STARR INTERNATIONAL COMPANY,
INC., on its behalf and on behalf of a class
of others similarly situated
1.3 From September 6 through September 22, the economy was essentially “in
free fall” (Geithner: PTX 563 at 15).
(a) The market conditions in mid-September 2008 were “unprecedented in the recent
history of financial markets” (PTX 2161 at 33).
1.4 On September 6, 2008, the Federal Housing Finance Agency (“FHFA”)
placed the two Government-Sponsored Entities (“GSEs”), Federal Home
Loan Mortgage Corporation (“Freddie Mac”) and the Federal National
Mortgage Association (“Fannie Mae”), into conservatorship (PTX 2097 at
15; PTX 2020 at 26).
1.5 In the two days prior to September 16: “Three major events shook the
financial system” (PTX 589 at 60).
(a) “Bank of America announced that it was buying Merrill Lynch amid concerns about
Merrill’s exposure to securities based on residential mortgages. In addition, at midday on
September 16, the assets of a money-market mutual fund that had exposure to Lehman
fell below $1 per share, a rare occurrence known as ‘breaking the buck,’ which further
stoked investors’ fears; that week, money-market mutual funds were subjected to
enormous withdrawals, especially by institutional investors. And finally . . . Lehman
Brothers filed for bankruptcy, in what became the largest bankruptcy case in U.S.
history” (PTX 589 at 60).
1.6 In the early hours of September 15, Lehman Brothers announced it would
file for bankruptcy, an event Secretary Geithner describes as “the most
destabilizing financial event since the bank runs of the Depression” (PTX 709
(a) At around 12:30 am on September 15, 2008, Lehman Brothers Holdings Inc.
announced its intent to file a Chapter 11 bankruptcy petition. (PTX 69).
(b) After Lehman’s bankruptcy: “Key regulators feared that nearly all of the nation’s
major financial institutions were at risk of failure within a period of a week or two” (PTX
680 at 16).
(c) Geithner: The “fall of Lehman was a serious blow, shattering confidence around the
world. It was the most destabilizing financial event since the bank runs of the
Depression” (PTX 709 at 228). In the aftermath, regulators “had two death spirals” that
they “needed to stop immediately: the run on money market funds, which was killing the
market for commercial paper that provided America’s top corporations with short-term
operating loans, and the run on investment banks, which was threatening to ignite two
more Lehman-style explosions” (Id. at 218).
(d) Federal Reserve Chairman Ben Bernanke (“Bernanke”): The Lehman bankruptcy
“was an enormous shock that affected the whole global financial system” (PTX 708 at
(e) The “failure of Lehman Brothers created substantial disruption in the derivatives
market” (PTX 680 at 48).
1.7 In the days following Lehman’s bankruptcy announcement, a “run on the
bank” panic caused investors and depositors to withdraw hundreds of
billions of dollars in funds.
1.8 Investors withdrew more than $300 billion from money market funds (PTX
709 at 211).
(a) Bernanke: One effect of the Lehman bankruptcy was that there was “a very intense
bank run or, in this case, a money market fund run, in which investors in these funds
began to pull out their money just as quickly as they could.” In the days immediately
following the bankruptcy, “one hundred billion dollars a day was flowing out of these
funds” (PTX 708 at 89).
1.9 Morgan Stanley’s “liquidity pool had shrunk from $130 billion to $55 billion
in a week” (PTX 709 at 219).
1.10 “Goldman Sachs, the strongest of the investment banks, watched helplessly
as half its $120 billion in liquidity evaporated in a week” (PTX 709 at 214-
1.11 Between September 13 and 15, 2008, Defendant brokered the acquisition of a
failing Merrill Lynch by Bank of America (PTX 709 at 201, 204, 292).
1.12 During the day of September 16, the Reserve Primary Fund, a money market
fund announced that it was “‘breaking the buck,’ which meant it could no
longer promise investors 100 cents on the dollar” (PTX 709 at 211; see also
PTX 589 at 60).
1.13 As money market funds “began to face runs, they in turn began to dump
commercial paper as quickly as they could. As a result, the commercial
paper market went into shock” (PTX 708 at 90).
(a) Geithner: “The Reserve Fund debacle discouraged risk taking by other money funds,
which meant even less buying of commercial paper and less lending through repo, which
meant an even more intense liquidity crisis for banks and other institutions. Basically,
short-term financing—whether secured by collateral or not—was vanishing” (PTX 709 at
1.14 On Friday September 19, Geithner was told that Morgan Stanley “indicated
they cannot open on Monday” and, if it did not open, Goldman Sachs was
“toast” (PTX 175; Geithner Dep. 119:23-120:25).
2.0 IN SEPTEMBER 2008 THE FREEZING OF CREDIT MARKETS AND PANIC
PRICING FOR SUBPRIME RELATED SECURITIES RESULTED IN AN
ABSENCE OF RELIABLE MARKET PRICES, THE INABILITY TO RECEIVE
FAIR MARKET VALUE FOR THOSE SECURITIES, AND DEMANDS FOR
COLLATERAL BASED ON ARTIFICIALLY LOW MARKS.
2.1 As early as March 10, 2008, the Federal Reserve recognized that the prices
for subprime backed securities did not reflect underlying values and that:
“The prices out there were just being driven by fear” (PTX 1196 at 22).
2.2 During the days after Lehman’s collapse, it was virtually impossible to get a
price for subprime backed securities, including because of “Lack of liquid
quotes from market participants”; the fact that industry standard CDS
agreements “didn’t consider illiquid markets”; and the “Subjectivity
involved in pricing” (PTX 221 at 4).
(a) “In September 2008, the failure of Lehman Brothers created substantial disruption in
the derivatives markets” (PTX 680 at 48).
(b) “over the course of the second half of 2008, the OTC derivatives market would
undergo an unprecedented contraction, creating serious problems for hedging and price
discovery” (PTX 624 at 328).
3.2 In September 2008, AIG faced a severe liquidity crisis.
(a) Then Treasury Secretary Henry Paulson (“Paulson”): The Federal Reserve believed
“it could make a loan to help AIG because, with AIG, you were dealing with a liquidity
problem, not a capital problem” (Paulson Dep. 73:10-17).
3.7 AIG’s securities lending operations faced the same “run on the bank”
pressures as many other financial firms.
(a) Bernanke: On “September 16, AIG, the largest multidimensional insurance company
in the world, which had been selling credit insurance, came under enormous attack from
people demanding cash either through margin requirements or through short-term
funding,” (PTX 708 at 80), which was part of a pattern of “Whenever there was doubt
about a firm, as in a standard bank run, the investors, the lenders, and the counterparties
would all pull back their money quickly for the same reason that depositors would pull
their money out of a bank that was thought to be having trouble” (Id. at 79).
(c) Federal Reserve Vice Chairman Kohn: The “loan to AIG was meant to serve the
public purpose of preventing broader exacerbation of the financial crisis” (Kohn Dep.
(d) Geithner: when “you gave AIG a loan, you weren’t giving AIG a loan to benefit AIG,
you were giving AIG a loan to benefit the system” (Geithner Dep. 152:17-20).
6.0 DEFENDANT’S REGULATORY FAILINGS AND RELATED POLICIES
CONTRIBUTED TO THE 2008 FINANCIAL CRISIS.
