credit Agreement on September 22,

2008, AIG began seeking concessions from various counterparties to unwind and

terminate the CDS transactions that were causing many of AIG’s liquidity issues. These

attempts generally were unsuccessful, and FRBNY representatives stepped in to take over

the negotiations with counterparties on behalf of AIG. PTX 333 at 1 (FRBNY asked

35

Elias Habayeb of AIG to “stand down on all discussions with counterparties on tearing

up/unwinding CDS trades on the CDO portfolio.”); see also Dahlgren, Tr. 2994-95;

Herzog, Tr. 6998-7002. FRBNY’s short-lived attempts to negotiate concessions from

AIG’s counterparties also proved unsuccessful. Alvarez, Tr. 354-55; Baxter Tr. 1028.

FRBNY informed AIG of its unsuccessful negotiations with counterparties on

November 8, 2008, telling AIG and its outside counsel, Weil Gotshal, that the

counterparties would receive full par value. DX 2131 at -7727. AIG’s counterparties

also received complete releases from AIG for all legal action, including any potential

fraud or misrepresentation claims. Baxter, Tr. 1071 (the deal “negotiated by

representatives of the New York Fed with the counterparties” “involved 100 percent par,

plus the releases.”). In this way, FRBNY was able to assure that the major financial

institutions would be made whole and would not suffer any losses from their transactions

with AIG.

On November 10, 2008, some leading credit rating agencies informed AIG that

they expected to downgrade the company unless AIG presented a solution to stabilize the

company and improve its financial condition. Baxter, Tr. 1028; LaTorre, Tr. 2323, 2331.

A downgrade of AIG’s rating would have triggered additional collateral calls on AIG’s

CDS portfolio. To avoid a ratings downgrade, AIG asked the Government for additional

assistance. Liddy, Tr. 3222-25, 3231. AIG’s Board of Directors approved a new

Government proposal on November 9, 2008. JX 144 at 9-13. The Government’s

proposal included the creation of a new entity known as “Maiden Lane III.” Id. at 11, 53-

54; Liddy, Tr. 3235-36.12

Under the terms of Maiden Lane III, FRBNY loaned $30 billion and AIG

contributed $5 billion to have Maiden Lane III purchase certain multi-sector CDOs

underlying CDSs written by AIGFP. Baxter, Tr. 1020; DX 664 at -18; JX 149 at 17.

Using Maiden Lane III, FRBNY and AIG were able to terminate the CDSs, and thereby

remove AIG’s exposure to collateral calls from its CDS portfolio. Liddy, Tr. 3230-31

(Maiden Lane III “remove[d] that cash drain and liability off of [AIG’s] balance sheet.”);

Schreiber, Tr. 6623 (Maiden Lane III eliminated the “volatility and ongoing liquidity

drain” from AIG’s CDS exposures). FRBNY’s loan to Maiden Lane III was senior to

AIG’s contribution and was to be repaid in full before AIG received any payment on its

$5 billion contribution. PTX 2800 at 34-35. After the amounts were repaid in full,

FRBNY received 67 percent and AIG received 33 percent of any additional Maiden Lane

III net proceeds. Id.

12

The “Maiden Lane” entities are named for the street in New York City that runs behind FRBNY’s

office building. Baxter, Tr. 889-90.

36

Between November 25 and December 31, 2008, Maiden Lane III purchased $62.1

billion in par amount of CDO securities from AIGFP’s counterparties and terminated the

associated CDSs. JX 188 at 41. By June 2012, AIG completely repaid the Government’s

Maiden Lane III loan with interest. By July 2012, AIG received repayment of its Maiden

Lane III contribution with interest. CDOs purchased by Maiden Lane III were then sold

through a series of auctions, culminating on August 23, 2012. PTX 2540 at 1. This

process resulted in a net gain to the Government of approximately $6.6 billion with $737

million in interest. Id.; DX 1883 at App’x C ¶ 29.

In addition to Maiden Lane III, the Government used another special purpose

vehicle, Maiden Lane II, to purchase AIG’s RMBS for $19.8 billion. JX 188 at 41, 250;

PTX 2800 at 34 (stating that the “nonagency RMBS . . . had an approximate fair value of

$20.8 billion.”). Under the terms of Maiden Lane II, the Government’s loan would be

repaid first, including accrued interest, and then any net proceeds from the transaction

would be divided: FRBNY was to receive five-sixths while AIG’s subsidiaries would

receive one-sixth. PTX 2800 at 34. In March 2011, the Government announced that it

would begin selling the securities in the Maiden Lane II portfolio. The sales of all the

securities as well as the cash flow they generated while held in Maiden Lane II created a

net gain of approximately $2.8 billion to FRBNY for the benefit of U.S. taxpayers. PTX

2539 at 1; see also DX 1883, Saunders Report, App’x C, ¶ 28.

Ultimately, as a result of Maiden Lane II and Maiden Lane III, AIG’s

counterparties received tens of billions of dollars in Government assistance. PTX 549 at

34 (“there is no question that the effect of FRBNY’s decisions . . . was that tens of

billions of dollars of Government money was funneled inexorably and directly to AIG’s

counterparties.”); Cragg, Tr. 5097-98 (noting $29 billion in payments to AIG’s

counterparties). Although AIG had offered to buy back the CDOs underlying Maiden

Lane II and III as part of a 2010 restructuring, Defendant refused to authorize this action,

despite the fact it would still make a profit on the transaction. See JX 324 at 3, 7 (“If the

FRBNY accepts this offer, the loans that the FRBNY made to Maiden Lane II will be

repaid in full, with interest, and the FRBNY will realize a profit of approximately $1.5

billion on its residual equity interest in Maiden Lane II.”); see also PTX 3366 at 1, 4.

