In the United States Court of Federal Claims
No. 11-779C
(Filed: June 15, 2015)
*************************************
*
STARR INTERNATIONAL COMPANY, *
INC., in its own right and on behalf of two *
classes of others similarly situated,
*
*
Plaintiff,
*
v.
*
*
THE UNITED STATES,
*
*
Defendant.
*
*
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Government’s Financial Rescue and
Takeover of American International
Group (AIG); Fifth Amendment
Taking and Illegal Exaction Claims;
Shareholder Class Action; Demand
for Corporate Equity and Voting
Control as Consideration for Loan;
Section 13(3), Federal Reserve Act;
Effect of AIG Board’s Approval of
Terms; Damages; Economic Loss
Analysis.

David Boies, with whom were Robert B. Silver, Robert J. Dwyer, Alanna C. Rutherford,
Amy J. Mauser, Abby Dennis, Julia C. Hamilton, Laura Harris, Ilana Miller, John
Nicolaou, Matthew R. Shahabian, David L. Simons, Craig Wenner, William Bloom, and
James A. Kraehenbuehl, Boies, Schiller & Flexner LLP, Armonk, New York, and John L.
Gardiner, R. Ryan Stoll, and Gregory Bailey, Skadden, Arps, Slate, Meagher & Flom
LLP, New York City, New York, for Plaintiff.
Brian A. Mizoguchi, Assistant Director, with whom were Benjamin C. Mizer, Acting
Assistant Attorney General, Robert E. Kirschman, Jr., Director, Kenneth M. Dintzer,
Deputy Director, Scott D. Austin, Claudia Burke, and Joshua E. Gardner, Assistant
Directors, John Roberson and John J. Todor, Senior Trial Counsel, Renee Gerber,
Matthew F. Scarlato, Mariana T. Acevedo, David D’Alessandris, Vincent D. Phillips, and
Zachary J. Sullivan, Trial Attorneys, Commercial Litigation Branch, Civil Division, U.S.
Department of Justice, Washington, D.C., for Defendant.
OPINION AND ORDER
WHEELER, Judge.
Plaintiff Starr International Company, Inc. (“Starr”) commenced this lawsuit
against the United States on November 21, 2011. Starr challenges the Government’s
financial rescue and takeover of American International Group, Inc. (“AIG”) that began

 on September 16, 2008. Before the takeover, Starr was one of the largest shareholders of
AIG common stock. Starr alleges in its own right and on behalf of other AIG
shareholders that the Government’s actions in acquiring control of AIG constituted a
taking without just compensation and an illegal exaction, both in violation of the Fifth
Amendment to the U.S. Constitution. The controlling shareholder of Starr is Maurice R.
Greenberg, formerly AIG’s Chief Executive Officer until 2005, and one of the key
architects of AIG’s international insurance business. Starr claims damages in excess of
$40 billion.
On the weekend of September 13-14, 2008, known in the financial world as
“Lehman Weekend” because of the impending failure of Lehman Brothers, U.S.
Government officials feared that the nation’s and the world’s economies were on the
brink of a monumental collapse even larger than the Great Depression of the 1930s.
While the Government frantically kept abreast of economic indicators on all fronts, the
leaders at the Federal Reserve Board, the Federal Reserve Bank of New York, and the
U.S. Treasury Department began focusing in particular on AIG’s quickly deteriorating
liquidity condition. AIG had grown to become a gigantic world insurance conglomerate,
and its Financial Products Division was tied through transactions with most of the leading
global financial institutions. The prognosis on Lehman Weekend was that AIG, without
an immediate and massive cash infusion, would face bankruptcy by the following
Tuesday, September 16, 2008. AIG’s failure likely would have caused a rapid and
catastrophic domino effect on a worldwide scale.
On that following Tuesday, after AIG and the Government had explored other
possible avenues of assistance, the Federal Reserve Board of Governors formally
approved a “term sheet” that would provide an $85 billion loan facility to AIG. This
sizable loan would keep AIG afloat and avoid bankruptcy, but the punitive terms of the
loan were unprecedented and triggered this lawsuit. Operating as a monopolistic lender
of last resort, the Board of Governors imposed a 12 percent interest rate on AIG, much
higher than the 3.25 to 3.5 percent interest rates offered to other troubled financial
institutions such as Citibank and Morgan Stanley. Moreover, the Board of Governors
imposed a draconian requirement to take 79.9 percent equity ownership in AIG as a
condition of the loan. Although it is common in corporate lending for a borrower to post
its assets as collateral for a loan, here, the 79.9 percent equity taking of AIG ownership
was much different. More than just collateral, the Government would retain its
ownership interest in AIG even after AIG had repaid the loan.
The term sheet approved by the Board of Governors contained other harsh terms.
AIG’s Chief Executive Officer, Robert Willumstad, would be forced to resign, and he
would be replaced with a new CEO of the Government’s choosing. The term sheet
included other fees in addition to the 12 percent interest rate, such as a 2 percent
2

 commitment fee payable at closing, an 8 percent undrawn fee payable on the unused
amount of the credit facility, and a 2.5 percent periodic commitment fee payable every
three months after closing. Immediately after AIG began receiving financial aid from the
Government on September 16, 2008, teams of personnel from the Federal Reserve Bank
of New York and its advisers from Morgan Stanley, Ernst & Young, and Davis Polk &
Wardwell, descended upon AIG to oversee AIG’s business operations.
The
Government’s hand-picked CEO, Mr. Edward Liddy, assumed his position on September
18, 2008. Although the AIG Board of Directors approved the Government’s harsh terms
because the only other choice would have been bankruptcy, the Government usurped
control of AIG without ever allowing a vote of AIG’s common stock shareholders.
Out of this nationalization of AIG, Starr has identified two classes of common
stock shareholders that were affected by the Government’s actions: (1) a class comprised
of AIG shareholders who held common stock during September 16-22, 2008 when the
Government took 79.9 percent ownership of AIG in exchange for the $85 billion loan;
and (2) a reverse stock split class comprised of AIG shareholders who held common
stock on June 30, 2009 when the government-controlled board engineered a twenty-forone reverse stock split to reduce the number of AIG’s issued shares, but left the number
of authorized shares the same. The Court formally certified these two classes of
shareholders as plaintiffs on March 11, 2013. See Starr Int’l Co. v. United States, 109
Fed. Cl. 628 (2013). Under the Court’s Rule 23 “opt in” procedure to join in a class
action, 274,991 AIG shareholders have become class plaintiffs in this case.
The main issues in the case are: (1) whether the Federal Reserve Bank of New
York possessed the legal authority to acquire a borrower’s equity when making a loan
under Section 13(3) of the Federal Reserve Act, 12 U.S.C. § 343 (2006); and (2) whether
there could legally be a taking without just compensation of AIG’s equity under the Fifth
Amendment where AIG’s Board of Directors voted on September 16, 2008 to accept the
Government’s proposed terms. If Starr prevails on either or both of these questions of
liability, the Court must also determine what damages should be awarded to the plaintiff
shareholders. Other subsidiary issues exist in varying degrees of importance, but the two
issues stated above are the focus of the case.
The Court conducted a 37-day trial in Washington, D.C. spanning from September
29 through November 24, 2014. The Court heard the testimony of 36 witnesses, 21 for
Plaintiff’s case, and 15 for Defendant’s case. Plaintiff’s fact witnesses were, in the order
presented: Scott Alvarez, Thomas Baxter, Patricia Mosser, Henry Paulson, Timothy
Geithner, Ben Bernanke, Alejandro LaTorre, Susan McLaughlin, Margaret McConnell,
Sarah Dahlgren, Edward Liddy, Chester Feldberg, Douglas Foshee, Mark Symons,
Kathleen Shannon, James Head, and Donald Farnan. Plaintiff’s four expert witnesses
were: Luigi Zingales, Paul Wazzan, S.P. Kothari, and Michael Cragg. Defendant’s fact
3

 witnesses were, in the order presented: Andrew Colaninno, John Brandow, Marshall
Huebner, Robert Willumstad, Brian Schreiber, Robert Reeder, David Herzog, James Lee,
Peter Langerman, Morris Offit, and Howard Smith. Defendant’s four expert witnesses
were: Jonathan Neuberger, David Mordecai, Anthony Saunders, and Robert Daines. The
Court also received the video deposition testimony of John Studzinski, a witness who
lives abroad. The trial record consists of 8,812 transcript pages and more than 1,600
exhibits. 1
Certain waivers of the attorney-client privilege occurred during the course of the
proceedings. In the discovery phase, due to the Government’s assertion of a defense that
the Federal Reserve Bank’s taking of a borrower’s equity under Section 13(3) of the
Federal Reserve Act was legal, the Court ruled that any privileged communications
among the Department of the Treasury, the Federal Reserve Board, the Federal Reserve
Bank of New York (“FRBNY”), and their counsel relating to the issue of legality must be
produced. See Discovery Order No. 6, Nov. 6, 2013, at 2-3, Dkt. No. 182. During trial,
the Court expanded this ruling to include the production of prior legal memoranda relied
upon or relating to the propriety and legal limits of agency action under Section 13(3) of
the Federal Reserve Act. See Tr. 1950-55.2 The Court made this ruling upon learning of
the existence of an FRBNY “Doomsday Book” that contains guidance on the range of
permissible government actions in a time of crisis. The Court required FRBNY to
produce these additional documents during trial, and the FRBNY complied. See Boies,
Tr. 3548 (“Treasury has now provided all documents, broadly defined, which concern the
authority of the Federal Reserve or Treasury to acquire or hold equity in connection with
a 13(3) loan.”).
Other waivers of the attorney-client privilege resulted from Defendant’s counsel
calling two Davis Polk & Wardwell lawyers to testify, John Brandow and Marshall
Huebner, and asking them about legal advice they provided to FRBNY and the
Department of Treasury. See, e.g., Tr. 5801 (Mr. Scarlato: “[D]id you think that
disclosing the [New York Stock Exchange] ten-day rule would, in fact, provide a
roadmap to shareholders to seek an injunction?” Mr. Brandow: “No, because there was
no basis for an injunction. . . . [W]ith respect to Delaware law, there was no basis for the
shareholders to have a vote.”); Tr. 5851 (Mr. Scarlato: Did you “provide[] legal advice to
1

The Court has included a description of the relevant entities and persons in an Appendix to this opinion.