6.1 The primary cause of the financial crisis of 2008-2009 was the bursting of a
bubble in the housing market.
(a) Paulson: “The crisis in the financial markets that I had anticipated arrived in force on
August 9, 2007. It came from an area we hadn’t expected—housing—and the damage it
caused was much deeper and much longer lasting than any of us could have imagined.”
(PTX 706 at 78).
(b) Bernanke: “Although a number of developments helped to trigger the crisis, the most
prominent was the prospect of significant losses on subprime mortgage loans that became
apparently [sic] shortly after house prices began to decline” (PTX 599 at 5).
6.2 Defendant kept interest rates artificially low in the years leading up to the
financial crisis, which created a housing bubble that began to burst in 2007.
6.2.1 The Federal Reserve kept the discount and federal funds rates low in
part to stimulate the economy by encouraging sales in the housing
(a) “At a congressional hearing in November 2002, Greenspan acknowledged—at
least implicitly—that after the dot-com bubble burst, the Fed cut interest rates in
part to promote housing” (PTX 624 at 116).
(b) “In the view of some, the Fed simply kept rates too low too long. John Taylor,
a Stanford economist and former undersecretary of treasury for international
affairs, blamed the crisis primarily on this action. If the Fed had followed its usual
pattern, he told the FCIC, short-term interest rates would have been much higher
6.2.2 Even as the Federal Reserve kept interest rates low, it recognized
that the boom in the housing market was a potential source of risk to
the financial system.
(a) Bernanke: “We always of course knew the housing prices were rising quickly,
but as of 2003-2004 there really was quite a bit of disagreement among
economists about whether there was a bubble, how big it was, whether it was just
a local or a national bubble. So we were certainly aware of that risk factor” (PTX
599 at 52).
6.3 As housing prices soared in the early to mid-2000s, mortgage originators,
including commercial banks, and investment banks, began to rely more
heavily on the so-called “originate and distribute” business model, whereby
originators would transfer mortgages to other entities instead of holding
them until maturity (PTX 624 at 117-119, 130-154).
(a) Defendant’s Expert Anthony Saunders: “The years preceding the financial crisis that
began in 2007 were characterized by a dramatic increase in systemic risk of the financial
system, caused in large part by a shift in the banking model from that of ‘originate and
hold’ to ‘originate and distribute’” (PTX 2161 at 23).
(b) “‘Securitization could be seen as a factory line,’ former Citigroup CEO Charles
Prince told the FCIC. ‘As more and more and more of these subprime mortgages were
created as raw material for the securitization process, not surprisingly in hindsight, more
and more of it was of lower and lower quality. And at the end of that process, the raw
material going into it was actually bad quality, it was toxic quality, and that is what ended
up coming out the other end of the pipeline’” (PTX 624 at 130-31)
6.7 Defendant failed to regulate the products and participants in the mortgage
market in the years leading up to the financial crisis.
(a) Geithner: “There was plenty of blame to go around, some of it was mine. Citi’s many
regulators, including the New York Fed, had failed to save Citi from itself during the
boom. We had recognized the vulnerabilities too late” (PTX 709 at 268).
(b) Bernanke, when asked by the FCIC whether the “actions of the Federal Reserve” in
regulating the mortgage market during the housing boom was “a very significant failure”
on the part of the Federal Reserve: “It was, indeed. I think it was the most severe failure
of the Fed in this particular episode” (PTX 599 at 27; see also PTX 708 at 57-58).
(c) Geithner: “Everyone could see there was ‘froth’ in some housing markets, as
Greenspan put it. We all knew lax lending standards were helping families buy more
expensive homes with less money down. Other families were staying put, then using
their existing homes as ATMs by borrowing against their soaring home values. I had
seen in Japan and Thailand how lavishly financed real estate booms can end in tears.
7.3.2 Defendant refused AIG’s request to become a bank holding
company while providing such assistance to others.
(a) On September 21, 2008, the Federal Reserve announced that it had approved
the applications of Goldman Sachs and Morgan Stanley to become bank holding
companies (PTX 198; PTX 200 at 3; PTX 201 at 3-4). The Federal Reserve
waived the usual five-day waiting period to make these approvals (PTX 220; PTX
(b) On November 10, 2008, the Board of Governors approved American Express
Company’s application to become a bank holding company upon conversion of
American Express’s subsidiary American Express Centurion Bank, an industrial
loan company, into a bank (PTX 1833).
(c) On December 24, 2008, the Federal Reserve approved GMAC LLC’s
(“GMAC”), General Motors’ partially-owned banking subsidiary, application to
form a bank holding company. (PTX 554 at 43; PTX 391 at 1, 10, 12).
(d) In August 2008, AIG outside counsel Cohen discussed with Defendant
whether AIG converting its thrift into a bank would increase AIG’s chances of
becoming a bank holding company. Government officials told Cohen such a
conversion would not make a difference (Cohen Dep. 113:21-24).
7.3.3 Defendant refused the suggestion that it provide AIG with a
guarantee while providing guarantees to others.
(a) During a meeting with representatives from JP Morgan, Goldman Sachs, and
FRBNY on September 15 or 16, 2008, Dinallo suggested that Defendant
guarantee AIG’s liabilities (Dinallo Dep. 161:24-166:6). Dinallo’s suggestion
was “slapped” down by Government officials (Dinallo Dep. 95:22).
7.4 Defendant discouraged private parties and the public from providing
liquidity to AIG by telling private parties that Defendant would not provide
any assistance to AIG.
7.4.1 Defendant repeatedly told private parties and the public, including
as late as September 15, that there would be no federal assistance for
(a) Around 11 am on September 15, 2008, Willumstad, New York State
Insurance Superintendent Dinallo, Geithner, Treasury contractor Dan Jester, and
other Government officials, as well as representatives of Morgan Stanley, JP
Morgan, and Goldman Sachs attended a meeting concerning AIG at FRBNY
(Dinallo Dep. 86:7-89:23). Geithner stated during the meeting that “just so it’s
clear, there’s no federal government money” or words to that effect (Dinallo Dep.
7.5 Defendant did not allow AIG management or AIG’s largest shareholder to
participate in the September 15-16, 2008 discussions between the Defendant,
JP Morgan, and Goldman Sachs concerning AIG.
(a) On September 15 and 16, 2008, “AIG did not participate in” and “was not
invited” to any meetings the Government had with JP Morgan and Goldman
Sachs concerning potential financing arrangements for AIG. (PTX 620 at 7; see
also PTX 587 at 116; Willumstad (Oct. 15, 2013) Dep. 239:12-240:22).
(b) On or before September 16, 2008, FRBNY declined to offer Greenberg a seat
at the table. Defendant intentionally excluded Greenberg and Starr – the largest
individual shareholder and former CEO of AIG, who was very familiar with all
aspects of the company, and the largest institutional shareholders – from the
meetings hosted by FRBNY on September 15 and 16, 2008 (see PTX 109;
Geithner Dep. 213:11-21).
7.7 On September 16, 2008, Defendant directly discouraged the New York State
Government from assisting AIG.
