American International Group (NYSE:AIG), recipient of over $180 billion in taxpayer funds during the financial crisis, is contemplating joining a lawsuit accusing the U.S. government of extracting too onerous terms in its 2008-2009 bailout. Pursuant to its fiduciary responsibilities to shareholders, AIG's board of directors will weigh the pros and cons of joining a $25 billion lawsuit filed in November 2011 by Starr International, Co. Once AIG's largest shareholder, Starr is run by former AIG CEO Maurice "Hank" Greenberg; the mercurial Greenberg was ousted as CEO in 2005 amid allegations of fraudulent business practices brought on by New York Attorney General Eliot Spitzer.
AIG sought government assistance in 2008 after it was unable to pay obligations under its credit default swap agreements. The Starr suit argues that the resulting rescue package was unconstitutional and inured to the benefit of AIG trading partners like Goldman Sachs (NYSE:GS) and UBS (NYSE:UBS), at the expense of shareholders:
Once AIG's largest shareholder, Starr said the government took a roughly 80 percent stake in AIG and charged an "punitive" 14.5 percent on federal loans without seeking a shareholder vote, hoping to provide a "backdoor bailout" for AIG trading partners such as Goldman Sachs Group Inc. It said the bailouts that began on Sept. 16, 2008, violated shareholders' rights to due process and equal protection, and a Fifth Amendment ban against taking private property for public use without just compensation, known as the "takings clause."
AIG has had a history of changing its negotiating posture based upon its leverage with the parties involved. AIG management came to the government "hat in hand" amid collateral calls from clients under its credit default swap agreements. However, after the government announced an $85 billion rescue package in September 2008, senior management became defiant. In March 2009 it planned to pay $165 million in bonuses to its Financial Products unit - the unit that created the losses - in addition to $121 million in scheduled bonuses to senior management. In December 2009 its general counsel, Anastasia Kelly, demanded a $3 million severance package after leaving the company - an attempt to skirt government-imposed pay cuts. According to SHOCK EXCHANGE How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead:
AIG's general counsel, Anastasia Kelly, is expected to receive approximately $3 million in severance pay upon her departure from the insurer. In December  Kelly announced she was leaving AIG because of pay cuts imposed by Kenneth Feinberg, President Obama's federal pay czar. Feinberg capped 2009 annual cash salaries for most AIG executives at $500,000 - a significant reduction for Kelly who previously had served as the top lawyer at Fannie Mae, Sears, and MCI/WorldCom. She also drew scrutiny for advising other AIG executives chafing under the pay cuts; at least four other senior AIG executives are expected to join Kelly in departing.
Now that AIG has repaid the government's bailout package, it no longer has to assuage government demands. Yet, it has also experienced a rapid deterioration in its operating results since the bailout. From 2007 to 2011 revenue declined from $81.5 billion to $64.2 billion. Income from continuing operations before taxes also declined from $4.7 billion to a $1.1 billion loss over that same period. In 2010 it recorded a non-recurring gain of $16.3 billion on its divestiture of its Asian life insurance company, AIA Group Limited. While the sale proceeds went to repay government debt, the transaction chipped away at AIG's crown jewel - its Asian insurance franchise. Previously, its international financial services franchise was rivaled only by JPMorgan Chase's (NYSE:JPM) and Citigroup's (NYSE:C). Moreover, AIG is facing stiff headwinds from the U.S. economy - in June 2012 the GOP even accused President Obama of having a John McCain Moment and not understanding the depths of the current economic crisis. Whether AIG will continue a pattern of biting the hand that feeds it by joining the Starr lawsuit remains to be seen. For the avoidance of doubt, I am bearish on the U.S. economy and the market as a whole. I recommend avoiding AIG until it proves it can deliver consistent profits as a standalone entity.