Starr International, a shareholder of AIG, is run by AIG’s former leader, Hank Greenberg. In Starr Intern’l v. Federal Reserve Bank of New York, Judge Engelmayer takes on Starr’s charge that the FRBNY ran roughshod over AIG’s shareholders when it bailed out AIG during the 2008 financial crisis. Judge Engelmayer describes Starr’s complaint as painting “a portrait of government treachery worthy of an Oliver Stone movie.” But like much of Oliver Stone’s work, the Judge found the complaint contains more imagination than fact.

According to Starr, the FRBNY exploited its financial rescue of AIG to create “a backdoor bailout” of other banks. In particular, the FRBNY required AIG to satisfy its outstanding credit default swap contracts (insurance that AIG provided to banks for the banks’ disastrous subprime mortgage loans) on “terms needlessly detrimental to AIG.” The complaint also alleges that the FRBNY circumvented Delaware law anti-dilution provisions by grabbing 80 per cent of AIG’s common stock. Because the FRBNY was alleged to have “de facto” control of AIG by reason of its rescue package, Starr alleged it “stood in a fiduciary relationship to AIG’s other shareholders…,” and had to act in the shareholders’ interests. 

Judge Engelmayer determined that “against the settled standards of corporate control under Delaware law, Starr has not adequately pled that FRBNY controlled AIG at the time of the… challenged transactions,” and that therefore “has not adequately pled that FRBNY was at those times a fiduciary to AIG and its shareholders.” Judge Engelmayer found that AIG’s board was independent of the FRBNY, elected “through the ordinary mechanisms of corporate democracy.” According to the Judge, the decision to accept the federal rescue package describes “a moment of corporate desperation, in which AIG’s board grabbed the sole lifeline expended to the company. Merely because the AIG board felt it had ‘no choice’ but to accept bitter terms from its sole available rescuer does not mean that the rescuer actually controlled the company.”

But the Court went even further and determined that the FRBNY was a federal instrumentality, exempt from state fiduciary law. Otherwise, the FRBNY would be charged with “fundamentally  incompatible missions.” On the one hand, it would be charged with the “unyielding duty” under Delaware law to further the interests of AIG shareholders, and, on the other hand, to act as “a custodian of the stability of the national banking system.” In these circumstances the federal mission, and federal law, take precedence. Judge Engelmayer found that the FRBNY’s judgment that the “stability of the U.S. economy required decisively terminating AIG’s exposure to counterparties; and that paying par value – as opposed to opening up a bazaar of uncertain any maybe protracted negotiations with counterparties- was the best means to attain such closure” shouldn’t be second guessed.

The decision runs 89 pages, and includes an informative “good read” of the reasons for AIG’s meltdown, and the role of the Federal Reserve in our economy. In the end, Judge Engelmayer dismissed Starr’s entire suit with prejudice, finding no government treachery. “It is, however, one thing to make a sweeping and dramatic claim of government misconduct. It is quite another to plead plausibly… and based on concrete factual allegations… that FRBNY exercised control over AIG.”