The Court will cite to the evidentiary record as follows: August 6, 2014 Stipulations – Stip. ¶ __; Trial
Testimony – Witness name, Tr. page; Joint Exhibits – JX __ at page; Plaintiff’s Exhibits – PTX __ at
page; Defendant’s Exhibits – DX at page. Some of the exhibits have a “U” in the exhibit number to
indicate that, although the documents were originally offered with redactions to protect privileged
material, they were later admitted in unredacted form due to Defendant’s waivers of the attorney-client
privilege, explained below.

2

4

 the New York Fed or Treasury in connection with the exchange transaction?”); Tr. 606162 (Mr. Gardner: “Why did Davis Polk advise that option B was the best yet identified
option?”); Tr. 6130 (Mr. Gardner: What was your “understanding as to why you were
being asked to consider the consequences of an AIG bankruptcy after September 16,
2008?”); Tr. 6135 (Mr. Gardner: “[W]hat advice, if any, did you provide on how
derivative counterparties would respond to a bankruptcy filing by AIG?”); Tr. 6139 (Mr.
Gardner: “[W]hat advice did you provide to the New York Fed or Treasury on the
likelihood that the New York Fed would be fully repaid in the event of a bankruptcy?”);
Tr. 6141 (Mr. Gardner: What was the advice you provided “to the New York Fed and
Treasury after September 2008 regarding the likelihood of policyholder cancellations if
AIG filed for bankruptcy?”).
Defendant’s waiver of the attorney-client privilege was so broad and covered so
many subjects that the Court found a waiver as to any previously privileged documents
relating to the Government’s economic rescue of AIG. Tr. 6249 (Court: “I have the
impression that any communication involving the law firm of Davis Polk & Wardwell
relating to AIG, that the privilege has been waived.”); Tr. 6251-52 (Court: “I think at this
point anything [relating to] AIG has been waived involving Davis Polk.”). The Court’s
ruling required Defendant to produce documents previously claimed to be privileged, and
to uncover redactions from documents offered into evidence. Significantly, the Court
also required the Davis Polk & Wardwell law firm to produce expeditiously internal and
client communications relating to the financial rescue of AIG. Tr. 7224-41 (discussing
the Davis Polk privilege issue and adopting the proposal of a law firm representative, Ms.
Francis Bivens, for the production of internal Davis Polk documents). Davis Polk
complied with the Court’s request using reasonable time and search parameters, but the
documents produced were so extensive that Plaintiff could not review all of them prior to
the close of trial. Accordingly, the Court granted Plaintiff’s post-trial motion to
supplement the evidentiary record with 133 additional exhibits. Order, Jan. 6, 2015, Dkt.
No. 417.
Defendant planned to call as witnesses three other law firm lawyers who served as
outside counsel to AIG. These lawyers were Robert Reeder and Rodgin Cohen from
Sullivan & Cromwell, and Joseph Allerhand from Weil, Gotshal & Manges. Due to the
unequivocal position of AIG to preserve its attorney-client privilege under any
circumstances, tr. 7736-37 (Mr. Carangelo: “AIG’s position has been consistent
throughout this proceeding and throughout discovery to not waive the privilege”), the
Court ruled that these lawyers should not testify. Tr. 7738-39 (Court: “I give paramount
importance to the privilege concerns of AIG . . . I’m not going to hear testimony in open
court from any of these lawyers. So, that includes Mr. Cohen, Mr. Reeder, and Mr.
Allerhand.”). The Court reasoned that the relevant testimony of these persons could only
relate to the professional legal services they furnished to AIG, and therefore presented too
5

 great a risk that AIG’s privilege might be violated. Mr. Reeder had provided preliminary
testimony in the trial, but the Court’s ruling obviated his need to appear further. In the
Court’s view, a stark contrast existed between Defendant’s conscious decision to waive
its own federal agency privilege, and calling AIG lawyers as witnesses that would imperil
AIG’s privilege. See Tr. 7054-55.
Following the completion of trial, the Court received post-trial briefs from the
parties on February 19, 2015, and post-trial response briefs on March 23, 2015. The
Court heard closing arguments from counsel on April 22, 2015.
The weight of the evidence demonstrates that the Government treated AIG much
more harshly than other institutions in need of financial assistance. In September 2008,
AIG’s international insurance subsidiaries were thriving and profitable, but its Financial
Products Division experienced a severe liquidity shortage due to the collapse of the
housing market. Other major institutions, such as Morgan Stanley, Goldman Sachs, and
Bank of America, encountered similar liquidity shortages. Thus, while the Government
publicly singled out AIG as the poster child for causing the September 2008 economic
crisis (Paulson, Tr. 1254-55), the evidence supports a conclusion that AIG actually was
less responsible for the crisis than other major institutions. The notorious credit default
swap transactions were very low risk in a thriving housing market, but they quickly
became very high risk when the bottom fell out of this market. Many entities engaged in
these transactions, not just AIG. The Government’s justification for taking control of
AIG’s ownership and running its business operations appears to have been entirely
misplaced. The Government did not demand shareholder equity, high interest rates, or
voting control of any entity except AIG. Indeed, with the exception of AIG, the
Government has never demanded equity ownership from a borrower in the 75-year
history of Section 13(3) of the Federal Reserve Act. Paulson, Tr. 1235-36; Bernanke, Tr.
1989-90.
The Government did realize a significant benefit in nationalizing AIG. Since most
of the other financial institutions experiencing a liquidity crisis were counterparties to
AIG transactions, the Government was able to minimize the ripple effect of an AIG
failure by using AIG’s assets to make sure the counterparties were paid in full on these
transactions.3 What is clear from the evidence is that the Government carefully
orchestrated its takeover of AIG in a way that would avoid any shareholder vote, and
maximize the benefits to the Government and to the taxpaying public, eventually
According to a chart available to the Government on September 16, 2008, the following financial
institutions were among those with significant economic exposure to AIG: ABN AMRO, Banco
Santander, Bank of America, Barclays, BNP, Calyon, Citigroup, Credit Suisse, Danske Bank, Deutsche
Bank, Goldman Sachs, HSBC, ING, JP Morgan, Merrill Lynch, Morgan Stanley, Rabobank, Société
Générale, and UBS. JX 60 at 3.

3

6

 resulting in a profit of $22.7 billion to the U.S. Treasury. PTX 658. AIG’s benefit was to
avoid bankruptcy, and to “live to fight another day.” PTX 195 at 8; see also testimony of
AIG Board member Morris Offit, Tr. 7392 (“we were giving AIG the opportunity to, in
effect, live, that the shareholder would still have a 20 percent interest rather than being
wiped out by a bankruptcy.”).
The Government’s unduly harsh treatment of AIG in comparison to other
institutions seemingly was misguided and had no legitimate purpose, even considering
concerns about “moral hazard.”4 The question is not whether this treatment was
inequitable or unfair, but whether the Government’s actions created a legal right of
recovery for AIG’s shareholders.
Having considered the entire record, the Court finds in Starr’s favor on the illegal
exaction claim. With the approval of the Board of Governors, the Federal Reserve Bank
of New York had the authority to serve as a lender of last resort under Section 13(3) of
the Federal Reserve Act in a time of “unusual and exigent circumstances,” 12 U.S.C. §
343 (2006), and to establish an interest rate “fixed with a view of accommodating
commerce and business,” 12 U.S.C. § 357. However, Section 13(3) did not authorize the
Federal Reserve Bank to acquire a borrower’s equity as consideration for the loan.
Although the Bank may exercise “all powers specifically granted by the provisions of this
chapter and such incidental powers as shall be necessary to carry on the business of
banking within the limitations prescribed by this chapter,” 12 U.S.C. § 341, this language
does not authorize the taking of equity. The Court will not read into this incidental
powers clause a right that would be inconsistent with other limitations in the statute.
Long ago, the Supreme Court held that a federal entity’s incidental powers cannot be
greater than the powers otherwise delegated to it by Congress. See Fed. Res. Bank of
Richmond v. Malloy, 264 U.S. 160, 167 (1924) (“[A]uthority to do a specific thing
carries with it by implication the power to do whatever is necessary to effectuate the
thing authorized – not to do another and separate thing, since that would be, not to carry
the authority granted into effect, but to add an authority beyond the terms of the grant.”);
see also First Nat’l Bank in St. Louis v. Missouri, 263 U.S. 640, 659 (1924) (“Certainly,
an incidental power can avail neither to create powers which, expressly or by reasonable
implication, are withheld nor to enlarge powers given; but only to carry into effect those
which are granted.”); Suwannee S.S. Co. v. United States, 150 Ct. Cl. 331, 336, 279 F.2d
874, 876 (1960) (“No statute should be read as subjecting citizens to the uncontrolled
caprice of officials.”).

4

“Moral hazard” refers to the Government’s concern that the availability of Federal Reserve bailout loans might
motivate private companies to accept risky propositions, knowing that the Government will extend credit to them if
they fail. The Government’s policy is to discourage such corporate thinking. Geithner, Tr. 1763-64; Bernanke, Tr.
2215-16.