7.7.1 Around noon on September 15, 2008, New York Governor David
Paterson announced that he had “directed” the New York State
Insurance Department to permit AIG to access approximately $20
billion in liquid assets from certain AIG insurance subsidiaries. He
also urged the federal government to be involved in some type of
arrangement, whereby AIG would have the necessary resources and
bridge loans to tide AIG over until it could resolve its liquidity
problems. (PTX 61 at 1; see also PTX 67 at 1).
8.0 ON THE AFTERNOON OF SEPTEMBER 16, 2008 THE FEDERAL RESERVE
CONCLUDED THAT IT WAS IN THE NATIONAL INTEREST TO PROVIDE
AN $85 BILLION 13(3) CREDIT TO AIG, AND AIG WAS OFFERED SUCH A
CREDIT LATER THAT DAY.
8.1 On the afternoon of September 16, 2008, the Federal Reserve determined
that it was in the national interest to offer an $85 billion 13(3) credit to AIG.
(a) Minutes of the Board of Governors September 16 meeting: “Given the unusual and
exigent circumstances, the Board authorized the Federal Reserve Bank of New York
under section 13(3) of the Federal Reserve Act to extend credit to AIG or any of its
subsidiaries, in an amount up to $85 billion” (JX 63 at 2).
(b) September 17, 2008 “Guidance” distributed to presidents of the Federal Reserve
Banks, copying Governors Donald Kohn, Randall Kroszner, Elizabeth Duke, and Kevin
Warsh: “The Board, with the full support and engagement of the Treasury Department,
decided late in the day yesterday to authorize the FRBNY to lend up to $85 billion to the
American International Group (AIG) under Section 13(3) of the Federal Reserve Act”
(PTX 122 at 2).
8.2 On September 16 after the Board of Governors meeting, Geithner called
Willumstad and offered AIG an $85 billion 13(3) credit.
(a) “I get on the phone with Willumstad and basically said we’re going 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” (PTX 673 at 24).
9.0 AS A CONDITION OF AN $85 BILLION 13(3) LOAN, DEFENDANT ON
SEPTEMBER 16 DEMANDED WARRANTS EXERCISABLE FOR 79.9% OF
AIG’S SHAREHOLDERS’ EQUITY.
9.1 The only term sheet approved by the Board of Governors provided that
Defendant’s 79.9% equity interest in AIG would be in the form of warrants.
9.1.1 The Summary of Terms attached to the minutes of the September
16, 2008 meeting of the Federal Reserve’s Board of Governors was
the only term sheet reviewed and approved by the Board of
Governors in connection with Defendant’s loan to AIG (JX 63 at 5-
9.1.2 The term sheet approved by the Board of Governors states that the
form of equity interest will be: “Warrants 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).
9.1.3 The term sheet approved by the Board of Governors includes a
“Summary of Terms of Warrants” which states that “Shareholder
Approval” was “Required to issue stock above authorized by
unissued shares”; provides when “The warrants may be exercised”;
and discusses the warrants’ “Exercise Price” (JX 63 at 10).
9.1.4 The Board of Governors did not discuss or authorize taking AIG
equity in any form other than warrants (JX 63).
(a) As of September 16, 2008, AIG expected that Defendant’s ownership would be in the
form of non-voting warrants (PTX 445 at 17; AIG 30(b)(6) (Reeder) Dep. 76:11-16;
Cohen Dep. 139:1-8).
9.3.1 Under New York Stock Exchange (“NYSE”) Listed Company
Manual Rule 312.03, shareholder approval is required prior to the
issuance of warrants exercisable into more than 20 percent of the
voting power of a corporation’s common stock (JX 75 at 2; JX 240 at
94-95) 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; JX 240 at 96).
9.3.2 On September 16, 2008, the Audit Committee of the AIG Board
approved the issuance of warrants without shareholder approval
under Rule 312.05 of the NYSE Listed Company Manual (JX 75 at
(a) On the afternoon of September 16, 2008, Geithner told Willumstad that he was going
to send him a term sheet and that Willumstad was “not going to like it, but you have an
hour to get your Board to approve it, two hours, we gave them a deadline” (PTX 673 at
(b) Geithner: The AIG Board “had no option”
(c) 2011 GAO Report: The “terms of the Government’s offer were unacceptable, given a
high interest rate and the large stake in the company—79.9%—the government would
take at the expense of current shareholders. AIG executives telephoned FRBNY officials
during the AIG board meeting in an effort to negotiate terms of the Revolving Credit
Facility, but the FRBNY officials said the terms were nonnegotiable and that the
company had no obligation to accept the offer” (PTX 641 at 42-43).
(d) During the September 16 Board meeting: “The Board as a whole instructed its
advisors to go back to the government to negotiate for better terms” (JX 74 at 11) but
Defendant refused to negotiate (id. at 12).
(e) FRBNY General Counsel Baxter’s handwritten notes reflect Defendant refused to
reduce the percentage of equity it would take and refused to include a “fiduciary out”
provision for AIG in the agreement (JX 52 at 20).
12.1.3 Aside from Willumstad, no AIG Board member saw a term sheet on
September 16, 2008.
(a) During the September 16, 2008 Board meeting, AIG’s Board of Directors
were not shown a term sheet. Instead, Defendant’s terms were orally described to
the AIG Board of Directors (see Willumstad (Oct. 15, 2013) Dep. 276:2-13;
Feldstein Dep. 67:15-69:11, 122:23-123:13; Simpson Thacher 30(b)(6) (Nathan)
73:21-74:21; Kelly Dep. 51:6-13).
13.0 UPON THE AIG BOARD’S PASSING OF ITS SEPTEMBER 16 RESOLUTIONS,
DEFENDANT ASSUMED CONTROL OF AIG.
13.1 On September 16, 2008, prior to any discussions with the AIG Board,
Defendant fired Willumstad as CEO of AIG and replaced him with a CEO of
Defendant’s own choosing.
(a) Paulson on the morning of September 16, 2008: “I worked on finding a new CEO for
the company. . . . I asked Ken Wilson to drop everything and help. Within three hours he
had pinpointed Ed Liddy, the retired CEO of Allstate” and Paulson “offered Ed the
position of AIG chief on the spot” (PTX 706 at 263).
(b) Willumstad left on September 16 because “I was terminated by Mr. Paulson” (PTX
617 at 68).
(c) At the September 18, 2008 AIG Board meeting the Board was informed that AIG
CEO Edward Liddy (“Liddy”) understood “the Department of the Treasury and Federal
Reserve Bank of New York to expect, that Mr. Liddy would be both Chief Executive
Officer and Chairman” (JX 94 at 2).
13.8 Starting on September 17, 2008, Defendant began to implement a liquidation
plan for AIG.
(a) Senior Federal Reserve officials on or around September 17, 2008: “An eventual
liquidation of the company is most likely” (PTX 113 at 1).
(b) Paulson on Meet the Press on September 21, 2008: “what the government did was
come in in a senior position, senior to the senior debt, well ahead of the shareholders,
with, as you said, an $85 billion funding facility to allow the government to liquidate this
company in a way in which it – we avoided a real catastrophe in our financial markets”
(PTX 205 at 4).
14.1 Defendant drafted the Credit Agreement.
(a) Davis Polk as counsel to FRBNY had “responsibility for the drafting of . . . both the
credit agreement and what became Annex D to the credit agreement” (Davis Polk
30(b)(6) (Brandow) Dep. 77:15-77:25).