K. Reverse Stock Split

During the weeks following the Credit Agreement, AIG’s stock continued to trade

at a low price. Herzog, Tr. 7011 (“the stock price had fallen below a dollar for a period

of time.”); JX 221 at 70 (“The share price of AIG Common Stock has declined

significantly since the third quarter of 2008, and, during February and March 2009, and

occasionally since then, it has closed below $1.00 per share.”). On October 14, 2008, the

NYSE sent a letter to Mr. Liddy warning that AIG was at risk of being delisted under

37

NYSE rules. DX 601 (NYSE requires its listed companies to have an “[a]verage closing

share price of not less than $1.00 over a 30 trading day period.”). In response, Mr. Liddy

requested AIG management to develop a plan to keep AIG’s common stock from being

delisted. Liddy, Tr. 3264.

Mr. Herzog testified that he first proposed the idea of a reverse stock split to

increase the trading price of AIG common stock. Herzog, Tr. 7012-13. In December

2008, AIG’s outside counsel, Sullivan & Cromwell, drafted a proxy statement proposing

the reverse stock split. JX 164 at 26-28. After consultation with D.F. King, an

independent proxy solicitor, regarding the terms of the contemplated reverse stock split,

AIG proposed a reverse stock split at a twenty-to-one ratio. JX 178 at 7; Liddy, Tr. 3280-

81. On May 20, 2009, AIG’s Board of Directors unanimously voted to include the

reverse stock split in the 2009 proxy statement. JX 218 at 4; Liddy, Tr. 3267-68.

On June 30, 2009,13 at AIG’s annual shareholder meeting, AIG included on its

proxy statement the resolution to amend AIG’s certificate of incorporation to effect a

reverse stock split of issued shares at a ratio of twenty-to-one. JX 221 at 2, 69-73

(Proposal Four). At the shareholder meeting, the preferred shareholders and 85 percent

of the voting common shareholders, including Starr, voted to approve the reverse stock

split. JX 226 at 6; DX 814-A at 1. Starr and other common stock shareholders knew that

by approving the reverse stock split, it would make almost five billion shares of common

stock available for future issuance. JX 221 at 68. AIG’s proxy statement also disclosed

that the shares “may be issued by AIG’s Board of Directors in its sole discretion. Any

future issuance will have the effect of diluting the percentage of stock ownership and

voting rights of the present holders of AIG Common Stock.” Id. at 70.

Plaintiff contends that the reverse stock split was proposed with a preferred-to-

common stock exchange in mind as a way to avoid a separate class vote of the common

stockholders, but there is insufficient evidence in the record to support Plaintiff’s claims.

Starr presented little evidence showing that the idea for the exchange preceded the

reverse stock split, or that the Government proposed the reverse stock split to avoid a

separate class vote of the common shareholders. Every witness at trial testified

unequivocally that Starr and AIG’s other shareholders voted for the twenty-to-one

reverse stock split to avoid a delisting on the NYSE. See, e.g., Liddy, Tr. 3267 (“It gave

us the best chance of keeping the stock listed on the New York Stock Exchange.”);

Herzog, Tr. 7014 (“Well, I know why I suggested it, and that was because I was

concerned about the delisting of the stock, and that’s why I suggested it to Morris

[Offit].”); Smith, 7711-12 (supported the one-for-twenty stock split “[s]olely for the

reason that it addressed the delisting issue.”). The proxy statement AIG filed with the

13

June 30, 2009 was also the day the NYSE suspension of its minimum price for listing expired. JX 221

at 2, 70 (day AIG’s stock would be delisted).

38

Securities and Exchange Commission confirmed that the “primary purpose of the reverse

stock split [was] to increase the per share trading price of AIG Common Stock.” JX 221

at 69.

The first time FRBNY and the Treasury contemplated the idea of an exchange was

in 2010 when AIG began to explore various ways to end the Government’s involvement

in AIG’s affairs. Shannon, Tr. 3701-02 (Q: “[W]hen was the first consideration that

you’re aware of exchanging [the Series C preferred stock] for common shares?” A: “In

connection with the . . . recapitalization . . . in the fall of 2010.”). AIG wanted to

improve its credit rating and gain access to private capital and credit markets that were

unavailable while it had existing obligations to the Government. PTX 2248 at 28;

Langerman, Tr. 7165; PTX 609 at 16; JX 271 at 7. To achieve that goal, AIG along with

Treasury, the trustees, and FRBNY, began to negotiate a comprehensive plan that would

allow AIG to exit the Credit Facility and repay its outstanding debt. JX 271 at 26; PTX

578; Schreiber, Tr. 6667-68; Langerman, Tr. 7164-65, 7170-71. Both AIG and the Trust

engaged advisers to assist with the negotiations. Feldberg, Tr. 3393; Schreiber, Tr. 6727;

PTX 2249 at 2-3 (listing advisers present at the September 29, 2010 AIG Board meeting).

During the negotiations, the idea of exchanging the preferred shares for common stock

was developed, which would legally allow the Government to avoid a separate class vote

of the common shareholders.14 Brandow, Tr. 5854.

On September 30, 2010, following extensive negotiations, the Government and

AIG signed a term sheet setting forth the terms of the recapitalization transaction. JX

285; JX 306 (parties signed a Master Transaction Agreement on December 8, 2010 which

implemented the September 30, 2010 term sheet). The exchange was facilitated by the

twenty-to-one reverse stock split which had increased the number of authorized but

unissued shares. Zingales, Tr. 3850-51; Brandow, Tr. 5852. As a result of the reverse

stock split, the Government could exchange its preferred shares for common shares

without a separate class vote of the common shareholders. JX 302 at 8; Brandow, Tr.

5852.

There were three series of preferred stock (Series C, Series E, and Series F) that

were exchanged for common stock in the 2011 restructuring agreement. Each series of

preferred stock that was exchanged for common stock in 2011 is defined below,

including the Series D stock acquired under TARP that had already been exchanged for

Series E preferred stock prior to the 2011 restructuring agreement:

14

Under Delaware law, the exchange did not require a separate class vote of the common shareholders.

A separate class vote is only required if “the amendment would increase or decrease the aggregate

number of authorized shares of such class” or “increase or decrease the par value of the shares of such

class.” 8 Del. C. § 242(b)(2) (2014).