7

 Moreover, there is nothing in the Federal Reserve Act or in any other federal
statute that would permit a Federal Reserve Bank to take over a private corporation and
run its business as if the Government were the owner. Yet, that is precisely what FRBNY
did. It is one thing for FRBNY to have made an $85 billion loan to AIG at exorbitant
interest rates under Section 13(3), but it is quite another to direct the replacement of
AIG’s Chief Executive Officer, and to take control of AIG’s business operations. A
Federal Reserve Bank has no right to control and run a company to whom it has made a
sizable loan. As FRBNY’s outside counsel from Davis Polk & Wardwell observed on
September 17, 2008 in the midst of the AIG takeover, “the [government] is on thin ice
and they know it. But who’s going to challenge them on this ground?” PTX 3283, Davis
Polk email. Answering this question, the “challenge” has come from the AIG
shareholders, whom the Government intentionally excluded from the takeover process.
A ruling in Starr’s favor on the illegal exaction claim, finding that the
Government’s takeover of AIG was unauthorized, means that Starr’s Fifth Amendment
taking claim necessarily must fail. If the Government’s actions were not authorized,
there can be no Fifth Amendment taking claim. See Alves v. United States, 133 F.3d
1454, 1456-58 (Fed. Cir. 1998) (Taking must be based on authorized government action);
Figueroa v. United States, 57 Fed. Cl. 488, 496 (2003) (If the government action
complained of is unauthorized, “plaintiff’s takings claim would fail on that basis.”); see
also Short v. United States, 50 F.3d 994, 1000 (Fed. Cir. 1995) (same). Thus, a claim
cannot be both an illegal exaction (based upon unauthorized action), and a taking (based
upon authorized action).
The Government defends on the basis that AIG voluntarily accepted the terms of
the proposed rescue, which it says would defeat Starr’s claim regardless of whether the
challenged actions were authorized or unauthorized. While it is true that AIG’s Board of
Directors voted to accept the Government’s proposed terms on September 16, 2008 to
avoid bankruptcy, the board’s decision resulted from a complete mismatch of negotiating
leverage in which the Government could and did force AIG to accept whatever punitive
terms were proposed. No matter how rationally AIG’s Board addressed its alternatives
that night, and notwithstanding that AIG had a team of outstanding professional advisers,
the fact remains that AIG was at the Government’s mercy. Case law is divided on
whether the death knell of bankruptcy represents a real board of directors’ choice in such
circumstances. Compare Swift & Courtney & Beecher Co. v. United States, 111 U.S. 22,
28-29 (1884) (“The parties were not on equal terms. . . . The only alternative was to
submit to an illegal exaction or discontinue its business.”) and In re Consolidated Pretrial
Proceedings in Air West Securities Litig., 436 F. Supp. 1281, 1290 (N.D. Cal. 1977)
(“[D]efendants’ claim that Trustees should be denied recovery . . . because they had an
alternative source of recovery (bankruptcy) has never been held to be an adequate
alternative under the law of business compulsion.”) with Starr Int’l Co. v. Fed. Reserve
8

 Bank of N.Y., 906 F. Supp. 2d 202, 219 n.13 (S.D.N.Y. 2012) (“Even a choice between a
rock and a hard place is still a choice.”) and FDIC v. Linn, 671 F. Supp. 547, 560 (N.D.
Ill. 1987) (“Threatened bankruptcy is insufficient to create economic duress.”).
Voluntary acceptance, however, is not a defense to an illegal exaction claim. See the
“Legal Analysis” section, “Illegal Exaction Claim,” below.
With regard to Starr’s reverse stock split claim, the evidence supports a conclusion
that the primary motivation for the split was to ensure AIG was not delisted from the
New York Stock Exchange (“NYSE”). In June 2009, AIG was in jeopardy of having its
stock delisted because the stock value was teetering at or below $1.00 per share. The
NYSE will not list stocks that are valued at less than $1.00 per share. Indeed, Starr voted
its shares in favor of the reverse stock split resolution. Although it might be logical to
conclude that the twenty-for-one decrease in the number of issued shares, with no change
in the authorized shares, was designed to allow the Government’s preferred stock to be
exchanged for common stock, there is no evidence that this was the case. The Court
concludes that the motivation for the reverse stock split was to assure the continued
listing of AIG stock on the NYSE. Accordingly, Starr’s reverse stock split claim is
denied.
Turning to the issue of damages, there are a few relevant data points that should be
noted. First, the Government profited from the shares of stock that it illegally took from
AIG and then sold on the open market. One could assert that the revenue from these
unauthorized transactions, approximately $22.7 billion, should be returned to the rightful
owners, the AIG shareholders. Starr’s claim, however, is not based upon any
disgorgement of illegally obtained revenue. Instead, Starr’s claim for shareholder loss is
premised upon AIG’s stock price on September 24, 2008, which is the first stock trading
day when the public learned all of the material terms of the FRBNY/AIG Credit
Agreement. The September 24, 2008 closing price of $3.31 per share also is a
conservative choice because it represents the lowest AIG stock price during the period
September 22-24, 2008. Yet, this stock price irrefutably is influenced by the $85 billion
cash infusion made possible by the Government’s credit facility. To award damages on
this basis would be to force the Government to pay on a propped-up stock price that it
helped create with an $85 billion loan. See United States v. Cors, 337 U.S. 325, 334
(1949) (“[V]alue which the government itself created” is a value it “in fairness should not
be required to pay.”).
In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s
intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s
shareholders would most likely have lost 100 percent of their stock value. DX 2615
(chart showing that equity claimants typically have recovered zero in large U.S.
bankruptcies). Particularly in the case of a corporate conglomerate largely composed of
9

 insurance subsidiaries, the assets of such subsidiaries would have been seized by state or
national governmental authorities to preserve value for insurance policyholders. Davis
Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for
AIG, like cascading champagne glasses where secured creditors are at the top with their
glasses filled first, then spilling over to the glasses of other creditors, and finally to the
glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926,
5930-31; see also Offit, Tr. 7370 (In a bankruptcy filing, the shareholders are “last in
line” and in most cases their interests are “wiped out.”).
A popular phrase coined by financial adviser John Studzinski, in counseling AIG’s
Board on September 21, 2008 is that “twenty percent of something [is] better than 100
percent of nothing.” Studzinski, Tr. 6936-37. Others, such as Mr. Liddy and Mr. Offit,
also embraced this philosophy, believing the top priority was for AIG to live to fight
another day. If the Government had done nothing, the shareholders would have been left
with 100 percent of nothing. In closing arguments, responding to Starr’s allegation that
FRBNY imposed punitive terms on AIG (which it did), Defendant’s counsel Mr. Dintzer
observed, “[i]f the Fed had wanted to harm AIG in some way, all it had to do was
nothing.” Dintzer, Closing Arg., Tr. 151.
The Federal Circuit’s guidance in a case of this type requires that Starr show its
economic loss. “[P]roving economic loss requires a plaintiff to show what use or value
its property would have but for the government action.” A&D Auto Sales, Inc. v. United
States, 748 F.3d 1142, 1157 (Fed. Cir. 2014). The analysis here leads to the conclusion
that, if the Government had done nothing to rescue AIG, the company would have gone
bankrupt, and the shareholders’ equity interest would have been worthless. Accordingly,
the Court finds that the first plaintiff class prevails on liability because of the
Government’s illegal exaction, but recovers zero damages. The Court finds that the
second plaintiff class, basing its claim on the reverse stock split, is not entitled to
recovery for either liability or damages.
As the Court noted during closing arguments, a troubling feature of this outcome
is that the Government is able to avoid any damages notwithstanding its plain violations
of the Federal Reserve Act. Closing Arg., Tr. 69-70. Any time the Government saves a
private enterprise from bankruptcy through an emergency loan, as here, it can essentially
impose whatever terms it wishes without fear of reprisal. Simply put, the Government
often may ignore the conditions and restrictions of Section 13(3) knowing that it will
never be ordered to pay damages. With some reluctance, the Court must leave that
question for another day. The end point for this case is that, however harshly or
improperly the Government acted in nationalizing AIG, it saved AIG from bankruptcy.
Therefore, application of the economic loss doctrine results in damages to the
shareholders of zero.
10

 Findings of Fact
A. The September 2008 Financial Crisis
In September 2008, the American economy faced the worst financial crisis since
the Great Depression in the 1930s. Bernanke, Tr. 1958 (“[T]he country at that time was
in the most severe financial crisis since the Great Depression.”); PTX 548 at 24
(Bernanke). The crisis that began in August 2007 had the world “at the edge of the
abyss.” “It was the worst financial shock in more than a century.” In the United States,
the initial loss to household wealth was five times as severe as compared to the initial loss
of wealth during the Great Depression. PTX 671 at 2 (Geithner).
This crisis was so widespread that it affected the viability of nearly every financial
firm, including institutions that were solvent at the time. PTX 663 at 11; Geithner, Tr.
1445, 1556 (noting that a solvent company may fail if it becomes illiquid). During a
panic, liquidity freezes up and firms are forced to sell off assets in a fire sale, which
“bring[s] asset prices down below their long-run value, which then harms everybody
else’s ability to borrow against assets.” This condition creates a vicious cycle where
people with liquid assets no longer extend liquidity to others, and it causes a significant
contraction to the financial markets, affecting even solvent institutions. Cragg, Tr. 542425; PTX 663 at 11 (Geithner: If a solvent entity becomes “caught up in the run, even the
strongest will not survive.”). Officials in Government and private enterprise were
working around the clock. Baxter, Tr. 840 (“I can’t tell you which day it was, Mr. Boies,
because I was pretty much working 24/7 at that time. The days were nights; the nights
were days.”).
The crisis that would come to a head in September 2008 “arrived in force on
August 9, 2007.” PTX 706 at 78 (Paulson). Foreclosures in the housing market began to
rise, credit spreads widened, and the amount of liquidity available to firms decreased
substantially. PTX 709 at 156. By March 2008, the Federal Reserve found there were
“unusual and exigent circumstances” sufficient for it to lend outside the banking system.
Baxter, Tr. 656-57, 659. On March 14, 2008, the Federal Reserve authorized an
emergency loan to Bear Stearns under its Federal Reserve Act Section 13(3) authority.
PTX 1201 at 2-3. On March 16, 2008, the Federal Reserve created the Primary Dealer
Credit Facility (“PDCF”) for primary dealers to obtain overnight liquidity. Stip. ¶ 51 (the
PDCF loaned as much as $40 billion a night); PTX 728 at 1-2. Between March and
September 2008, the financial markets continued to deteriorate. Alvarez, Tr. 136-37