(b) FRBNY staff, in an interview with GAO: “That’s why there was language in the RCF
that would allow the Fed to force changes in the support package without AIG consent”
(PTX 634 at 4).
14.2 A summary of the Credit Agreement terms was presented to the AIG Board
for the first time the evening of September 21.
(a) At 6:31pm on September 21, 2008, Eric Litzky (AIG Special Counsel and Secretary
to the Board of Directors) emailed the AIG Board: “Attached is a summary of the terms
of the Convertible Participating Serial Preferred Stock, which represents the United
States Government equity participation. The terms of the Preferred Stock will be
presented to the AIG Board at the Board meeting tonight” (PTX 196 at 1, 3).
14.3 Prior to the evening of September 21, the AIG Board had not been given any
indication that Defendant was demanding equity in the form of voting
preferred stock (AIG 30(b)(6) (Reeder) Dep. 105:8-13; Miles Dep. 154:9-25).
(a) Minutes of the September 21, 2008 AIG Board meeting: Although “the Board had
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).
14.4 Even at the September 21 Board meeting, the AIG Board was not given a
copy of the draft credit agreement.
(a) AIG Director Miles Offit:
“Q. Do you recall seeing a draft of a credit agreement document either during this
meeting or sometime afterward?
A. I do not” (Offit Dep. 179:16-19).
15.0 THE TERMS OF THE CREDIT AGREEMENT WERE MATERIALLY WORSE
FOR AIG SHAREHOLDERS THAN THE TERMS DEFENDANT HAD
OFFERED, AND WHICH THE FEDERAL RESERVE BOARD OF GOVERNORS
HAD APPROVED, ON SEPTEMBER 16.
15.1 The form of equity was material to AIG.
(a) AIG General Counsel and Chief Compliance and Regulatory Officer Anastasia Kelly
emailed AIG executives and staff on September 21, 2008, at 9:27am regarding the
forthcoming Credit Agreement: “We have not yet received the equity piece, which is the
most important” (PTX 182 at 1).
(b) At the September 21, 2008 AIG Board meeting: “Members of the Board noted that
the change from warrants to preferred stock would give the Bank current voting rights
and would not require shareholder approval to the issuance” (JX 103 at 3).
15.2 Defendant changed the form of equity from non-voting warrants to voting
convertible preferred stock in order to obtain immediate control of AIG.
(a) “FRBNY considered whether it should seek equity in the form of warrants, but
concluded that, among other shortcomings, this approach would not be consistent with all
of its objectives because the warrants would not carry voting rights until exercised” (Def.
Resp. to Pl. 2nd Interrogatories No. 2).
(b) “If warrants were issued, how would anybody who got the warrants have the power
to be the majority shareholder. The difficulty was with warrants, that you couldn’t
exercise the power to vote, that would be a problem” (Baxter Dep. 212:18-23).
15.3 Defendant wanted immediate control of AIG to prevent AIG’s common
shareholders from rejecting the terms of the Credit Agreement
(a) Treasury Counsel Stephen Albrecht to Treasury personnel responsible for “AIG
Preferred Stock – Fed Credit Agreement”: “We originally pushed for voting rights to help
fend off the shareholder attempts to ‘reclaim’ the company” (PTX 349 at 1).
(b) “Major shareholders are trying to help pay off the federal government’s loan to
American International Group Inc. in time to avoid having Washington take an 80% stake
in the company” (PTX 179 at 1).
(c) “AIG shareholders are seeking to pay off the loan quickly so a government takeover
of the company could be averted” (PTX 179 at 1).
(d) “AIG said Sept. 18 it would give the U.S. warrants entitling the government to get
common shares equal to a 79.9 percent stake. Some investors surmised that the U.S.
might hold onto the warrants for long enough for them to find enough new cash to make
the government takeover unnecessary. . . . The company yesterday said the Treasury will
instead get preferred shares with voting rights, guaranteeing the U.S. will control the
outcome of any shareholder vote” (PTX 1658 at 2).
15.4 Defendant changed the form of equity from non-voting warrants to voting
convertible preferred stock to avoid the shareholder vote that would be
required to issue warrants. after the board signed the terms.
15.6 Defendant required AIG not to comply with NYSE rules that required 10
days notice to shareholders if a company planned to waive the rule requiring
a shareholder vote for the issuance of preferred stock representing more
than 20% of a company’s voting control.
(a) “A company relying on this exception must mail to all shareholders not later than 10
days before issuance of the securities a letter alerting them to its omission to seek the
shareholder approval” (JX 240 at 96).
16.0 THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE NEVER
APPROVED THE CREDIT AGREEMENT NOR THE CHANGES MADE TO
THE TERMS OF THE $85 BILLION 13(3) LOAN TO AIG AS APPROVED BY
THE BOARD OF GOVERNORS ON SEPTEMBER 16.
16.1 The Board of Governors authorized a 13(3) loan to AIG based on a term
sheet that called for warrants and did not mention a Trust.
(a) The only term sheet considered by the Board of Governors provided that Defendant’s
equity interest would be “Warrants 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)
and that “shareholder approval” would be required to issue stock above what was then
authorized (JX 63 at 10).
(b) The Board of Governors did not discuss or consider requiring AIG to issue voting
convertible preferred stock or FRBNY’s creating a Trust (JX 63).
(c) Bernanke: “I don’t recall really any substantive discussion” about the “formation of
the Trust” (Bernanke Dep. 192:1-16).
16.2 After September 16, 2008, none of the individual members of the Board of
Governors had any further involvement in how to structure the credit
facility, how much to provide, or when to provide it.
(a) United States 30(b)(6) (Greenlee), Murray v. Geithner, Dep. 29:17-21:
“Q. So your testimony here today is that the Federal Reserve Board took no decision
regarding that particular structure versus any other structure that the Federal Reserve
Bank of New York might have used?
A. Yes” (PTX 545 at 29).
(b) United States 30(b)(6) (Greenlee), Murray v. Geithner, Dep. 32:15-20:
“Q. So is it your testimony here today, Mr. Greenlee, that after September 16th none of
the individual board members – and that includes Chairman Bernanke – had any further
involvement in the decision as to how to structure the credit facility, how much to
provide, when to provide it?
A. Yes” (PTX 545 at 32).
16.3 The Board of Governors did not vote to approve the Credit Agreement
(a) The “United States admits that the Credit Agreement was not presented to the Board
of Governors for a formal vote” (Def. Resp. to Pl. 2nd RFAs No. 550).
(b) The Board of Governors “did not hold a meeting or vote to consider the terms of the
Credit Agreement separate and apart from the two-part meeting on September 16, 2008”
(Def. Resp. to Pl. 3rd Interrogatories No. 5).
16.4 The Board of Governors did not learn that FRBNY would demand voting
convertible preferred stock or that FRBNY would create a Trust until after
September 16, 2008.
