Judge Rules in Former AIG Chief Greenberg's Favor in Bailout Trial

A federal judge ruled that the U.S. government exceeded its authority in its 2008 rescue of American International Group Inc., handing former AIG Chief Maurice R. "Hank" Greenberg a moral victory in a case that once seemed unwinnable.

But the judge didn't award Mr. Greenberg and other members of a class of about 287,000 shareholders any money, accepting the government's arguments that the company's alternative to the government bailout had been a bankruptcy filing that likely would have left shareholders with nothing.

"The government's unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose," judge Thomas C. Wheeler of the U.S. Court of Federal Claims wrote in his 75-page opinion.

At the center of the case is a dispute about the breadth of the Federal Reserve's powers, and the limits on its discretion, during the financial crisis.

The government demanded a 79.9% equity stake in the then-teetering financial-services conglomerate in exchange for providing an $85 billion loan at an initial 14.5% interest rate. At the time, U.S. officials said the government acted because AIG was so entangled with other firms around the world that they feared its collapse would be catastrophic to the global financial system.

To award damages "would be to force the government to pay on a propped-up stock price that it helped create with an $85 billion loan," Judge Wheeler wrote.

Mr. Greenberg's class-action lawsuit maintained that a decades-old law governing such emergency loans by the Federal Reserve restricted the nation's central bank from taking the equity stake.

AIG by the end of 2012 had fully repaid the massive bailout—-which reached nearly $185 billion at its peak—by divesting many units and returning to profitability in its core property-casualty and life-insurance businesses. The government earned a return of about $20 billion.

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