11

 (stating that “[l]iquidity was becoming difficult to get with any kind of haircut on a
secured basis, and unsecured credit was becoming all but unavailable.”).5
By September 2008, panic among financial institutions had caused the private
market to freeze and stop functioning altogether. This panic also led to a run on money
market funds that, in turn, began to dump commercial paper, and the “commercial paper
market went into shock.” PTX 708 at 90 (Bernanke). Financial institutions stopped
lending to each other and every financial institution faced enormous pressure and strain.
Offit, Tr. 7920, 7927. Of the thirteen most important financial institutions in the United
States, twelve “had either failed or were at risk of failure.” Bernanke, Tr. 1960.
There were five major causes of the September 2008 financial crisis: (1) the socalled “housing bubble”; (2) the floating interest rates of subprime mortgages; (3) the
rating agencies’ misrepresentations of the riskiness of certain securities such as
collateralized debt obligations (“CDOs”); (4) the “originate-to-distribute” business
model; and (5) the collapse of the alternative banking system. The “housing bubble” was
caused by low interest rates and poor lending practices by mortgage originators and
banking and financial institutions. Following September 11, 2001, the Government kept
interest rates artificially low to encourage home buying. Saunders, Tr. 8379 (The roots of
the financial crisis are traceable to “when interest rates were lowered after 9/11 and then
there was a buildup of subprime mortgages.”). The low interest rates in turn overstimulated the housing market and resulted in the over extension of credit. In addition to
the artificially low interest rates, banks and financial institutions had adopted poor
lending practices extending mortgages to borrowers for housing that they could not
actually afford. These mortgages, especially the subprime mortgages, included floating
interest rates. When interest rates began to rise during 2006 and home prices began to
drop, many low income homeowners could no longer meet their mortgage commitments
and either became delinquent or defaulted on their loans. Saunders, Tr. 8380; PTX 599 at
5 (Bernanke).
Another major cause of the financial crisis was the “originate-to-distribute”
business model developed by financial institutions. Under the “originate-to-distribute”
model, “originators would transfer mortgages to other entities instead of holding them to
maturity.” PTX 624 at 117-19, 130-54. Mortgage originators would first transfer or sell
mortgages to a special purpose vehicle (“SPV”). This process would then lead to the
creation of CDOs, which are securities or tranches representing tiered rights to be paid
from the revenue of the pool. The originator of the SPV then either marketed the CDOs
A “haircut” in the financial industry is a percentage discount applied to the market value of a security or
the face value of a bond to account for the risk of loss that an investment in the security or bond poses.
See Alvarez, Tr. 130-32; PTX 2856 at 171 (Cragg Expert Report).
5

12

 to investors or retained them on the balance sheet. Cragg, Tr. 4952-55. Between 2004
and 2007, “nearly all of the adjustable rate subprime mortgages written were packaged
into residential mortgage-backed securities (“RMBS”) and a large share of these
subprime RMBS were purchased by managers of CDOs of asset backed securities.” Stip.
¶ 37; PTX 11 at 10; PTX 583 at 8 (by 2006, subprime mortgages accounted for 20
percent of the total mortgages on the market whereas in 1994, they only accounted for
five percent of the total market). This “originate-to-distribute” model increased the
amount of money available for housing loans and resulted in mortgage originators paying
less attention to a borrower’s credit and making loans without “sufficient documentation
or care in underwriting” because the risk of non-payment had been transferred to others.
PTX 607 at 11 (Bernanke). Rating agencies downplayed the riskiness of the CDOs and
related securities, and the Government later charged some of these agencies with fraud
for their misrepresentations regarding the safety of CDOs and related securities. PTX
661 at 2-3.
Finally, the alternative or “shadow” banking system collapsed, further worsening
the September 2008 financial crisis. The alternative banking system had developed as a
way to provide trillions of dollars of short-term liquidity to financial firms. Between
2003 and 2006, the alternative banking system grew at an exponential rate and by the
time the housing bubble burst in 2006, it was larger in size than the traditional banking
sector. Cragg, Tr. 4942, 4945. At its peak, the size of the shadow banking system was
approximately $13 trillion. Cragg, Tr. 4943; PTX 5302. But the shadow banking system
was not regulated in the same way that traditional banks are regulated. Instead, this
alternative system consisted primarily of investment banks and broker dealers that
extended credit in competition with traditional banks. These investment banks and
broker dealers originated loans, packaged those loans into securities, and created
institutions that would buy those securities and distribute them to investors. Cragg, Tr.
4941-43. In this “shadow” system, “what was most important was the ability to do deals,
because it was fees that generated profits.” Cragg, Tr. 4947. By contrast, in the
traditional banking system, most of the income comes from what is called spread income.
Spread income is “the difference between the cost of money coming into the bank versus
. . . the interest that [the bank is] able to charge on mortgages and other loans.” Cragg,
Tr. 4946-47.
Significantly, the alternative system also included the “repo” market which
provided short-term funding for companies by “funding through repurchase agreements
where the investment banks would put out assets overnight and use that as collateral.”
PTX 548 at 13 (Bernanke). The repo market was particularly important to the broker
dealers of the alternative banking system because “half of their balance sheet was
supported by repo.” Cragg, Tr. 5005-06. Before the crisis began, bankers considered
repos safe. But starting in 2007, the repo lenders grew concerned they would receive
13

 collateral instead of cash and these lenders responded by imposing higher haircuts or
pulling away and causing some borrowers to lose access to repo entirely. PTX 650 at 1213 (Bernanke). Repo financing was particularly susceptible to a financial crisis because
it was overnight financing which had to be renewed every day. PTX 706 at 115-16
(Paulson) (“Most of this money was lent overnight.”). By September 2008, the size of
the repo market had dropped precipitously, falling from $4.5 trillion in March 2008 to
$3.5 trillion, a decrease of 20 percent. Cragg, Tr. 5006.
B. AIG’s Financial Condition in 2008
The bursting of the housing bubble and the collapse of the alternative or shadow
banking system exposed nearly every major financial institution to significant liquidity
risks beginning in 2007 and into September 2008. Cragg, Tr. 5031-32 (“Lehman,
Morgan Stanley, Goldman Sachs, Merrill Lynch . . . were all, you know, in fear of
failure, because of liquidity.”). Financial institutions such as AIG, Lehman, Morgan
Stanley, Goldman Sachs, and Merrill Lynch faced these liquidity risks due, in part, to
their massive CDO and CDS6 portfolios. See Cragg, Tr. 4987-89; Saunders, Tr. 8074-75,
DX 1356 at 28; DX 1883 at 23 (“[AIG’s] super senior CDS portfolio began in 1998 and
had a total net exposure of $465 billion at June 30, 2007.”). Though AIG, unlike other
major financial firms, had “stop[ped] writing credit protection on multi-sector CDOs” in
2005, stip. ¶ 42, its securities lending program in its Financial Products Division
(“AIGFP”) still faced substantial risks from its existing CDS portfolio.7 First, AIG’s
CDS agreements contained substitution provisions which allowed CDO managers to
swap pre-2006 RMBS with “more suspect” 2006 and 2007 subprime RMBS that
presented “more problematic credit issues.” Cragg, Tr. 5304, 5307. Second, AIG had
failed to hedge against the risk it faced from its multi-sector CDS contracts. Schreiber,
Tr. 6541-44; Saunders, Tr. 8086. Starr itself concluded that a significant portion of
AIG’s 2008 liquidity problems was the result of its failures in risk management. Smith,
Tr. 7687-90; DX 211 at -10576.
6

A CDS is a “credit default swap contract” and is akin to financial insurance, whereby the CDS seller
collects premium payments in exchange for guaranteeing the performance of a debt obligation. Cragg,
Tr. 4964; PTX 549 at 7; Saunders, Tr. 8071-72.

7

At a time when AIG was exiting the CDO market, other financial firms such as Goldman Sachs,
Citigroup, and Merrill Lynch were dramatically increasing their CDO transactions. From 2005 to 2006,
Goldman Sachs’ CDO transactions doubled, going from $12.6 billion to $25.4 billion. Merrill Lynch
tripled the size of its CDO transactions from 2005 to 2006, issuing approximately $14 billion in 2005 to
$40.9 billion in 2006. Citigroup more than doubled the size of its CDO transactions going from $11.1
billion in 2005 to $28.3 billion by 2007. Cragg, Tr. 4987-89. As evidenced by a May 17, 2007 speech at
the Federal Reserve Bank of Chicago, Mr. Bernanke had a favorable view of the home mortgage market
two years after AIG had stopped accepting additional CDO risk. PTX 1041 at 6; Bernanke, Tr. 2142-43.

