Amid the furor last week over whether AIG would thumb its nose at its federal rescuers and join former chairman Hank Greenberg’s $25 billion constitutional case against the United States, a curious side deal by AIG and Greenberg’s Starr International was mostly overlooked. Last year, as government lawyers prepared motions to dismiss Starr’s suits against both the United States and the Federal Reserve Bank of New York, AIG signed an agreement with Starr that kept the insurer out of the fray — even though one of the most powerful defenses against the claims Starr was asserting on behalf of AIG was that Greenberg’s lawyers had served the requisite presuit demand on the corporation’s board.
We still don’t know exactly why AIG agreed to the side deal with Greenberg and we probably won’t ever get a direct answer now that AIG is out of the case. (AIG’s board voted Wednesday to stay out of Starr’s Fifth Amendment “takings” case and Starr lawyer David Boies of Boies, Schiller & Flexner subsequently said Greenberg won’t sue the board for breach of duty.) But a filing Friday by AIG shows that the insurer has its own megabucks dispute under way with the Federal Reserve. That could be one of the reasons AIG didn’t help the government defend against Starr’s suits — and, more importantly, at this point, it could affect AIG’s $10 billion claims against Bank of America, as well as BofA’s proposed $8.5 billion breach-of-contract settlement with holders of Countrywide mortgage-backed securities.
AIG’s new filing, styled as a New York State Supreme Court complaint against the New York Federal Reserve’s Maiden Lane special purpose vehicle, requests a declaration that in 2008, when the Fed paid $20.8 billion to acquire AIG’s mortgage-backed portfolio through the Maiden Lane vehicle, Maiden Lane did not acquire AIG’s rights to sue MBS issuers for securities fraud. (The Fed has since sold off the Maiden Lane MBS portfolio, at a profit of more than $2 billion.) The complaint explains that the suit is a response to recent declarations by Fed officials in AIG’s case against Countrywide, which (as I’ve told you) Bank of America has moved to dismiss on the grounds that the Fed, and not AIG, owns the fraud claims AIG has asserted.
What’s really fascinating, however, is the suit’s discussion of AIG’s long-running feud with the New York Fed over which of them has the right and the responsibility to bring MBS issuers to account. AIG’s new filing suggests that if the Fed’s interpretation of the Maiden Lane transaction is correct, then the Federal Reserve Bank has failed American taxpayers by neglecting to bring securities fraud claims against BofA. So while AIG’s suit, in one sense, is yet more litigation gamesmanship with its archenemy Bank of America, the insurer’s dispute with the Fed also raises some really serious policy questions about federal bailouts. Can taxpayers count on the Fed — which, of course, has extremely complex relationships with U.S. banks — to sue those banks for fraud on their behalf? And if not, should the Fed leave the right to sue with the bailed-out company, but pay less for the securities?
This particular dispute dates back to the fall of 2011, when New York Fed general counsel Thomas Baxter sent a letter to AIG counsel Michael Carlinsky of Quinn Emanuel Urquhart & Sullivan. Baxter took note of AIG’s suit against Bank of America and asked Carlinsky to confirm that the suit did not make any claims based on supposed breach of contract by BofA. The Fed GC didn’t discuss it in his letter, but it’s important to remember that in the fall of 2011, the Fed and AIG were on opposite sides of the fight over Bank of America’s proposed $8.5 billion breach-of-contract, or put-back, settlement with holders of Countrywide notes. The Fed’s Maiden Lane vehicle, you will recall, was part of the noteholder group that negotiated the deal with BofA. AIG, on the other hand, was one of the most prominent objectors to the proposed settlement.