39

Series C Preferred Stock: convertible stock issued to the Government on

September 22, 2008 under the $85 billion Credit Agreement, which

provided the Government with 79.9 percent equity and voting control in

AIG. PTX 196 at 3; JX 110 at 1, 3, 66. The stock was later placed into a

trust on January 16, 2009. Def.’s Resp. to Pl.’s 2nd RFAs No. 726.

Series D Preferred Stock: stock purchased by Treasury for $40 billion on

November 25, 2008 under TARP. JX 158 at 2. The Series D Preferred

Stock had an annual dividend rate to the Government of 10 percent and the

dividends owed were cumulative, meaning that dividends owed under the

stock accumulated until AIG made the payment. Id. at 10-11.

Series E Preferred Stock: stock acquired by the Government on April 17,

2009 as part of a March 2009 restructuring agreement that allowed the

Government to exchange its Series D Preferred Stock for Series E. The

Series E was noncumulative, and as such, was looked upon more favorably

by the credit agencies. Like the Series D Preferred Stock, it also had a

dividend rate of 10 percent per year. PTX 589 at 96 n.362 (noncumulative

stock more closely resembles common stock); JX 208 at 3 (reporting AIG’s

issuance of the Series E Preferred Stock).

Series F Preferred Stock: stock issued to Treasury on April 17, 2009

under a credit facility where Treasury agreed to provide $30 billion to AIG

in exchange for the preferred stock. The Series F Preferred Stock was

noncumulative and had a dividend rate of 10 percent. JX 209 at 3

(reporting AIG’s issuance of the Series F Preferred Stock).

The September 30, 2010 term sheet took effect on January 14, 2011 and

terminated the Credit Facility. AIG paid FRBNY $21 billion in cash, which represented

“complete repayment of all amounts owing under the Credit Agreement.” JX 314 at 2.

The Government earned a profit of $6.7 billion on the Credit Facility. Alvarez, Tr. 611-

12 ($6.7 billion represented interest and fees). As part of the Recapitalization Plan, the

Government also acquired 92.1 percent of AIG’s common stock through an exchange of

its preferred shares. Stip. ¶ 212. To acquire 92.1 percent of the common stock, the

Treasury exchanged its Series C preferred stock for 562.9 million shares of common

stock and exchanged the Series E and Series F preferred stock for 1.09 billion shares of

common stock. Id. AIG also issued ten-year warrants to existing shareholders with a

strike price of $45 on January 19, 2011. JX 285 at 9-10; JX 311 at 3; PTX 609 at 58

(“Exchange price of $45.00 per AIG common share, a 26.2% premium to market”). The

number of warrants received was equal to the number of shares held as of the Record

40

Date (“the date on which one must be registered as a stockholder on the stock book of a

company in order to receive a dividend declared by the company”) multiplied by

0.533933. JX 311 at 3; Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 732

F.2d 859, 861 (11th Cir. 1984) (defining record date).

L. The Government’s Common Stock

From May 24, 2011 through December 14, 2012, the Government sold

1,655,037,962 shares of AIG common stock at prices ranging from $29 to $32.50 per

share for a total of $51,610,497,475. PTX 2852 at 65 n.197. Assuming that the common

shares received in exchange for Series C Preferred Stock are treated as being sold pro rata

with common shares received in exchange for Series E and F Preferred Stock, the amount

received for the Series C Preferred Stock would be $17.6 billion. Id.

Defendant’s only payment to AIG for the Series C Preferred Stock was $500,000

in loan forgiveness that FRBNY provided to AIG in September 2008. JX 107 at 37-38 (§

402(e)); JX 185 at 2. AIG recorded the fair value for the Series C Preferred Stock as $23

billion. JX 188 at 293-94; Kothari, Tr. 4700. Ultimately, the Government received $22.7

billion in profit on the sale of all AIG stock it had acquired. PTX 658; see also Bernanke,

Tr. 2014 (return to the Government “on all of the assistance that was given to AIG,

whether it was from the Federal Reserve or TARP or some other place,” was $23

billion.); Schreiber, Tr. 6684-85 (stating the Government received “all of the money they

put into AIG back plus a profit of approximately $23 billion.”).

M. Treatment of Other Distressed Financial Entities

During the financial crisis, many financial institutions engaged in much riskier and

more culpable conduct than AIG, but received much more favorable loan treatment from

the Government. In fact, financial institutions that originated and marketed subprime

mortgage-backed securities made representations and disclosures that the Government

later concluded were false and misleading. There was fraud in the underwriting process.

Cragg, Tr. 4996; PTX 5321 (summarizing the results of government litigation against

Bank of America, Citigroup, JP Morgan, Merrill Lynch, and Countrywide). The

Department of Justice charged many firms with fraud related to the financial crisis. DOJ

press releases, PTX 2734 (Bank of America), PTX 2527 (Citigroup), PTX 2473 (JP

Morgan), PTX 2872 (Merrill Lynch and Countrywide).

Citigroup. The DOJ “has brought claims against a number of companies,

including Citi, alleging that these companies had engaged in fraudulent conduct that

caused the financial crisis.” Paulson, Tr. 1236. In July 2014, the Government announced

that “after collecting nearly 25 million documents relating to every residential mortgage

41

backed security issued or underwritten by Citigroup in 2006 and 2007, our teams found

that the misconduct in Citigroup’s deals devastated the nation and the world’s economies,

touching everyone.” PTX 2527 at 2. Mr. Geithner concluded that Citigroup had taken

excessive risks. Geithner, Tr. 1675.