14

 AIG began to face liquidity issues from both its CDS portfolio and securities
lending program starting in 2007. The CDS contracts “carried substantial liquidity risks
for AIG” because they required AIG to post cash collateral in three circumstances: (1) a
default in a covered CDO; (2) a decline in the CDOs’ market value; (3) a downgrade of
an individual CDO tranche; or (4) a rating downgrade for AIG itself. Saunders, Tr. 807273. If AIG’s credit rating declined, AIG would be forced to post billions of dollars in
collateral due to the terms of its CDS contracts. Cragg, Tr. 5036-37 (noting that
“[e]ventually the credit rating agencies [got] concerned about AIG’s liquidity” which led
to more liquidity problems and then the run on AIG).
Under AIG’s securities lending program, AIG could borrow money by lending
securities to third parties in exchange for cash collateral. This program created a liquidity
risk by allowing borrowers to return the borrowed securities and demand the return of
their cash collateral in as little as a few days, whereas the average maturity of the RMBS
investments or assets that AIG purchased with the security borrowers’ cash collateral was
about five years. Saunders, Tr. 8145-46; Cragg, Tr. 5287-90. If securities borrowers did
not roll over their existing borrowings, AIG would have to respond to securities returns
by either selling the investments it had purchased or providing cash from other sources.
Saunders, Tr. 8147. AIG continued to expand this program in 2006 and 2007, investing
the cash collateral in risky subprime and alternative “Alt-A” RMBS. Saunders, Tr. 809798; Kothari, Tr. 4870. By September 2008, 84 percent of the collateral obtained through
the securities lending program had been invested in either subprime mortgages or Alt-A
mortgages. Saunders, Tr. 8099-8100.
In order for AIG to manage its liquidity needs from the CDS portfolio and the
securities lending program, the company, starting in 2007, created a Liquidity Risk
Committee to “measure, monitor, control and aggregate liquidity risks across AIG” and
began to build liquidity. Willumstad, Tr. 6477; DX 939 at 99. To build liquidity, AIG
decided to raise additional capital from the market. In May 2008, AIG raised “$20
billion in new capital by issuing a mix of common stock, equity units, and junior
subordinated debentures,” which was the largest private capital raise in history at that
time. Stip. ¶ 56; PTX 587 at 13-14; Willumstad, Tr. 6481. AIG continued to try to
strengthen its balance sheet, raising another $3.25 billion in capital in August 2008. JX
188 at 3; Stip. ¶ 66; Offit, Tr. 7917 (“I had made a statement to the board and I said I
didn’t know whether we were the most overcapitalized company in this country or the
most undercapitalized. I said it all depends on housing prices. And that was really the
variable.”). To conserve cash, AIG also halted merger discussions with a number of
entities that it had been contemplating acquiring. Willumstad, Tr. 6483. In addition,
“AIG hired JP Morgan Chase to help develop funding options” and “approached
Berkshire Hathaway about providing a $5 billion backstop to AIG’s guaranteed
15

 investment contracts.” Stip. ¶¶ 67, 69. As of August 2008, AIG’s outside auditors from
PricewaterhouseCoopers (“PWC”) concluded that AIG’s liquidity needs did not rise “to
the level of concern that required disclosure.” Farnan, Tr. 4243; DX 175 at 233 (as of
June 30, 2008, AIG’s cash and short-term investments totaled $82.2 billion). By
September 2008, AIG had reduced its securities lending balance by 25 percent from its
peak. PTX 625 at 4.
Despite the capital raises and AIG’s other efforts to conserve cash, AIG’s liquidity
problems continued in August and September 2008 due to the further deteriorating
condition of the financial markets, the lack of available liquidity, and similar difficulties
facing other financial institutions. See Offit, Tr. 7920, 7928; Bernanke, Tr. 1960; Cragg,
Tr. 4942, 4945; Liddy, Tr. 3183-84 (“I thought the company faced a very complex
liquidity squeeze, in line with that which was affecting many other financial
institutions.”). Many market participants such as AIG also “found it difficult to derive
fair market values for their securities based on market transactions.” PTX 221 at 4; see
also Willumstad, Tr. 6484-86. Accordingly, AIG was forced to post collateral to its
counterparties that “way exceeded any reasonable estimate of the actual risk of
nonpayment on the CDS contracts” and this circumstance further strained AIG’s
liquidity. Cragg, Tr. 5016-17.
C. September 13-14, 2008 – “Lehman Weekend”
In the weeks leading up to “Lehman Weekend,” FRBNY’s Mr. Geithner met twice
with AIG’s Chief Executive Officer, Mr. Willumstad. On July 8, 2008, Mr. Geithner
held a meeting as a courtesy because Mr. Willumstad had just become AIG’s new CEO,
and on July 29, 2008, they met again at Mr. Willumstad’s request. Mr. Willumstad did
not indicate in either of these meetings that AIG was facing significant liquidity issues,
and he did not request any FRBNY assistance. Geithner, Tr. 1720-21; PTX 715 at 1. Mr.
Willumstad asked during the July 29 meeting if AIG might borrow from FRBNY if the
need arose in the future. Willumstad, Tr. 6342-44; Geithner, Tr. 1721. In response, Mr.
Geithner explained that providing AIG with access to FRBNY lending facilities would be
unlikely for “moral hazard” reasons because AIG was an insurance company, not a bank.
Geithner, Tr. 1721-22. “Moral hazard” refers to the concern that Federal Reserve loans
might encourage companies to assume undue risk in the hope of receiving government
support on favorable terms if they fail. Geithner, Tr. 1763-64; Bernanke, Tr. 2215-16
(when deciding whether to authorize FRBNY to offer a rescue loan to AIG, the Board of
Governors discussed the “moral hazard . . . that would attend such a loan.”). The Federal
Reserve began to monitor AIG more closely in August 2008. PTX 24, 26, 27, 29, 30, 33.
Mr. Geithner and Mr. Willumstad met a third time on Tuesday, September 9,
2008, where Mr. Willumstad raised AIG’s interest in becoming a primary dealer to gain
16

 access to FRBNY’s Primary Dealer Credit Facility (“PDCF”). Willumstad, Tr. 6370-71;
Geithner, Tr. 1722-24. Mr. Willumstad was aware that the process for becoming a
primary dealer would require at least two months for AIG to establish a primary dealer
affiliate. Willumstad, Tr. 6359-61; JX 43 at 3 (Sept. 5, 2008 AIG Board minutes).
Ultimately, AIG did not apply to become a primary dealer. Willumstad, Tr. 6373.
In August 2008, AIG learned that credit rating agencies were considering
downgrading AIG because of continued earnings volatility and financial deterioration.
DX 178 at -1005 (Fitch Ratings). AIG retained JP Morgan as a financial adviser to
develop funding options and strategic alternatives. Willumstad, Tr. 6350. In early
September 2008, AIG’s management remained optimistic about raising up to $20 billion
in capital to address liquidity needs, and considered using asset sales and a dividend cut
to increase available funds even more. Willumstad, Tr. 6360; JX 43 at 3. Mr.
Willumstad met with credit rating agencies during the week of September 8-12, 2008
“with the hope and expectation that they would wait until the end of September” before
deciding to downgrade AIG. Willumstad, Tr. 6366-67; DX 227 at -5283. During this
one-week period, AIG’s stock price fell from $22.76 to $12.14 per share. Willumstad,
Tr. 6369; JX 188 at 4 (AIG 2008 Form 10-K).
By Friday, September 12, 2008, AIG was caught in a “downward spiral” due to its
likely credit rating downgrades, increased CDS collateral calls, the decline of its
mortgage-related assets, the absence of market liquidity, and the decline of its stock price.
Mr. Willumstad spoke to Mr. Geithner on Friday morning, September 12, indicating that
AIG had urgent and severe liquidity needs in the range of $13 to $18 billion to meet its
collateral demands. Geithner, Tr. 1726-27; Willumstad, Tr. 6374-75. As a result of an
afternoon meeting with AIG representatives on September 12, FRBNY reported that
“AIG is facing serious liquidity issues that threaten its survival viability.” Mosser, Tr.
1292; PTX 42 at 1.
Upon learning of AIG’s liquidity needs on September 12, 2008, the Federal
Reserve encouraged AIG and other private-market participants to pursue a private
solution over the coming weekend. During September 13-14, 2008, FRBNY and Board
of Governors representatives met or spoke repeatedly with AIG and its representatives to
understand AIG’s needs and to explore potential options to address the financial
pressures. Mr. Geithner commissioned teams of FRBNY staff to study AIG’s financial
profile and assess AIG’s financial condition and needs. Over this weekend, the role of
these teams expanded to include consideration of the pros and cons of lending to AIG,
analysis of the consequences of an AIG bankruptcy, and an overall evaluation of AIG’s
importance to the national and world economies. Geithner, Tr. 1729; Mosser, Tr. 1334;
LaTorre, Tr. 2300-01; DX 307 at -6652-53; DX 398 at -9979.
17

 In meetings and other communications with AIG, FRBNY and Board of
Governors representatives encouraged AIG’s efforts to borrow money or raise capital
from the private sector. Geithner, Tr. 1730 (“[T]he purpose of those meetings [was] for
[AIG] to give us a better feel for the nature of their financial difficulties, the scale of the
assistance they may need, and to lay out for us or provide a report on progress they were
making or not making in their efforts to raise private assistance.”); Bernanke, Tr. 2203 (“I
understood that there were some private sector negotiations going on with at least one
and maybe more private equity firms.”).
The meetings on Saturday, September 13, 2008 also included discussions of
possibly freeing up collateral held by AIG’s New York insurance subsidiaries to provide
liquidity to the parent company. Willumstad, Tr. 6380-81. On Saturday evening, Mr.
Geithner and Secretary of the Treasury Henry Paulson met with Mr. Willumstad and
other AIG executives and advisers for an update on AIG’s private sector efforts. Mr.
Willumstad explained that AIG was pursuing possible commercial deals, but he thought
some liquidity support from the Treasury Department or the Federal Reserve might be
necessary to assist AIG in achieving a private sector solution. Willumstad, Tr. 6380-82;
Geithner, Tr. 1730-31.
During the weekend of September 13-14, 2008, AIG increased its estimate of how
much money it needed to survive. The increasing AIG projections raised concerns about
whether it was possible to pinpoint AIG’s actual needs and exposure. AIG’s initial $18
billion liquidity projection increased to $45 billion on Sunday (DX 1882 at 106-07), and
to at least $75 billion on Monday (JX 74 at 21).
On Sunday, September 14, 2008, Mr. Willumstad reported to government officials
that AIG’s efforts to secure private sector funding had been unsuccessful. Willumstad,
Tr. 6389-90. AIG had not found any private firm or sovereign wealth fund that was
willing to provide sufficient financing to stabilize the company, and in time to meet
AIG’s needs. AIG’s Chief Financial Officer, David Herzog, testified “[w]hatever ideas
[investment bank consultants] came up with just simply weren’t executable.” Herzog, Tr.
6957.
In the early hours of Monday, September 15, 2008, Lehman Brothers filed for
bankruptcy. Stip. ¶ 93; Willumstad, Tr. 6390-91; Alvarez, Tr. 493. Before its
bankruptcy, Lehman Brothers had been a prominent investment bank and a primary
dealer. Baxter, Tr. 1101-02; LaTorre, Tr. 2312. Mr. Paulson agreed that, “right after
Lehman failed, the country was plunged into . . . the most wrenching financial crisis since
the Great Depression.” Paulson, Tr. 1200-01. The Lehman Brothers’ bankruptcy made
AIG’s financial crisis much worse.
The marketplace reacted to the Lehman
announcement by tightening liquidity, which made conventional financing sources more
18

