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Was the Government AIG Bailout Legal?

Former AIG CEO Maurice Greenberg Testifies At House Hearing

Insurer AIG became a poster child for the “too big to fail” imperative that led the government to bail out banks and auto companies during the recession. While this annoyed many taxpayers, ousted AIG CEO Maurice “Hank” Greenberg, age 89, felt the government’s takeover of AIG was not by legal means. AIG was faced with either a bailout or bankruptcy, but Greenberg’s lawyer says the government took advantage of AIG’s situation to make unfair profits and perhaps behaved contrary to the constitution.

Former Fed Chairman Ben Bernanke and former Treasury Secretaries Tim Geithner and Henry Paulson will give testimony, according to Reuters. Greenberg’s lawyers say the government punished AIG shareholders with harsh conditions, while the U.S. Department of Justice dismisses the case as a “conspiracy theory.” U.S. Judge Thomas Wheeler rejected the government’s attempt to dismiss the case, which could result in $50 billion in damages.

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The case hinges on the fact the government bought $35 billion worth of AIG shares and did not pay a fair price for them. The 5th Amendment prohibits the government from taking private property without fair compensation. The second issue is if the government had the right to make owning a stake in AIG a condition of issuing its $85 billion loan. This potentially violates the Federal Reserve Act.

AIG paid back its loan in full and left taxpayers with $23 billion in profit.

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