Bank of America. In March 2014, Bank of America agreed to pay $9.3 billion to

settle claims brought by the Federal Housing Finance Agency under its statutory mandate

to recover losses incurred by Fannie Mae and Freddie Mac accusing the Bank, and

subsidiaries Merrill Lynch and Countrywide Financial, of “misrepresenting the quality of

loans underlying residential mortgage-backed securities purchased by the two mortgage

finance companies between 2005 and 2007.” PTX 2504 at 1. In August 2014, Bank of

America paid $16.65 billion, approximately 10 percent of its market capitalization, to

settle a Department of Justice probe related to the Bank’s misconduct in originating

mortgage securities. The settlement was “the largest civil settlement with a single entity

in American history,” and Bank of America “acknowledged that it sold billions of dollars

of RMBS without disclosing to investors key facts about the quality of the securitized

loans. . . . The bank has also conceded that it originated risky mortgage loans and made

misrepresentations about the quality of those loans.” PTX 2734 at 1. The U.S. District

Court for the Southern District of New York held in a case brought by the United States

that Countrywide Financial engaged in conduct that “was from start to finish the vehicle

for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the

harms thereby visited, not just on the immediate victims but also on the financial system

as a whole.” United States ex. rel. O’Donnell v. Countrywide Home Loans, Inc., 33 F.

Supp. 3d 494, 503 (S.D.N.Y. 2014). According to then-Attorney General Eric Holder,

Merrill Lynch and Countrywide “knowingly, routinely, falsely, and fraudulently

[marketed] and sold these loans as sound and reliable investments.” PTX 2872 at 1.

Goldman Sachs. In July 2010, Goldman Sachs settled with the SEC, “paying a

record $550 million fine. Goldman ‘acknowledge[d] that the marketing materials for the

ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was

a mistake for the Goldman marketing materials to state that the reference portfolio was

“selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc.

in the portfolio selection process and that Paulson’s economic interests were adverse to

CDO investors.’” PTX 624 at 221.

JP Morgan. In November 2013, the Department of Justice announced a $13

billion settlement of claims brought by the United States “in which JP Morgan

acknowledges that it regularly represented to RMBS investors that the mortgage loans in

various securities complied with underwriting guidelines. Contrary to those

representations, as the statement of facts explains, on a number of different occasions, JP

Morgan employees knew that the loans in question did not comply with those guidelines

42

and were not otherwise appropriate for securitization, but they allowed the loans to be

securitized – and those securities to be sold – without disclosing this information to

investors. This conduct, along with similar conduct by other banks that bundled toxic

loans into securities and misled investors who purchased those securities, contributed to

the financial crisis.” PTX 2473 at 1.

Morgan Stanley. In February 2014, Morgan Stanley “agreed to pay $1.25 billion

to the Federal Housing Finance Agency to resolve claims that it sold shoddy mortgage

securities to Fannie Mae and Freddie Mac.” “According to the agency’s lawsuit, Morgan

Stanley sold $10.58 billion in mortgage-backed securities to Fannie and Freddie during

the credit boom, while presenting ‘a false picture’ of the riskiness of the loans.” “Many

of the loans involved were originated by subprime lenders, like NewCentury and

IndyMac, bundled into bonds and sold to Fannie and Freddie. One group of loans had

default and delinquency rates as high as 70 percent, according to the lawsuit.” PTX 2485

at 1. Mr. Geithner concluded that Morgan Stanley had taken excessive risks. Geithner,

Tr. 1675.

In contrast to the wrongful conduct of the above entities, no claims of fraud or

misconduct have been brought by the Department of Justice against AIG for any of

AIG’s actions in the years leading up to or during the financial crisis. Paulson, Tr. 1236.

The Federal Reserve, following the Bagehot Principle,15 used Section 13(3) of the

Federal Reserve Act a number of times in 2008 to lend to institutions in need of liquidity.

Mr. Bernanke explained the Federal Reserve’s approach to lending in 2008:

During the financial crisis, the Federal Reserve provided two

basic types of liquidity support under section 13(3) – broad-

based credit programs aimed at addressing strains affecting

groups of financial institutions or key financial markets, and

credit directed to particular systematically-important

institutions in order to avoid a disorderly failure of those

institutions. In both cases the purpose of the credit was to

mitigate possible adverse effects on the broader financial

sector and the economy. Liquidity facilities of the first type

included the Primary Dealer Credit Facility (PDCF), the Term

Securities Lending Facility (TSLF), the Asset-Backed

Commercial Paper Money Market Mutual Fund Liquidity

15

Bagehot’s Principle, first enunciated in Walter Bagehot’s 1873 book, “Lombard Street,” is that in a

time of financial crisis or panic, the central bank should freely lend to entities or persons in need of cash

liquidity if they have adequate collateral to post for the loan.

43

Facility (AMLF), the Commercial Paper Funding Facility

(CPFF), the Money Market Investors Funding Facility

(MMIFF), and the Term Asset-Backed Securities Loan

Facility (TALF). Liquidity support provided to particular

institutions to avert a disorderly failure included credit

provided through Maiden Lane LLC to facilitate the

acquisition of Bear Stearns by J.P. Morgan Chase, and credit

provided to American International Group (AIG) through a

revolving credit line and through Maiden Lane II LLC and

Maiden Lane III LLC. The Federal Reserve, acting with the

U.S. Treasury and FDIC, also agreed to provide loss

protection and liquidity support to Citigroup and Bank of

America on designated pools of assets utilizing authority

provided under section 13(3), but ultimately did not extend

any credit to either of these institutions.

PTX 616 at 10 (Bernanke).

On March 16, 2008, the Federal Reserve authorized FRBNY to establish the

PDCF to provide a source of liquidity to primary dealers, including Goldman Sachs,

Morgan Stanley, Bear Stearns, and Lehman Brothers. PTX 12 at 3-4; PTX 1202 at 1;

PTX 693 at 4-5; Alvarez, Tr. 83. The terms of the PDCF included an interest rate at the

primary credit rate with very small fees. The primary credit rate was “somewhere on the

order of 2-1/2 to 3 percent.” Bernanke, Tr. 1995-97. The Government did not demand

any equity in exchange for PDCF lending. PTX 12 at 3-4; Baxter, Tr. 1085. The Federal

Reserve provided assistance to primary dealers without monitoring the way the primary

dealers were managed. Baxter, Tr. 1093.

There were 20 firms that were eligible to use the PDCF. Cragg, Tr. 5051; PTX

5348. Countrywide continued to be a primary dealer despite the fact that it was in

“significant financial trouble.” Baxter, Tr. 1101. “Lehman Brothers continued to be a

primary dealer until after the parent had gone into bankruptcy.” Baxter, Tr. 1101-02.