 difficult to access. AIG’s counterparties began withholding payments to AIG and
refusing to transact with AIG even on a secured, short-term basis. Willumstad, Tr. 639697; JX 188 at 4.
By Monday, September 15, 2008, FRBNY concluded that AIG could not raise
private capital. Mr. Geithner asked JP Morgan and Goldman Sachs to organize a private
consortium of lenders to try to rescue AIG. Mr. Willumstad recommended these two
entities because they were most knowledgeable about AIG, and best suited to arrange a
syndicated rescue loan. Geithner, Tr. 1744 (“I asked two banks, after consulting with Mr.
Willumstad, to undergo an effort to assess whether they could arrange a substantial
source of private financing.”).
During Monday and early Tuesday, September 15-16, 2008, senior bankers from
Goldman Sachs and JP Morgan consulted with other banks, including Morgan Stanley, to
assess AIG’s immediate liquidity needs and economic value. Lee, Tr. 7073; Head, Tr.
3768-69. JP Morgan’s James Lee was one of the country’s leading arrangers of
syndicated loans. Lee, Tr. 7078. A group from Goldman Sachs and JP Morgan worked
through the night to develop terms that might be attractive to other banks. Mr.
Willumstad kept AIG’s Board apprised of these efforts, including an “expectation that
banks [would] ultimately be paid in some form of equity.” JX 74 at 2. These efforts
proved unsuccessful principally because of the perception that AIG’s borrowing needs
exceeded AIG’s value by tens of billions of dollars. Lee, Tr. 7075.
During the lead-up to “Lehman Weekend” and the following Monday, government
officials were not prepared to let AIG file for bankruptcy because of the catastrophic
consequences an AIG bankruptcy would have had on other financial institutions and the
economy. Def.’s Resp. to Pl.’s 2nd RFAs No. 206 (“The failure of AIG could easily
have led to a worldwide banking run and a severe financial meltdown, devastating
millions of people financially along the way.”); Id. No. 233 (“The Federal Reserve made
its decision to lend based on a judgment that a failure of AIG would cause dramatically
negative consequences for the financial system and the economy, consequences worse
than what occurred in the aftermath of the failure of Lehman Brothers.”); Baxter, Tr. 676
(On September 16, Messrs. Bernanke, Geithner, and Paulson “all concluded that if AIG
filed for bankruptcy, that would have catastrophic effects for financial markets.”).
Further on this point, in his book “Stress Test,” Mr. Geithner observed:
The U.S. financial system seemed even more exposed to AIG
than it had been to Lehman. Europe and Asia were also more
exposed to AIG. And not only was AIG larger than Lehman,
with a more complex derivatives book, its decline had been
19

 much swifter, which would be even scarier to markets. “If
they default, you’ll see default probabilities explode on all
financial firms,” I said. In other words, mass panic on a
global scale.
PTX 709 at 208.
Mr. Bernanke also shared these views. PTX 599 at 77 (“AIG’s demise would be a
catastrophe.”); PTX 708 at 92, Collection of Mr. Bernanke’s Lectures in “The Federal
Reserve and The Financial Crisis,” (“In our estimation, the failure of AIG would have
been basically the end. It was interacting with so many different firms. It was so
interconnected with both the U.S. and the European financial systems and global
banks.”); Bernanke, Tr. 1970 (AIG was “a case where action was necessary.”).
Mr. Paulson concurred with his colleagues. PTX 564 at 142 (AIG’s collapse
“would have buckled our financial system and wrought economic havoc on the lives of
millions of our citizens.”); Id. at 141 (“An AIG failure would have been devastating to
the financial system and to the economy.”); Paulson, Tr. 1206 (“[I]t would be
catastrophic if AIG filed for bankruptcy.” While “the system could withstand a Lehman
failure, if AIG went down, the country faced a real disaster.”).
D. September 16, 2008 Loan and Term Sheet
Once the Federal Reserve concluded that it could not allow AIG to file for
bankruptcy, it drafted a term sheet for the Board of Governors’ approval. The Board of
Governors convened a meeting on September 16, 2008 to approve the term sheet as
required under Section 13(3) of the Federal Reserve Act. Alvarez, Tr. 509-10. This
meeting was the only one that the Board of Governors held before the AIG Credit
Agreement was executed. Bernanke, Tr. 1974-75.
The term sheet approved by the Board of Governors is included in the record as
JX 63. Alvarez, Tr. 188; Bernanke, Tr. 1974. This term sheet expressly stated that the
form of equity would be “[w]arrants 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 6.8
The objective of the Board of Governors in setting a 79.9 percent rate was to keep the Government’s
equity ownership of AIG below 80 percent, because at an 80 percent or higher level, the Federal Reserve
or the Treasury Department would be considered the controlling owner of AIG. See Alvarez, Tr. 515-16.
At an ownership level above 80 percent, principles of “push down” accounting would have likely required
FRBNY to recognize AIG’s assets and liabilities on its own books and records. JX 146 at 23-28 (PwC
analysis, Nov. 9, 2008); Farnan, Tr. 4408-13.
8

20

 Warrants are a “contract by which the corporation gives an irrevocable option to the
holder to purchase authorized corporate stock within a period of time at a price and upon
terms specified in the contract.” Tribble v. J.W. Greer Co., 83 F. Supp. 1015, 1022 (D.
Mass. 1949). For the AIG term sheet presented to the Board of Governors, the members
understood that the warrants would be non-voting until they were exercised, would have
an exercise price, and required shareholder approval9 before the warrants could be issued.
Bernanke, Tr. 1975; Baxter, Tr. 816; see also JX 63 at 10. Other key provisions of the
term sheet voted on by the Board of Governors included a drawn interest rate of 12
percent (3.5 percent London InterBank Offered Rate10 (“Libor”) floor + 850 basis points),
an undrawn fee of 8.5 percent, meaning that any amount not drawn by AIG would be
charged an interest rate of 8.5 percent, a commitment fee of 3 percent of the total facility,
and a periodic commitment fee of 2.5 percent “payable in kind every [three] months after
closing.” JX 63 at 6. The five Board of Governors members unanimously voted to
approve the term sheet. JX 63 at 4. This was the only term sheet the Board of Governors
ever saw or approved. Alvarez, Tr. 188.
Following the Board of Governors meeting on September 16, 2008, the Davis Polk
lawyers began to circulate a term sheet time-stamped 1:44 PM to FRBNY and Treasury
officials. PTX 86 at 1. This term sheet, like the one presented to the Board of
Governors, stated that warrants would be the form of equity granted to the Federal
Reserve. Id. at 4. At 2:15 PM that day, Mr. Baxter sent Mr. Alvarez a term sheet
providing for “Warrants for the purchase of common stock of AIG representing 79.9% of
the common stock of AIG on a fully-diluted basis.” JX 64-A at 1; Alvarez, Tr. 262;
Baxter, Tr. 695. Later, at 3:21 PM, a black-lined term sheet was distributed, showing
changes from earlier drafts. However, the warrants provision in the term sheet remained
unchanged. JX 378 at 1, 8-12.
In the afternoon of September 16, 2008, Mr. Geithner called Mr. Willumstad to
tell him that FRBNY would be sending him a term sheet and that he had two hours to
convince AIG’s Board of Directors to accept. PTX 673 at 24 (Geithner: “[W]e’re going
Under New York Stock Exchange Listed Company Manual Rule 312.03, “shareholder approval is
required prior to the issuance of warrants exercisable into twenty percent or more of the voting power of a
corporation’s common stock 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. On September
16, 2008, the AIG Audit Committee approved the issuance of warrants without shareholder approval,
invoking Rule 312.03. Id. at 3.
9

10

LIBOR is an interest rate benchmark that has been called “the world’s most important number.” In re
LIBOR-Based Fin. Instruments Antitrust Litig., 935 F. Supp. 2d 666, 676 (S.D.N.Y. 2013).