(a) Bernanke was informed “a couple of days after September 16” that “the warrants had
been changed to a preferred stock issuance and that there would be a Trust” (Bernanke
18.0 FACED WITH DEFENDANT’S NON-NEGOTIABLE DEMANDS, ITS THREAT
TO CALL ITS SECURED DEMAND NOTES, AND THE OPINION OF AIG
COUNSEL THAT A DECISION TO FILE FOR BANKRUPTCY WOULD NO
LONGER BE PROTECTED BY THE BUSINESS JUDGMENT RULE, AIG HAD
NO CHOICE BUT TO ACCEPT DEFENDANT’S LOAN ON DEFENDANT’S
18.1 The AIG Board of Directors’ outside counsel, Rodgin Cohen of Sullivan &
Cromwell LLP, advised the Board during the September 21, 2008 meeting
that “bankruptcy was a considerably worse alternative now than it was
previously,” (JX 103 at 6), and that “if the Board accepted the Bank
transaction, the Board would have properly exercised its business
judgment,” but that “if the Board chose to file for bankruptcy, he was not
prepared to render a similar opinion to the Board” (JX 103 at 5-6). (See also
Bollenbach (Dec. 4, 2013) Dep. 165:6-25.)
18.1.1 By contrast, during the September 16, 2008 AIG Board meeting,
Cohen had advised the Board that it “could accept either option” of
accepting the proposed credit facility or filing for bankruptcy “if the
Board believed in good faith that that option was in the best interests
of the constituencies to whom the Board now owes its duties” (JX 74
18.2 AIG’s Board had “no choice” except to accept Defendant’s offer on
(a) Geithner: the AIG Board “had no option” (PTX 673 at 24).
(b) The minutes of the September 21 AIG Board meeting report: “Several of the directors
commented that they did not feel as though they had any choice” (JX 103 at 5) and notes
of the meeting state “GM [George Miles] doesn’t think we had choice” and “VR
[Virginia Rometty]: don’t have choice” (PTX 195 at 4).
(c) On September 22, 2008, Jacob Frenkel, Vice Chairman of AIG and a former
Governor of the Bank of Israel, wrote that the Board’s approval of the Credit Agreement
“should not be confused with approval of the robbery – the government stole at a
gunpoint 80 percent of the company” (PTX 228 at 1).
18.3 The Credit Agreement was signed by Liddy on behalf of AIG (Def. Resp. to
Pl. 2nd RFAs No. 457; JX 110 at 66) on the morning of September 23, 2008,
with an effective date of September 22, 2008 (JX 110 at 1, 3).
18.4 AIG’s obligation to issue to Defendant voting preferred stock representing
79.9% of the shareholders’ equity and voting control (JX 107 at 46, § 5.11)
was fixed as of the execution of the Credit Agreement even if Defendant later
unilaterally substituted a different financing structure.
LIDDY worked for Goldman Sachs.
19.0 AIG WAS THE ONLY 13(3) BORROWER IN HISTORY WHOSE
SHAREHOLDERS WERE REQUIRED TO SURRENDER 79.9% OF THEIR
EQUITY AND VOTING CONTROL AS CONSIDERATION FOR A 13(3) LOAN.
(a) Def. Resp. to Pl. 1st RFAs No. 18.0: Since “1938 no federal reserve bank has
received equity in any company in exchange for providing that company access to credit
under Section 13(3).”
PRIOR TO THE EXECUTION OF THE CREDIT AGREEMENT, NEITHER
THE BOARD OF GOVERNORS NOR ANY OTHER GOVERNMENT OFFICIAL
UNDERTOOK ANY INVESTIGATION OR ANALYSIS, OR MADE ANY
FINDINGS, OR ALLOWED AIG OR PLAINTIFFS ANY MEANINGFUL
OPPORTUNITY TO BE HEARD AS TO WHAT PERCENTAGE OF EQUITY OR
VOTING CONTROL WAS APPROPRIATE TO DEMAND.
20.1 Government officials neither conducted nor were aware of any analysis
concerning the requirement of a 79.9% equity interest as a condition of the
13(3) loan to AIG.
NEITHER THE FEDERAL RESERVE NOR TREASURY HAD THE
AUTHORITY TO ACQUIRE EQUITY AND VOTING CONTROL AS A
CONDITION OF MAKING A 13(3) LOAN.
21.1 The Federal Reserve had no authority to purchase or hold equity.
(a) 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 409 at 177).
(b) Bernanke: “The Federal Reserve is authorized under the Federal Reserve Act to
extend credit in various forms, but is not authorized to purchase equity securities of
financial institutions” (PTX 363 at 2).
(c) Bernanke: We “had only one tool, and that tool was the ability of the Federal Reserve
under 13(3) authority to lend money against collateral. Not to put capital into a company
but only to lend against collateral” (PTX 548 at 28).
(d) Paulson, referring to the Federal Reserve: “They legally couldn’t do preferred. They
legally could only make a loan” (PTX 417 at 11).
(e) “The Federal Reserve is only, by statute only allowed to extend credit to
organizations. It is not empowered to make any type of investments or equity injections”
(PTX 545 at 82).
(f) “FRBNY does not have authority to purchase equity under the Federal Reserve Act”
(PTX 361 at 12).
(g) “Corporate debt and equity instruments are not included among the assets that may be
acquired under Section 14” of the Federal Reserve Act (PTX 336 at 1 n.2).
(h) FRBNY General Counsel Thomas Baxter wrote to Federal Reserve General Counsel
Scott Alvarez confirming “we agree that there is no power” for the Federal Reserve “to
hold AIG shares” (PTX 320 at 1).
(i) FRBNY’s independent auditor Deloitte: “FRBNY cannot legally control a
commercial company, and therefore it is not appropriate for them to consolidate an entity
it cannot legally own” (PTX 448 at 6).
21.2 In September 2008, Treasury had no authority to purchase or hold equity.
(a) Defendant’s Rule 30(b)(6) witness: The “Treasury Department as of September of
2008 had no budgetary authority to invest in equities, securities of any financial
institution” (US 30(b)(6) (Millstein) (Dec. 18, 2012) Dep. 75:19-76:10).
(b) FRBNY counsel to Federal Reserve Board officials on September 17, 2008,
concerning “Issues with regard to the NY Fed/Treasury’s equity participation in AIG:”
Treasury “consider themselves legally unable to assume ownership. This leaves the
NYFed as Treasury’s place to house the equity position” (PTX 143 at 2)
(c) September 17, 2008 report of Treasury’s external counsel at Wachtell: “Treasury
legal is telling, as per doj, that they cannot hold voting shares” (PTX 135 at 1).
(d) TARP Chief Investment Officer Jim Lambright: In “September when the Fed
extended the credit facility, the government didn’t have an equity tool” (PTX 402 at 7).
(e) Board of Governors Legal Division: “We understand that the Treasury lacks the legal
authority to hold directly voting stock of AIG” (PTX 370 at 3). (See Alvarez Dep. 86:6-
“Q. And prior to TARP’s approval, Treasury did not have the authority to purchase
equity, either. Right?
A. Correct.” (Paulson Dep. 177:17-21). (See also PTX 362 at 1; PTX 278 at 20.)
(g) Even though Congress provided Treasury with authority to purchase equity in EESA,
12 U.S.C. § 5223, that authority was still far more limited than the taking and/or illegal
exaction provided for by the Credit Agreement. See COL ¶¶ 92-94. As FRBNY
Assistant General Counsel Stephanie Heller recognized in March 19, 2009: “There were
questions at that time which continue today as to whether Treasury or the FRBNY have
authority to ‘own’ voting shares of a company. As I mentioned, the TARP legislation
(section 113(d)) suggests that Treasury cannot have voting control” (PTX 2067 at 1).