In September 2008, the Federal Reserve expanded the range of collateral that

borrowers could pledge at the PDCF. PTX 59 at 2-3; PTX 696 at 2-3. Borrowers could

post non-investment grade bonds and equities. Paulson, Tr. 1234-35. The collateral

included “mortgage-backed securities and asset-backed securities,” and there “wasn’t

very much trading” in either at that time. Bernanke, Tr. 2278-79. On September 21,

2008, FRBNY expanded the range of collateral that Morgan Stanley, Goldman Sachs,

and Merrill Lynch could pledge at the PDCF to include foreign currency denominated

44

securities. McLaughlin, Tr. 2411-12. The expanded collateral “had more risk.”

McLaughlin, Tr. 2445.

By September 29, 2008, the Federal Reserve had loaned $155.7682 billion through

the PDCF, including $15 billion to Barclay’s Capital, $10 billion to Goldman Sachs, $5

billion to Goldman Sachs’ London branch, $29.694 billion to Merrill Lynch, $6.589

billion to Merrill Lynch’s London branch, $40.0621 billion to Morgan Stanley, and

$21.23 billion to Morgan Stanley’s London branch. PTX 728 at 11. Although FRBNY

provided Section 13(3) loans to many institutions in 2008 and 2009, FRBNY did not take

an equity stake in any of those institutions, including Citigroup, Bank of America, Bear

Stearns, JP Morgan, Morgan Stanley, or Goldman Sachs. Baxter, Tr. 1083-85; Bernanke,

Tr. 1989-90 (only AIG was required to provide its equity as compensation); Geithner Tr.

1396-97. The shareholders of Citibank, Goldman Sachs, Bear Stearns, and all the firms

that had access to the PDCF got “a windfall as a result of government assistance.”

Geithner, Tr. 1903. On September 21, 2008, the Federal Reserve Board of Governors

permitted Morgan Stanley and Goldman Sachs to become bank holding companies while

waiving the normal five-day antitrust waiting period for such an application. PTX 200,

201, 220; Bernanke, Tr. 2116-17.

The following chart shows a comparison of the Federal Reserve’s financial

assistance to AIG and Morgan Stanley during September 16-30, 2008:

Date AIG Morgan Stanley

Sept.16, 2008 $14B 12% Interest Rate $16.5B 2.25% - 3% Interest Rate

loan loan

Sept. 22, 2008 $37B 12% Interest Rate $60.6B 2.25% - 3% Interest Rate

loan loan

2% Commitment Fee No Commitment Fee

8.5% Undrawn Amounts No Undrawn Amounts Fee

Fee

Sept. 29, 2008 $55B 79.9% Equity $97.3B No Equity

loan loan

$85 Billion No Commitment Ceiling

Commitment Ceiling

25% Collateral Haircut 6-10% Collateral Haircut

45

PTX 5356 (Cragg chart, citing source exhibits, PTX 728, 2565, 2857 at 152-171; JX 107,

108).

N. Expert Testimony

Plaintiff and Defendant offered the testimony of four experts each during the trial.

The Court summarizes below the main points of each expert’s testimony.

Plaintiff’s experts:

Dr. Michael Cragg. The Court accepted Dr. Cragg as an expert in “economics

and financial markets.” Cragg, Tr. 4928; 4934. Dr. Cragg summarized his testimony in

five main points. First, Dr. Cragg assessed AIG’s financial condition. He asserted that

“[t]he liquidity crisis at AIG was caused by the same market forces that affected every

major financial institution during one of the worst financial panics in world history.” Dr.

Cragg then explained the Federal Reserve’s role as lender of last resort. According to Dr.

Cragg, “[t]he punitive terms imposed by the Federal Reserve on AIG’s shareholders,

including the onerous interest rate and equity taking, were inconsistent both with (1) the

Federal Reserve’s central banking function of lender of last resort, and (2) the manner in

which the Federal Reserve exercised its lender of last resort powers with respect to other

institutions.” Moreover, “[t]he Federal Reserve was able to impose punitive terms on

AIG’s shareholders by misusing its monopoly position as lender of last resort to

expropriate AIG shareholder equity in a manner entirely inconsistent with any legitimate

economic policy or rationale.” Dr. Cragg addressed the explanations given for the

Government’s treatment of AIG. Dr. Cragg asserted that the “Government’s alleged

justifications for treating AIG in this manner, i.e., punishment, addressing moral hazard,

preventing a windfall, and compensating for credit risk, [were] not economically

supportable.” Finally, if “there [were] an economically rational explanation for the

Government’s abuse of power, it [was] one of political expediency: AIG was a political

scapegoat.” PTX 5300 at 1; see also Cragg, Tr. 4935-37.

Dr. S.P. Kothari. The Court accepted Dr. Kothari as an expert in “accounting

and finance.” Kothari, Tr. 4525-26; 4529. Dr. Kothari was a damages expert for

Plaintiff. During the trial, Dr. Kothari provided the Court with his valuations of the

Credit Agreement Class and the Reverse Stock Split Class takings. Dr. Kothari valued

the 79.9 percent equity and voting interest (Credit Agreement Class) acquired by the

Defendant at $35.4 billion or $13.16 a share using a market-based approach. A “market-

based approach” is an assessment of the fair market value of equity as of a given date.

Kothari, Tr. 4543-44; PTX 5202; PTX 2852 at 21. For the Reverse Stock Split Class, Dr.

Kothari valued the Series E and F Preferred stock at $4.33 billion or $1.61 per share and

the Series C Preferred Stock at $0.34 billion or $0.13 per share as of June 30, 2009. Dr.

46

Kothari also valued the Government’s return on all the liquidity and financing it provided

to AIG as of January 14, 2011, stating that the Government earned a total return of $37.5

billion.