21

 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.”). According to Mr. Baxter, the Federal Reserve’s offer to AIG
was “take it or leave it. Nothing could be negotiated.” PTX 126; see also Liddy, Tr.
3200 (“The only game in town was the Federal Reserve.”); Paulson, Tr. 1444 (“Federal
Reserve was the only fire station in town.”). The AIG Board meeting to discuss the
proposed Federal Reserve loan commenced at approximately 5:00 PM that day. JX 74 at
1. At the start of the meeting, Mr. Richard Beattie of Simpson Thacher & Bartlett
informed the directors about key aspects of the $85 billion credit facility. Id. at 3. Mr.
Willumstad also relayed to the Board of Directors what Mr. Geithner had said: that as
one of the conditions to accepting the Federal Reserve’s loan facility, he would be
replaced as CEO of AIG. Id. at 3-4.
The law firms of Simpson Thacher & Bartlett, Sullivan & Cromwell, and Weil
Gotshal then gave the AIG directors comprehensive legal advice on whether they should
accept the loan or file for bankruptcy. Id. at 4-5; Offit, Tr. 7349-50, 7373. After hearing
from these advisers and engaging in a lengthy discussion regarding the pros and cons of
filing for bankruptcy, the AIG Board of Directors decided that accepting the loan was a
better alternative than bankruptcy. JX 74 at 9-11 (Offit: “AIG, as a financial institution
based on trust, cannot survive in bankruptcy;” Sutton: “[t]he risks of bankruptcy are
simply too high and there is too great a likelihood that the value of AIG would drop very
quickly, hurting all the constituencies about whom the Board must be concerned.”); Offit,
Tr. 7392 (“[B]y accepting the terms . . . shareholder[s] would still have a 20 percent
interest rather than being wiped out by a bankruptcy, and . . . one day [AIG] could again
be a very vibrant company.”). Of the twelve AIG board members, all but Mr. Bollenbach
voted in favor of the Federal Reserve loan. JX 74 at 14. The AIG directors believed
doing so was in the best interests of AIG and its shareholders and that it was a better
alternative to bankruptcy. Willumstad, Tr. 6432; Offit, Tr. 7402-03; JX 74 at 11. AIG’s
directors were independent of FRBNY and the Government, with no affiliation with or
dependence on FRBNY or the Government for their livelihood. Willumstad, Tr. 643536.
Before the conclusion of the board meeting on September 16, 2008, the AIG
Board of Directors adopted two resolutions. The first authorized AIG “to enter into a
transaction with the Federal Reserve Bank of New York (the ‘Lender’) to provide a
revolving credit facility of up to $85 billion on terms consistent with those described at
this meeting, including equity participation equivalent to 79.9 percent of the common
stock of the Corporation on a fully-diluted basis.” The second resolution authorized AIG
“to enter into a $14 billion demand note with the Lender” and to “enter into such
additional demand notes . . . as any Authorized Officer determines is necessary or
appropriate to meet the liquidity needs of the Corporation prior to the execution of the
22

 definitive documentation of the Credit Facility.” JX 74 at 13-14. After the Board of
Directors approved the loan facility, FRBNY immediately advanced funds to AIG. Offit,
Tr. 7938.
Someone presented a two-page term sheet to Mr. Willumstad prior to the AIG
Board meeting. It is unclear from the evidence exactly what version of the term sheet he
saw. Willumstad, Tr. 6515. Mr. Huebner testified that Mr. Wiseman of Sullivan &
Cromwell handed out hard copies of a term sheet to AIG’s Board members, stating the
form of equity would be “79.9 percent equity equivalent to common stock, form to be
determined.” Huebner, Tr. 5945-46 (emphasis added). However, this evidence
contradicts the testimony of Mr. Willumstad and Mr. Offit who both testified that they
did not see a term sheet during the September 16, 2008 board meeting. JX 76 at 1;
Willumstad, Tr. 6515; Offit, Tr. 7936. The Court cannot determine what version of the
term sheet Mr. Willumstad actually received or whether any hard copies, much less what
version, of the term sheet were shown to AIG’s Board of Directors. All the term sheets
circulated on September 16, 2008 did state, however, that “[t]his Summary of Terms is
not intended to be legally binding on any person or entity.” JX 63 at 5 (time-stamped
7:42:23 AM); JX 64-A at 3 (time-stamped 3:50:06 AM); JX 64-A at 9 (time-stamped
1:54:10 PM); JX 71 at 2.
According to various press releases issued on the night of September 16, 2008 or
the following day, the public would have understood that the form of equity to be
acquired by the Federal Reserve would be common stock warrants. PTX 2736 at 1 (New
York Times press release) (“Fed Staffers, who briefed reporters at 9:15 tonight, don’t
even want us to say the government will control AIG. The government will name new
management, and will have veto power over all important decisions. And it will have a
warrant allowing it to take 79.9 percent of the stock whenever it wants.”); PTX 131 at 3
(New York Times) (“Under the plan, the Fed will make a two-year loan to AIG of up to
$85 billion and, in return, will receive warrants that can be converted into common stock
giving the government nearly 80 percent ownership of the insurer, if the existing
shareholders approve.”); PTX 1593 at 3 (A.M. Best) (“Current AIG shareholders will see
their equity diluted 79.9% by the issuance of warrants to the federal government.”).
Though some press releases issued on September 16-17, 2008 stated the Government
would receive a 79.9 percent equity interest in AIG without stating the form of equity,
“no published report prior to the evening of September 23, 2008, explicitly stated that the
Government would receive voting preferred stock.” See PTX 234 at 1; DX 419 at -1425;
JX 79 at 2.
After the board meeting concluded on September 16, 2008, Mr. Willumstad signed
a single signature page that had nothing attached. JX 76 at 1-2; Willumstad Tr. 6438-39,
6441-42. An AIG representative faxed a copy of the signature page to FRBNY’s Mr.
23

 Baxter at 8:44 PM. PTX 94 at 1-2. The final version of the term sheet was sent at 8:51
PM after the Government received the signed signature page. Def.’s Resp. to Pl.’s 3rd
Interrog. No. 2 (identifying DX 437 as the final version). The key terms included in the
final version of the term sheet were nearly identical to those approved by the Board of
Governors except that the equity term stated “[e]quity participation equivalent to 79.9%
of the common stock of AIG on a fully-diluted basis. Form to be determined.” DX 437
at -025.
E. Development of the September 22, 2008 Credit Agreement
During September 16-19, 2008, the Government lent significant funds to AIG
pursuant to fully secured demand notes. These demand notes were separate agreements
and they were cancelled on September 23, 2008 after the execution of the Credit
Agreement. JX 84 (demand notes); JX 107 at 12, 23, 38-39, 74-75; Baxter, Tr. 761;
Liddy, Tr. 3044. Under the demand notes, AIG was obligated to pay the principal, fees
and interest on the demand of FRBNY or on September 23, 2008, whichever came
earlier. Stip. ¶ 150.
FRBNY representatives, with the assistance of their outside counsel, Davis Polk,
drafted the Credit Agreement. Brandow, Tr. 5887; Baxter, Tr. 935-36. At AIG’s
September 18, 2008 board meeting, “Mr. Litsky [Vice President of Corporate
Governance] noted that a number of directors had raised questions regarding the process
by which the various agreements with the Federal Reserve and Treasury would be
approved. Mr. Wiseman [Sullivan & Cromwell] explained the process in detail, and
noted that the documents were still being drafted by counsel for the Federal Reserve and
that counsel for the Corporation hoped to receive them shortly.” JX 94 at 6.
During September 17-21, 2008, discussions occurred between FRBNY and AIG
representatives, but the Government unilaterally imposed the key terms of the Credit
Agreement on AIG. None of the key terms were subject to negotiations. Liddy, Tr.
3293-94 (AIG had several discussions about the terms with Sarah Dahlgren, but was told
“there was not going to be any change.”); Dahlgren, Tr. 2779-80 (Mr. Liddy “expressed
unhappiness with respect to the equity piece of the deal between September 16th and
September 21st.”). AIG’s September 21, 2008 board minutes state that “[c]oncern was
raised about the Corporation’s inability to conduct further negotiations with the Bank.”
JX 103 at 6; see also PTX 195 at 7 (handwritten note) (“Fed gets it both ways not purely
negotiated.”).
The Government changed some of the key terms of the Credit Agreement from
those that the Federal Reserve’s Board of Governors had approved on September 16,
2008. The September 21, 2008 AIG board minutes state: Although “the Board had
24

 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. Mr. Liddy confirmed “[w]e had been anticipating that it would
be warrants. It was, in fact, preferred stock. So, it was a change from what was
anticipated.” Liddy, Tr. 3129-30; see also Liddy, Tr. 3136 (“the clear expectation of AIG
management was that there would be warrants with no vote” but the final Credit
Agreement “provided preferred stock with a 79.9 percent vote.”).
There are two major differences between warrants and convertible preferred
voting stock. First, with convertible preferred voting stock, the Government would
acquire voting rights from the moment the preferred stock was issued. Warrants would
have voting rights only after the warrants were exercised. Geithner, Tr. 1492-93;
Alvarez, Tr. 261. Second, in order to exercise the warrants, the Government must pay a
strike price. Zingales, Tr. 3826-27; Kothari, Tr. 4824. The strike price to exercise
warrants in this instance would have been approximately $30 billion, calculated at 12
billion shares times the par value of $2.50 per share. Zingales, Tr. 3827-28; Cragg, Tr.
5107-08. The Government avoided the $30 billion strike price payment and obtained
immediate voting control of AIG through the issuance of convertible preferred voting
stock.
FRBNY first presented a proposal for convertible preferred voting stock to AIG at
6:31 PM on September 21, 2008, prior to an AIG Board meeting to be held that night.
PTX 196 at 1. The summary of terms described the form of equity as “Convertible
Participating Serial Preferred Stock” that “will vote with the common stock on all matters
submitted to AIG’s stockholders” and will be entitled to control “79.9%” of the vote. Id.
at 3. The document available at the board meeting was a term sheet, not a draft of the
complete Credit Agreement. JX 103 at 2 (“Mr. Reeder reviewed a summary of the
principal terms of the facility that had been prepared for review by the members.”); Offit,
Tr. 7965-66 (Mr. Offit never saw anything but the term sheet).
Between the evening of September 21st and the morning of September 23rd, more
changes were made to the Credit Agreement. Brandow, Tr. 5878. On September 22,
2008 at 9:37 PM, Davis Polk sent a draft of the Credit Agreement “requesting that all
parties review and sign off within the hour.” PTX 1645 at 2. This version added to
Section 5.11, “Trust Equity,” the following language: “The Borrower shall use best
efforts to cause the composition of the board of directors of the Borrower to be, on or
prior to the date that is 10 days after the formation of the Trust, satisfactory to the Trust
in its sole discretion.” Id. at 49-50.
25