22.5 The Trust was nothing more than a legal shell for Defendant.
22.5.1 Defendant was always the beneficiary of AIG Equity in all its forms.
(a) FRBNY paid $500,000 for the Series C Preferred Stock at the closing of the
Credit Agreement, for which it would be reimbursed by the Trust (PTX 1635 at
(b) The Trust ultimately reimbursed FRBNY for the payment of the $500,000
credit given to AIG after the Trust was created (JX 107 at 37-38; PTX 448 at 2;
PTX 1635 at 1; PTX 2009 at 1).
(c) The “United States performed the accounting and reporting on its financial
statements for its beneficial interest in the Preferred Stock held by the Trust”
(Def. Resp. to Pl. 2nd Set of RFAs No. 748).
(d) The 2009, 2010 and 2011 Financial Reports of the United States Government
reflect the value of the United States’ beneficial interest in the Preferred Stock as
of September 30, 2009 and as of September 30, 2010 (Def. Resp. to Pl. 2nd Set of
RFAs No. 752).
(e) Although the Trust held the Preferred Shares, it never held the AIG common
stock. (Def. Resp. to Pl. 2nd Set of RFAs No. 745). The Trust dissolved on
January 14, 2011 without having ever held or sold any AIG Common Stock (id.
(f) The Recapitalization Plan resulted in the direct transfer of AIG common stock
exchange for the Series C Preferred Stock to Defendant (Def. Resp. to Pl. 2nd Set
of RFAs No. 740).
(g) Defendant eventually sold the common stock, holding on to the cash proceeds
(Def. Resp. to Pl. 2nd Set of RFAs No. 741-744).
(h) In sum, there is no meaningful distinction between identifying the beneficiary
of the Trust as the United States Treasury or the Department of the Treasury (JX
106 at 1-2).
25.1.4 On or about March 26, 2014 Bank of America agreed to pay $9.3
billion to settle claims brought by the Federal Housing Financing
Agency under its statutory mandate to recover losses incurred by
Fannie Mae and Freddie Mac accusing the bank of misrepresenting
the quality of loans underlying residential mortgage-backed
securities purchased by the two mortgage finance companies
between 2005 and 2007 (PTX 2504).
26.2 AIG in fact did not take excessive risk from an ex ante standpoint (the only
standpoint relevant to fault).
(a) Scott Polakoff, Acting Director, Office of Thrift Supervision: “AIGFP’s role was not
underwriting, securitizing, or investing in subprime mortgages” (PTX 449 at 58).
(b) As of September 2008, AIGFP’s Multi-Sector CDS Portfolio accounted for
approximately 3 percent of the notional value of AIGFP’s total credit and non-credit
derivatives exposure, and less than 20 percent of AIGFP’s total credit derivatives
portfolio (PTX 589 at 31-32).
(c) Office of Thrift Supervision Acting Director Polakoff: “AIGFP’s procedures required
modeling based on simulated periods of extended recessionary environments (i.e., ratings
downgrade, default, loss, recovery). Up until June 2007, the results of the AIGFP models
indicated that the risk of loss was a remote possibility, even under worst-case scenarios.
The model used mainstream assumptions that were generally acceptable to the rating
agencies, PwC, and AIG” (PTX 449 at 59).
26.3 The collateral calls AIGFP was facing were based on artificially depressed
prices driven in part by lack of information, which in turn led to
indiscriminate liquidity flight, and market failure.
(a) Geithner: “As the crisis escalated, markets continued to run from mortgage assets that
looked toxic, and as investors shunned them, they became toxic” (PTX 709 at 154).
26.3.1 Financial firms such as AIG are “particularly vulnerable” to a
“crisis of confidence and panic selling” (PTX 168 at 1)
In September 2008, Defendant provided emergency assistance to money
(b) On September 19, 2008, Paulson announced that Treasury would use up to $50
billion of the Exchange Stabilization Fund to guarantee shares in money market funds.
(PTX 171). The announcement, combined with the other Federal Reserve provisions of
liquidity to the broader markets, “helped prevent other funds from breaking the buck”
(PTX 709 at 218-19).
26.12 In September 2008, Defendant allowed Morgan Stanley and Goldman Sachs
to become bank holding companies.
26.12.1 On September 18-19, 2008, Defendant concluded that Morgan
Stanley and Goldman Sachs would fail without additional assistance.
(a) By the morning of September 18, 2008, the remaining investment banks
“were under siege”. Morgan Stanley’s clients withdrew $32 billion from the firm.
Even Goldman Sachs, the strongest of the investment banks, lost approximately
$60 billion in liquidity in a week. As Geithner would later acknowledge,
“Goldman was getting killed” (PTX 709 at 214-15).
(b) Geithner: On the morning of September 18, 2008, “I thought the investment
banks were doomed, and I was worried about several major commercial banks.
As the unprecedented runs on money market funds and commercial paper
accelerated, a wave of defaults by major nonfinancial corporations seemed likely
as well. My colleagues and I thought we were looking at another global
depression that would hurt billions of people” (PTX 709 at 215).
(c) On September 19, 2008, Morgan Stanley and Goldman Sachs expressed
concerns to FRBNY that they would not be able to open for business on Monday
(PTX 175 at 1; PTX 174 at 1).
26.12.2 After learning that Morgan Stanley and Goldman Sachs were likely
to fail, Defendant provided immediate non-punitive assistance by
allowing them to become bank holding companies.
(a) On the weekend of September 20-21, 2008, Defendant attempted to find
potential acquirers for Morgan Stanley and Goldman Sachs, but could not. (PTX
709 at 220-21).
(b) On the morning of September 20, 2008, Geithner’s Chief-of-Staff Michael
Silva reported to several senior officials at FRBNY that options being actively
discussed for Morgan Stanley and Goldman Sachs included sovereign wealth fund
capital injections, mergers with or acquisition by a bank, or becoming a bank
holding company (PTX 174 at 1).
(c) On September 21, 2008, FRBNY Executive Vice Presidents William Dudley
and Terrence Checki told Geithner that they were unable to find buyers for
Goldman Sachs and Morgan Stanley. They proposed the alternative that the
Federal Reserve approve the conversion of both investment banks into bank
holding companies like Citi and JP Morgan. The conversion “would create the
impression that they were under the umbrella of Fed protection” (PTX 709 at 221;
see also Geithner Dep. 127:6-12).
(d) Morgan Stanley and Goldman Sachs first applied to be bank holding
companies on the weekend of September 20-21, 2008 (Checki Dep. 74:12-75:21,
80:20-23). Morgan Stanley and Goldman Sachs were, “at that point, at the risk of
failing” (Geithner Dep. 117:7-19).
(e) Neither Morgan Stanley nor Goldman Sachs were regulated by the Federal
Reserve prior to September 21, 2008 (Morgan Stanley 30(b)(6) (Setya) Dep. 12:3-
15; PTX 202).
(f) On September 21, 2008, the Federal Reserve announced that it had approved
the applications of Goldman Sachs and Morgan Stanley to become bank holding
companies (PTX 198). The Federal Reserve waived the usual five-day waiting
period to make these approvals (PTX 220).