Dr. Christopher Paul Wazzan. The Court accepted Dr. Wazzan as an expert in

prejudgment interest. Wazzan, Tr. 4416, 4420. At trial, Dr. Wazzan testified that the

appropriate prejudgment interest rate would be best determined by looking at a rate of

return on a synthetic portfolio comprised of competitors of AIG. Wazzan, Tr. 4423-26.

Looking at such a portfolio, the appropriate prejudgment interest rate to compensate

Plaintiff would be 7.0 percent for the Credit Agreement Class and 20.1 percent for the

Reverse Stock Split Class. Wazzan, Tr. 4428; see also PTX 2841.

Professor Luigi Zingales. The Court accepted Professor Zingales as an expert in

“economics and corporate governance.” Zingales, Tr. 3796; 3799. Professor Zingales

offered expert testimony on Defendant’s effective economic control of AIG, asserting

that Defendant took “effective economic control” on September 16, 2008, which

continued well beyond July 1, 2009. The effective economic control Defendant took

over AIG was evidenced by the Government’s equity ownership, ability to select

directors, its direct and indirect control or influence over management, and its monopoly

position as the lender of last resort. PTX 5045 (noting only one of these factors is

necessary to find control). “Direct or indirect control is shown by hiring, firing, and

compensating executive officers;” “engaging in new business lines;” “making substantial

changes in operations;” “raising additional debt or equity capital;” “merging and

consolidating;” and “selling, transferring, or disposing of material subsidiaries or major

assets.” PTX 5046. The trust created to hold AIG’s assets did not remove the

Government’s effective economic control over AIG, as it was established for the sole

benefit of the Treasury, the trustees were required to act in the best interests of the

Treasury, and Defendant appointed the trustees and had the power to replace them. PTX

5059.

Defendant’s Experts

Professor Robert Daines. The Court accepted Professor Daines as an expert in

“corporate governance, corporate finance, and the economic analysis of corporate

control.” Daines, Tr. 8432-33. Professor Daines summarized his testimony into three

main points. First, he critiqued Professor Zingales’s analysis of effective economic

control. Daines, Tr. 8436. Professor Daines testified that Professor Zingales’s analysis

was fundamentally flawed for three reasons: (1) the board’s incentives were aligned with

AIG’s shareholders; (2) effective economic control does not explain whether the AIG

board acted in the shareholders’ interests; and (3) “[e]ffective economic control [did] not

mean that the Government’s conditions made AIG worse off.” DX 2801; DX 2802.

47

Second, Professor Daines explained the difference between warrants and preferred stock.

According to Professor Daines, the “equity participation terms of the September 22, 2008

Credit Agreement were not materially different from the terms approved by AIG’s board

on September 16, 2008.” DX 2801; see also Daines, Tr. 8436. Professor Daines

critiqued Professor Zingales’s analysis of the reverse stock split. He testified that

Professor Zingales’s analysis of the reverse stock split was fundamentally flawed because

the primary purpose of the stock split was to increase AIG’s trading price, many

companies also conducted reverse stock splits that did not reduce the number of

authorized shares, and common shareholders, including at least some of whom were the

plaintiff shareholders, voted for the reverse stock split. DX 2801; DX 2816; see also

Daines, Tr. 8436.

Dr. Jonathan Neuberger. The Court accepted Dr. Neuberger as an expert in

“financial economics, the quantification of economic harm, and the determination of

prejudgment interest rates.” Neuberger, Tr. 5557-59. Dr. Neuberger offered testimony

on prejudgment interest. He asserted that if prejudgment interest is awarded, it should be

at a rate equal to a risk free rate of return since Plaintiff should not be compensated for

risks it did not bear. DX 2403; DX 2407. A good proxy for a risk free rate of return

would be government securities such as one-year Treasury bills or the five year Treasury

Inflation Protected Securities (“TIPS”) rate. Using Treasury bills or the TIPS rate as

proxies would yield interest rates of 0.5 and 0.3 percent or 2.9 and 3.2 percent to

compensate Plaintiff for the two alleged takings.

Dr. David K. A. Mordecai. The Court accepted Dr. Mordecai as an expert in

“financial economics, fixed income and credit markets, credit default swap markets, and

distressed lending.” Mordecai, Tr. 7445, 7457. Dr. Mordecai was a damages expert for

Defendant. At trial, Dr. Mordecai summarized his testimony into four main points. First,

he provided an opinion on the initial rescue, asserting that it “did not result in an

economic loss to AIG’s shareholders.” Second, Dr. Mordecai addressed the need for the

Government to obtain an equity component in AIG. Dr. Mordecai opined that “[w]ithout

the equity component, the Revolving Credit Facility (“RCF”) [would] not [have]

provide[d] a return to adequately compensate for the significant risk of lending to AIG.”

He critiqued Dr. Kothari’s estimate of the alleged harm suffered by both the Credit

Agreement Class and the Reverse Stock Split Class as being fundamentally flawed. DX

2601. According to Dr. Mordecai, Dr. Kothari’s estimates of the alleged harm suffered

by both classes was flawed because share dilution does not equal economic loss, Dr.

Kothari ignored that AIG’s stock price actually increased as a result of the initial rescue,

and Dr. Kothari did not estimate a value for the losses to shareholders.

Professor Anthony Saunders. The Court accepted Professor Saunders as an

expert in “financial economics.” Saunders, Tr. 8067-68. Professor Saunders summarized

48

his testimony in eight main points. First, Professor Saunders addressed AIG and its

financial condition. He asserted that “AIGFP’s un-hedged Multi-Sector CDS portfolio

exposed AIG to significant liquidity risk.” Further, the “deterioration in AIG’s financial

condition and risk profile were primarily caused by factors unique to AIG, not market-

wide forces as Dr. Cragg claim[ed].” Professor Saunders testified that the “ex-ante risk

of lending to AIG was extremely high as of September 16, 2008.” Next, he addressed

whether AIG could have become a primary dealer. According to Professor Saunders,

AIG did not meet the requirements to become a primary dealer and, “in any event, access

to the PDCF would not have solved AIG’s liquidity crisis.” Professor Saunders critiqued

Dr. Kothari’s valuations of the Credit Agreement Class and the Reverse Stock Split

Class. He claimed that Dr. Kothari’s valuation of the Credit Agreement Class claims as

being worth $35.4 billion or $13.16 per share did not make economic sense as AIG’s

“stock price did not approach the value Dr. Kothari claims was lost under his ‘bounce

back’ theory.” Similarly, Dr. Kothari’s valuation of the Reverse Stock Split Class claims

as of June 30, 2009 did not make economic sense because there was no economic loss to

the shareholders as a result of increasing the number of unissued authorized shares. DX

2701-02, 2753; see also Saunders, Tr. 8069-71.