(g) The approval of Goldman Sachs’ and Morgan Stanley’s applications to
become bank holding companies “benefitted” both firms (Geithner Dep. 152:7-
16). Geithner: Morgan Stanley and Goldman Sachs “transformed their business
structure to avoid failure” (PTX 709 at 272). Absent their conversion into bank
holding companies, there was “significant risk that both would fail” (Geithner
26.13 In September 2008, the Federal Reserve continued to provide non-punitive
assistance to primary dealers, including Morgan Stanley, Merrill Lynch and
(a) Geithner: On September 19, 2008, “the SEC temporarily banned the short selling of
799 financial stocks….The ban’s most immediate beneficiary appeared to be Morgan
Stanley…. Its liquidity pool had shrunk from $130 billion to $55 billion in a week; it was
borrowing nearly $70 billion from the Fed to make up the difference. Its stock price fell
60 percent before word of the short-selling ban leaked” (PTX 709 at 219-20).
(b) On September 29, 2008, Morgan Stanley’s outstanding borrowing from all federal
loan facilities was approximately $107 billion (Morgan Stanley 30(b)(6) (Setya) Dep.
22:9-14, 28:5-10, 29:25-30:15).
(c) On September 29, 2008, Morgan Stanley’s borrowing from the PDCF exceeded $60
billion (Morgan Stanley 30(b)(6) (Setya) Dep. 17:18-18:4, 29:25-30:15).
(d) PDCF borrowing was a benefit for Morgan Stanley because it was a source of
liquidity (Morgan Stanley 30(b)(6) (Setya) Dep. 19:20-23).
26.14 In 2008 and 2009, Defendant provided non-punitive assistance to Citigroup
and Bank of America.
(a) On October 3, 2008, the Emergency Economic Stabilization Act (“EESA”) was
enacted (P.L. 110-342, Oct. 3, 2008, 122 Stat. 3765). EESA authorized Defendant to
purchase up to $700 billion in troubled assets (PTX 2156 at 14).
(b) On October 28, 2008, Treasury purchased $125 billion in non-voting preferred stock
from nine financial institutions, including $15 billion from Bank of America and $25
billion from Citigroup (PTX 1864 at 8).
(c) On November 23, 2008, Treasury announced the Targeted Investment Program
(“TIP”) and Asset Guarantee Programs (“AGP”) (PTX 554 at 20).
(d) TIP gave Treasury “the necessary flexibility to provide additional or new funding to
financial institutions that were critical to the functioning of the financial system” (PTX
554 at 34). Treasury “invested $20 billion in each of Bank of America (BofA) and
Citigroup under the TIP” (Id.).
(e) The AGP was designed “to provide protection against the risk of significant loss in a
pool of assets held by a systemically significant financial institution” (PTX 554 at 36).
(f) On November 23, 2008, the Federal Reserve, Treasury, and the FDIC announced that
they would provide a package of guarantees, liquidity access, and capital to Citigroup.
Case 1:11-cv-00779-TCW Document 281-1 Filed 08/22/14 Page 65 of 99Under the terms of the support package, Defendant guaranteed up to $306 billion in
assets (PTX 379 at 1, 3).
(g) The Federal Reserve provided its guarantee to Citi using its Section 13(3) authority
(PTX 379 at 1).
(h) On December 31, 2008, under TIP, Treasury purchased another $20 billion in
Citigroup perpetual preferred stock and warrants (PTX 1864 at 4).
(i) On January 15, 2009, Treasury, FDIC, and the Federal Reserve agreed to provide
Bank of America with assistance, including the purchase of “an additional $20 billion in
newly issued senior preferred stock of Bank of America” under TIP (PTX 406 at 1, 3).
The Defendant also agreed to provide an “Eligible Asset Guarantee” on a pool of assets
up to $118 billion. (Id. at 6 (Attached “Summary of Terms”)).
26.15 In 2009, Defendant provided non-punitive assistance to a major insurance
(a) On June 26, 2009, Treasury purchased $3.4 billion in preferred stock from Hartford
Financial Services Group, Inc., a thrift holding company primarily engaged in the
business of insurance (PTX 2150 at 13; PTX 2189 at 203).
27.3.1 The Defendant recruited directors for AIG.
(a) Defendant admits that “FRBNY employees participated in the recruitment”
“of new AIG board members” (Def. Resp. to Pl. 2nd RFAs No. 806).
(b) FRBNY Vice President Dahlgren told Michael Hsu of Treasury that the Board
of Governors “wanted FRBNY to have people lined up to replace the board of
directors” (PTX 428).
(c) In April 2009, Defendant planned to replace the Board of Directors and
appoint two lead directors to serve as the “governmental face of” AIG. Defendant
also planned to require the new directors to replace AIG management (PTX 496
(d) On April 3, 2009 FRBNY Vice President Dahlgren told Liddy that Treasury
“would be recruiting two very high profile directors (‘wow factor’) in the
immediate term” (PTX 2077 at 1).
27.3.2 Defendant decided which directors would stay and which would be
(a) AIG Director Martin Feldstein left the Board because Treasury “decided that
it wanted to have different representation on the Board” (Feldstein Dep. 259:20-
(b) Defendant asked AIG Director George Miles to “stay on and then, over the
course, they’d put new directors on and then we would resign.” He agreed to do
so (Miles Dep. 183:4-185:25).
(c) AIG Director Bollenbach “chose not to stand for reelection to AIG’s board”
because Defendant proposed that he “stand for reelection, but then be prepared to
resign when someone else was brought on” (Bollenbach Dep. (Dec. 4, 2013)
(d) With respect to the election of directors to the AIG Board proposed in the
2009 proxy statement, Glass Lewis, a proxy advisory service which provided the
AIG Board of Directors with an analysis on June 18, 2009 of the proxy statement
for the 2009 annual meeting of AIG shareholder, stated: “Following the
resignation of Mr. Bollenbach from the board at the 2009 annual meeting, the
Company will not have an independent chairman or an independent lead or
presiding director” (PTX 528 at 58).
(e) At the June 30, 2009 annual meeting of AIG shareholders, six new directors
were elected to AIG’s Board (JX 251 at 22-23). All were selected by Defendant.
(f) In 2010, Treasury appointed Donald H. Layton and Ronald A. Rittenmeyer to
AIG’s Board of Directors pursuant to its rights under the Series E and F Preferred
Stock (JX 256 at 2).
(g) The terms of the Series E and Series F stock did not impose any restrictions
on Treasury’s discretion in appointing directors (JX 208 at 4).
29.3 Defendant developed the Reverse Stock Split as an alternative in order to
circumvent the shareholder vote requirement.
(a) A November 19, 2008 e-mail from FRBNY outside counsel James Brandow, Davis
Polk & Wardwell LLP: We “have an alternative for the sale of the investment if the
convertible preferred can’t be converted” (JX 156 at 1).
(b) A December 19, 2008 draft AIG proxy statement received by Defendant includes
votes on charter amendments necessary to enable conversion of the Series C Preferred
Stock as well as a proposed reverse stock split of outstanding common stock at a ratio of
one for ten (JX 164 at 4; Def. Resp. to Pl. 2nd Interrogatories No. 5).
(c) A member of the FRBNY Monitoring Team attended the February 10, 2009 meeting
of the Finance Committee of the AIG Board of Directors at which the ratio for the
proposed reverse stock split was discussed (JX 178 at 1, 7).