O. AIG Epilogue

AIG survived the 2008 economic crisis. AIG repaid all loan amounts to the U.S.

Government, although it sold valuable insurance assets worth billions of dollars to

achieve this objective. PTX 5371 (Cragg chart). The Government’s extension of the

loan term from two years to five years was critical to AIG’s survival. Schreiber, Tr. 6627

(Extension of the loan term “was the most important asset we had. It avoided a rapid-fire

sale of our businesses.”). AIG did not file for bankruptcy protection, and it continues

today as a publicly-traded company on the New York Stock Exchange.

History of Proceedings

The Court’s docket sheet for this case, currently containing 442 docket entries,

provides a detailed chronological history of every judicial filing. With few exceptions,

all of the filings are available to the public. The proceedings began with Starr’s filing of

the original complaint on November 21, 2011.

The Court has issued seven published decisions thus far in this case. On February

10, 2012, the Court added AIG as a nominal defendant for Starr’s shareholder derivative

claims. Starr Int’l Co. v. United States, 103 Fed. Cl. 287 (2012). On July 2, 2012, the

Court granted in part and denied in part Defendant’s motion to dismiss, allowing most of

Starr’s causes of action to proceed. Starr Int’l Co. v. United States, 106 Fed. Cl. 50

(2012). On September 17, 2012, the Court denied Defendant’s motion for

49

reconsideration of the July 2, 2012 ruling. Starr Int’l Co. v. United States, 107 Fed. Cl.

374 (2012). On March 11, 2013, the Court certified two classes of plaintiff shareholders

who could proceed with this action under Rule 23: (a) the Credit Agreement Class,

consisting of persons or entities who owned shares of AIG common stock during

September 16-22, 2008, excluding Defendant and the named trustees; and (b) the Stock

Split Class, consisting of persons or entities who owned shares of AIG common stock on

June 30, 2009, AIG’s annual shareholder meeting date, excluding Defendant and the

named trustees. Starr Int’l Co. v. United States, 109 Fed. Cl. 628 (2013). On June 26,

2013, the Court granted AIG’s and the Government’s motions to dismiss Starr’s

shareholder derivative claims, and denied the Government’s motion to dismiss Starr’s

direct claims. The Court also dismissed AIG as a party to this action. Starr Int’l Co. v.

United States, 111 Fed. Cl. 459 (2013). On July 29, 2013, the Court authorized Plaintiff

to take the deposition of Ben S. Bernanke. Starr Int’l Co. v. United States, 112 Fed. Cl.

56 (2013). On September 27, 2013, the Court denied Defendant’s motion to certify the

Court’s June 26, 2013 ruling for interlocutory review. Starr Int’l Co. v. United States,

112 Fed. Cl. 601 (2013).

The Court also has issued various unpublished rulings and orders, including a

denial of Defendant’s motion for summary judgment (Dkt. No. 282, issued Aug. 25,

2014), and Discovery Orders No. 1-11. Of these, Discovery Order No. 6 perhaps is the

most significant, where the Court ruled upon multiple claims of the attorney-client

privilege and the deliberative process privilege. Dkt. No. 182, issued Nov. 6, 2013.

Jurisdiction – Section 13(3) of the Federal Reserve Act

As noted above, the Court has addressed a number of jurisdictional and standing

questions at earlier stages of this case. The Court dismissed some of Starr’s allegations in

the amended complaints, and dismissed AIG as a nominal defendant, but ruled that the

two classes of shareholders could proceed to trial on the taking and illegal exaction

claims under the Fifth Amendment to the U.S. Constitution. The Court’s earlier rulings

on these issues need not be repeated here. However, there is one jurisdictional issue

where the Court previously granted an inference in Starr’s favor, but which now requires

further analysis. See Starr Int’l Co., 107 Fed. Cl. at 378 (deferring ruling on whether a

money-mandating statute is required for an illegal exaction claim).

The Government contends that the Court lacks jurisdiction over Starr’s illegal

exaction claim because Section 13(3) of the Federal Reserve Act is not a money-

mandating source of law. The general rule is that the Court of Federal Claims possesses

jurisdiction under the Tucker Act, 28 U.S.C. § 1491, of claims based upon a

constitutional provision, statute, or regulation when “the constitutional provision, statute,

or regulation is one that is money-mandating.” Def.’s Post-Trial Concl. of Law at 108

50

(citing Fisher v. United States, 402 F.3d 1167, 1173 (Fed. Cir. 2005) (en banc)). While

Fifth Amendment taking claims are based upon the money-mandating language “nor

shall private property be taken for public use without just compensation,” illegal exaction

claims are based upon the Due Process Clause of the Fifth Amendment. See, e.g., Casa

de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d 1356, 1363 (Fed. Cir. 2002).

The Due Process Clause does not contain a money-mandating provision, and therefore an

illegal exaction claim requires reference to another statute or regulation to create

jurisdiction in this Court. See Hamlet v. United States, 873 F.2d 1414, 1416-17 (Fed.

Cir. 1989) (this Court can adjudicate constitutional claims if they are made in conjunction

with a money-mandating source of law).

This Court ordinarily lacks jurisdiction of due process claims under the Tucker

Act, but possesses jurisdiction of illegal exaction claims “when the exaction is based on

an asserted statutory power.” Aerolineas Argentinas v. United States, 77 F.3d 1564, 1573

(Fed. Cir. 1995). As defined, an illegal exaction claim involves money that was

“improperly paid, exacted, or taken from the claimant in contravention of the

Constitution, a statute, or a regulation.” Eastport S.S. Corp. v. United States, 178 Ct. Cl.

599, 605, 372 F.2d 1002, 1007 (1967). Illegal exaction claims often arise in tax disputes.

A classic illegal exaction claim is a tax refund suit alleging that taxes have been

improperly collected or withheld by the Government. See, e.g., City of Alexandria v.

United States, 737 F.2d 1022, 1028 (Fed. Cir. 1984). However, illegal exaction claims

arise in many other contexts as well, such as the AIG shareholders’ lawsuit here.

Fifth Amendment taking claims and illegal exaction claims are two sides of the

same coin: taking claims are based upon authorized actions by government officials,

whereas illegal exaction claims are based upon unauthorized actions of government

officials. See Aerolineas Argentinas, 77 F.3d at 1579 (Nies, J., concurring):

As recognized in United States v. Testan, 424 U.S.

392, 401-402, 96 S. Ct. 948, 954-55, 47 L. Ed. 2d 114 (1976),

a Tucker Act claim for damages against the United States

based upon a statute may take one of two forms: a claim

under a money-mandating statute or a claim for money

improperly exacted or retained. A claimant must rely either

on a statute that mandates payment of money from the

government to the claimant or on an illegal exaction, that is, a

payment to the government by the claimant that is obtained

without statutory authority. See Clapp v. United States, 127

Ct. Cl. 505, 117 F. Supp. 576 (1954). The first is founded on

statutory authorization; the second on the absence of statutory

authorization. One is the flip side of the other.

51

Id. Intuitively, taking claims and illegal exaction claims ought to be on equal

jurisdictional footing in this Court, but a problem is created because taking claims stem

from explicit money-mandating language in the Fifth Amendment, while illegal exaction

claims do not.

In addressing this jurisdictional problem for illegal exaction claims, some

decisions have dispensed with the requirement for a money-mandating statute, seemingly

embracing the concept that the Government should not escape responsibility for its

unauthorized actions based on a jurisdictional loophole. See Figueroa v. United States,

57 Fed. Cl. 488, 495-96 (2003) (“In the context of an illegal exaction, the court has

jurisdiction regardless of whether the provision relied upon can be reasonably construed

to contain money-mandating language.”); Bowman v. United States, 35 Fed. Cl. 397, 401

(1996) (“In illegal exaction cases, in contrast to other actions for money damages,

jurisdiction exists even when the provision allegedly violated does not contain

compensation mandating language.”); Aerolineas Argentinas, 77 F.3d at 1573 (“[A]n

illegal exaction has occurred when ‘the Government has the citizen’s money in its

pocket.’ Suit can then be maintained under the Tucker Act to recover the money

exacted.”) (quoting Clapp, 127 Ct. Cl. at 513, 117 F. Supp. at 580); Auto. Club Ins. Ass’n

v. United States, 103 Fed. Cl. 268, 273 (2012) (Where an illegal exaction is alleged, the

Tucker Act “enables suit even in the absence of a money-mandating statute.”).

Other decisions have espoused a slightly tighter standard, but one that is still

broader than simply requiring a “money-mandating” source of law. The lead case in this

category is Norman v. United States, 429 F.3d 1081 (Fed. Cir. 2005), which states:

An illegal exaction involves a deprivation of property without

due process of law, in violation of the Due Process Clause of

the Fifth Amendment to the Constitution. See, e.g., Casa de

Cambio Comdiv, 291 F.3d at 1363. . . . To invoke Tucker Act

jurisdiction over an illegal exaction claim, a claimant must

demonstrate that the statute or provision causing the exaction

itself provides, either expressly or by “necessary

implication,” that “the remedy for its violation entails a return

of money unlawfully exacted.” Cyprus Amax Coal Co. v.

United States, 205 F.3d 1369, 1373 (Fed. Cir. 2000)

(concluding that the Tucker Act provided jurisdiction over an

illegal exaction claim based upon the Export Clause of the

Constitution because the language of that clause “leads to the

ineluctable conclusion that the clause provides a cause of

action with a monetary remedy”).

52

Id. at 1095 (emphasis added).

Even under the more demanding test of Norman, the words “by necessary

implication” would lead to a finding of jurisdiction in this case. Certainly, where the

Government has imposed unlawful conditions in connection with an emergency loan

under Section 13(3) of the Federal Reserve Act, the Government should not be permitted

to insulate itself from liability by arguing that Section 13(3) is not “money-mandating.”

If this were true, the Government could nationalize a private corporation, as it did to AIG,

without fear of any claims or reprisals. Section 13(3) does not contain express “money-

mandating” language, but “by necessary implication,” the statute should be read to allow

the shareholders’ cause of action here. By taking 79.9 percent equity and voting control

of AIG, the Government exacted the shareholders’ property interests. The two certified

classes of AIG common stock shareholders were the parties directly affected by the

Government’s unlawful action, and “by necessary implication,” they should be permitted

to maintain their lawsuit.

The Government also argues that Section 13(3) of the Federal Reserve Act is a

discretionary statute and cannot be money-mandating because of the language stating

“the Board of Governors . . . may authorize” a loan, (citing Doe v. United States, 463

F.3d 1314, 1324 (Fed. Cir. 2006)). Def.’s Post-Trial Resp. Br. at 20-21. However, in the

case of Section 13(3), the discretionary part of the statute is in allowing the Government

to consider whether it would extend an emergency rescue loan to AIG. Section 13(3) did

not require the Government to make an emergency loan to any entity, including AIG.

Once it decided to make an emergency loan to AIG, the Government’s discretion ended.

At that point, the Government had to abide by the restrictions of Section 13(3), which did

not include the steps it took in taking 79.9 percent equity and acquiring voting control to

nationalize AIG. Further, Doe is an overtime pay case, not an illegal exaction case, and

does not apply in the circumstances presented here.

Last, the Government argues that even if Section 13(3) of the Federal Reserve Act

were money-mandating, Starr could not recover

This text is long and has been trimmed here. Open the source document for the complete record.