29.3.1 In order to implement Defendant’s planned “exchange,” it was still
necessary to have enough common shares to satisfy Defendant’s
desire to exchange its AIG preferred stock for AIG common stock.
29.3.2 Defendant caused AIG to engage in a 20 to 1 reverse stock split
(“RSS”) that applied only to issued shares and not authorized shares
(JX 197 at 2; JX 201 at 5).
29.4 The Reverse Stock Split was coercive and deceptive.
30.0 THE FAIR VALUE OF THE 79.9% OF AIG SHAREHOLDERS’ EQUITY AND
VOTING CONTROL DEFENDANT ACQUIRED SEPTEMBER 22, 2008 WAS A
MINIMUM OF APPROXIMATELY $35 BILLION.
30.1 Defendant paid only $500,000 for 79.9% of AIG’s shareholders’ equity.
30.1.1 The only payment made to AIG for AIG’s Series C Preferred Stock
was $500,000 in loan forgiveness that FRBNY provided to AIG in
September 2008 (JX 107 at 37-38 § 4.02(e), 138).
30.1.2 As AIG’s Senior Vice President Brian Schreiber on January 13,
2010 told the AIG Board of Directors: The “Treasury Department’s
priority is the repayment of the Series E and Series F Preferred
Stock, as the Series C was essentially received for nothing” (PTX 584
(a) A presentation for the AIG Board of Directors by Bank of America and Citi
on September 29, 2010: “Series C was received by UST for no financial
consideration; merely to obtain governance rights until FRBNY Facility repaid”
(PTX 609 at 86).
30.2 Defendant asserts that market-based valuations are the most reliable way to
value equity generally and Defendant’s 79.9% equity interest in AIG
“THE WITNESS: I don’t think that economists can do much better than seeing the share
price in terms of valuing a company.
Q. So from, from your perspective, the best an economist can do to figure out what the
value of the company is is to look at the share price on any given day and multiply it by
the number of outstanding shares? . . . Is that what you’re saying?
A. That’s what I’m saying” (Bernanke Dep. 163:4-16).
(b) Def. Resp. to Pl. 3rd Interrogatories No. 18: Because “the Series C Preferred Stock
was economically equivalent to AIG’s common stock and AIG’s common stock was
actively traded on the New York Stock Exchange, the market value per share of AIG’s
common stock represented the best independent valuation available for valuing the
government’s beneficial interest in the Trust.”
30.3 Defendant, AIG, KPMG and Deloitte all utilized market-based approaches to
calculate the value of Defendant’s 79.9% equity interest.
(a) “In its annual financial statements for the years ended September 30, 2009 and 2010,
Treasury recorded the value of its beneficial interest in the Trust based on the market
Case 1:11-cv-00779-TCW Document 281-1 Filed 08/22/14 Page 82 of 99value of the Trust’s holdings of the AIG Series C Preferred Stock at the date of each such
financial statement” (Def. Resp. to Pl. 3rd Interrogatories No. 18).
(b) “The United States admits that its financial statement reported that the value of the
Government’s beneficial interest in the Trust was $23.5 billion, based on the market
value of the Trust’s AIG holdings on September 30, 2009” (Def. Resp. to Pl. 2nd RFAs
(c) AIG in its 10-Q for the third quarter of 2008 reported that the obligation to issue the
Series C Preferred Stock had a “fair value” of $23 billion (JX 150 at 28).
(d) KPMG, AIG’s auditor hired to conduct the valuation of the Series C, determined that
the fair market value of the Series C Preferred Stock as of September 16, 2008 was $23
billion (PTX 375 at 21).
(e) On September 21, 2008, Deloitte & Touche, the independent auditor of the Federal
Reserve System, calculated that Defendant’s 79.9% equity interest in AIG had a value
approximately $24.478 billion, based on the September 17, 2008 market price for AIG’s
common stock (PTX 185 at 1-2).
30.5.1 Under a market-based valuation approach, the property taken from
the AIG common shareholders had a fair market value of $50.449
billion, $53.442 billion and $35.378 billion on September 22, 23, and
24, 2008, respectively (PTX 2494 at 29), and, on a per share basis,
the property taken from the Credit Agreement Class had a fair
market value of $18.76, $19.88 and $13.16 per share on September
22, 23, and 24, 2008, respectively (PTX 2494 at 34 ).
30.6 Defendant sold the common stock exchanged for the Series C Preferred for
at least $17.6 billion.
30.6.1 From May 24, 2011 through December 14, 2012, Defendant 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 (see PTX 2453
30.6.2 Assuming that the common shares received in exchange for Series C
Preferred are treated as being sold pro rata with common shares
received in exchange for Series E and F Preferred (which for the
reasons stated in Findings 29.7 to 29.9 understates what the proceeds
from the common shares received in exchange for Series C Preferred
should be) the amount received for the common shares received in
exchange for the Series C Preferred would be $17.6 billion (Kothari
Report n.197; PX 2494 at 50).
30.7 The prices received by Defendant for its sales of AIG common shares was
artificially reduced by damage done to AIG’s business, operations, and assets
as the result of Defendant’s control over AIG.
30.7.1 Defendant reduced the value of AIG common shares by giving up
value to Defendant in ML II and ML III.
(a) Government Accountability Office Interview with AIG Executives: “In
general, AIG ‘got skinned’ on ML III, with terms unfavorable to the company.
ML III forced AIG to ‘crystallize’ a loss, which severely hurt existing
shareholders. This is because they then had no chance of recovery, other than
through AIG’s minor participation in the structure. There was little upside for
shareholders if asset values increased, because they had the first loss position, but
little equity return; nearly all the upside went to the structure. Also, unrealized
market value losses on the CDOs going into ML III became realized losses when
the CDS were torn up. Further, collateral that AIG had posted went to the
counterparties. ‘It was a tough set of terms’” (PTX 620 at 10).
(b) AIG Senior Vice President for Strategic Planning Brian Schreiber: “ML II and
ML III, when they were created, transferred the bulk of the upside to the Treasury
or to the Fed at the time. The AIG shareholders, as a result, wouldn’t be able to
participate fully in the recovery” (Schreiber Dep. 260:10-261:2)
30.7.2 Defendant reduced the value of AIG common shares by not
negotiating discounts from ML III counterparties and by giving such
counterparties 100% par value plus releases of claims that had
substantial value to AIG.
30.8 Defendant diluted the value of the common stock it received in exchange for
its Series C Preferred Stock by using its control of AIG to exchange its Series
E and Series F Preferred Stock for common stock and then selling those
additional shares pro rata with the shares exchanged for the Series C
30.8.1 “Between fiscal years 2011 and 2013, the Department sold all of its
1.7 billion AIG common shares held by the General Fund and TARP
together, on a pro-rata basis, in the open market” (PTX 685 at 89).
30.9 Defendant reduced the value of the common stock it received in exchange for
the Series C Preferred Stock by its decision to liquidate when and how it did.
30.9.1 Plaintiffs’ Expert S.P. Kothari: “The choice of when to liquidate
these securities was an investment decision by the Government” and
if the Government had “chosen to continue to hold all its AIG stock
until December 31, 2013” the value of the value of the Series C
Preferred Stock would have been $28.7 billion (Kothari Report ¶