 Changing the form of equity from warrants to voting convertible preferred stock in
the Credit Agreement yielded important benefits to the Government. Avoiding a
shareholder vote was a key government objective. PTX 3272 (Sept. 17, 2008 Davis Polk
email: “avoiding a SH vote we don’t control is a primary goal.”); PTX 3129 at 7 (Nov. 5,
2008 Davis Polk email: “We succeeded in finding a structure that allows the trust to gain
control of the company without a shareholder vote.”); PTX 349 (Treasury counsel
Stephen Albrecht, discussing need to “fend off the shareholder attempts to ‘reclaim’ the
company.”).
The Federal Reserve’s Board of Governors did not consider or approve any of the
changes that FRBNY made to the Credit Agreement. The Board of Governors had
approved the term sheet on September 16, 2008 that contemplated an equity component
of non-voting warrants with a strike price (exercise price). JX 63 at 10. The Chairman of
the Board of Governors “understood that the warrants would not have a vote until they
had been exercised.” Bernanke, Tr. 1975. There also was no mention of creating a trust
during the Board of Governors meeting. Bernanke, Tr. 2028 (“[T]he provision for a
trust” was never “presented to the Board of Governors for approval.”). The Board of
Governors never voted to approve the Credit Agreement. Bernanke, Tr. 2025.
On September 21, 2008, AIG’s Board, without shareholder vote or approval,
passed a resolution authorizing the execution of the Credit Agreement. JX 103 at 1, 7.
The key players in the Credit Agreement events immediately understood the effect of this
agreement. On September 23, 2008, Davis Polk’s Mr. Huebner observed to FRBNY’s
Mr. Baxter “[t]he real joy comes when we get back the $85 [billion], with $10 +++ in
fees and interest, and make the [T]reasury tens of billions it deserves (and needs!) on the
equity.” PTX 3228 at 1. On September 22, 2008, AIG’s Dr. Jacob Frenkel stated to a
colleague, Oakley Johnson, “the [G]overnment stole at gunpoint 80 percent of the
company.” PTX 228 at 1.
F. The Government’s Control of AIG
When the Government began lending money to AIG on September 16, 2008, it
promptly took control of the company. Offit, Tr. 7938, 7964-65, 7968. FRBNY’s Sarah
Dahlgren prepared “an immediate punch list for taking control of AIG.” Dahlgren, Tr.
2640-41. On September 17, 2008, Ms. Dahlgren told a group of high-level AIG
executives, we “are here, you’re going to cooperate.” PTX 581 at 2; Dahlgren, Tr. 281718. Mr. Paulson testified that the Government in effect nationalized AIG. Paulson, Tr.
1445.
On September 16, 2008, prior to any discussions with the AIG Board, the
Government terminated Mr. Willumstad as AIG’s Chief Executive Officer, and replaced
26

 him with a new CEO of the Government’s choosing. Secretary of the Treasury, Henry
Paulson, “worked on finding a new CEO for the company. We had less than a day to do
it – AIG’s balances were draining by the second. I asked Ken Wilson [Treasury] to drop
everything and help. Within three hours he had pinpointed Ed Liddy, the retired CEO of
Allstate.” Mr. Paulson “called Ed Liddy and offered him the position of AIG chief on the
spot.” Paulson, Tr. 1227-28; PTX 706 at 263. The Treasury’s Dan Jester told Ms.
Dahlgren that Mr. Liddy is “the person who is going to be the new CEO of AIG.”
Dahlgren, Tr. 2639. Mr. Liddy accepted the position, and at his request, Ms. Dahlgren
“prepared some bullet points that we thought he should focus on in his initial interactions
with the company.” Dahlgren, Tr. 2645, 2917-18.
On the morning of September 17, 2008, Mr. Liddy met with Ms. Dahlgren, and
other AIG senior managers, “including the CFO, the chief risk officer, [and] the general
counsel.” Dahlgren, Tr. 2641-42. Mr. Liddy “was clearly the one in charge” during that
meeting. Dahlgren, Tr. 2643. Mr. Liddy and Ms. Dahlgren conveyed the message to
AIG senior managers that “[t]he Fed is coming in and now we are going to talk about
what we are going to do.” Dahlgren, Tr. 2644. AIG senior managers at this meeting
were “shell-shocked and at other times terrified.” Id.
The AIG Board convened a meeting on September 18, 2008. The Government
informed key Board members, Mr. Bollenbach and Mr. Offit, that Mr. Liddy would fill
the dual role of Chairman and CEO of AIG. Liddy, Tr. 3040-41; Offit, Tr. 7930. At the
board meeting, the board’s counsel, Mr. Beattie, explained that “these are uncharted
waters for any board, but that Mr. Liddy was accepted as Chief Executive Officer as part
of the agreement to accept government financing on September 16 and that the board was
acting in accordance with its duties to formally implement that agreement by appointing
Mr. Liddy as Chief Executive Officer.” JX 94 at 2; Offit, Tr. 7929-30. Mr. Paulson
“assumed the board would approve” Mr. Liddy’s installation. Paulson, Tr. 1228.
Beginning on September 16, 2008, “the government in the form of the Federal
Reserve, working with the Treasury, became very deeply involved in the overall strategy”
of AIG. PTX 449 at 15-16. When Mr. Geithner appointed Ms. Dahlgren to head the
AIG monitoring team, he told her “[y]ou’re going to take on AIG, we are going to make
them a loan, and you are going to run it.” Dahlgren, Tr. 2601; Geithner, Tr. 1565-66.
According to FRBNY’s counsel, Mr. Baxter, “we had a team that we sent to AIG to
monitor AIG on a continuous basis.” Baxter, Tr. 935. This team spent “an enormous
amount of time over at AIG,” including “people who spent much of their time at AIG
[Financial Products] up in Connecticut.” Dahlgren, Tr. 2602. Ms. Dahlgren “spent at
least part of every day at AIG” during the early stages of the Federal Reserve’s
monitoring of AIG. Dahlgren, Tr. 2603. By October 2008, Ms. Dahlgren was leading an
effort to replace current AIG board members with new members of the Government’s
27

 choice. PTX 310 (Oct. 19, 2008 email, Dahlgren to Geithner, recommending new board
members, and stating “Morris Offit is prepared to hand his resignation to Ed [Liddy]
when he asks.”). Even at earlier stages, FRBNY’s plan was to replace all of AIG’s Board
members. PTX 3248 at 2 (Sept. 20, 2008 Davis Polk email: “We plan to take out the
board and insert our own people. . . .”); PTX 3290 (Sept. 16, 2008 Davis Polk email:
“The Fed wants the entire board to resign and be replaced.”).
The AIG monitoring team consisted of hundreds of government officials and
outside advisers. Dahlgren, Tr. 2605. The monitoring team included professionals “from
Ernst & Young, from Morgan Stanley, and from Davis Polk.” Dahlgren, Tr. 2603-04;
PTX 524 (containing a “working group list” of team members from FRBNY, Morgan
Stanley, Davis Polk, Blackstone, and Ernst & Young).
Morgan Stanley had
approximately “[one] hundred individuals throughout the firm in different disciplines”
who worked on the AIG engagement “on behalf of” FRBNY. Head, Tr. 3722. Morgan
Stanley’s scope of work was very broad, and encompassed virtually every important
decision and activity. JX 222 at 3-4; PTX 303 at 1, 8. Ernst & Young also had “upwards
of [one] hundred people” assisting on the monitoring team. Dahlgren, Tr. 2605.
Blackrock worked to value AIG’s assets (JX 379 at 2) and to devise, structure, and
manage Maiden Lane II and Maiden Lane III (explained in section J below). Dahlgren,
Tr. 2647; Head, Tr. 3743-44; JX 382 at 1, 25. Approximately ten to twenty Davis Polk
lawyers were working with Ms. Dahlgren on AIG. Dahlgren, Tr. 2606.
AIG was required to reimburse FRBNY for all expenses incurred by FRBNY’s
advisers. Dahlgren, Tr. 2606-08; JX 251 at 316-17 (AIG 2009 10-K Report
acknowledging AIG’s obligation to reimburse FRBNY for the monitoring team
expenses). There was no budget for all of the persons and firms helping the Federal
Reserve, but it was “very expensive.” Geithner, Tr. 1569.
Based upon statements made by government officials, there can be little doubt that
the Government controlled AIG. Mr. Bernanke testified before Congress on March 23,
2009 that “AIG is effectively under our control.” PTX 447 at 50. Donald Kohn, Vice
Chair of the Federal Reserve, stated on September 23, 2008 that the Fed is “definitely
acting like we own the company [AIG]. Will need to consolidate on our balance sheet.”
PTX 233. Ms. Dahlgren told Standard & Poor’s on October 1, 2008 that she was
speaking on behalf of the “largest creditor and 80% equity holder of the company
[AIG].” PTX 270 at 2; Dahlgren, Tr. 2676. Ms. McConnell’s handwritten notes from
September 15, 2008 state “loan comes with conditions, plan to run the company [AIG].”
PTX 68 at 14. On September 16, 2008, FRBNY’s Christopher Calabria stated in an
email “We own [AIG], essentially. I can’t believe it.” PTX 97. On September 17, 2008,
FRBNY’s Michael Silva, Chief of Mr. Geithner’s staff, wrote in an email that Mr.
28

 Greenberg “should have said he WAS one of the largest shareholders in the company
[AIG]. The Federal Reserve is now the largest shareholder in the company.” PTX 109.
On September 19, 2008, prior to executing the Credit Agreement, FRBNY’s
Joseph Sommer recommended that Ms. Dahlgren attend the National Association of
Insurance Commissioners Conference, “[n]ow that you are the proud new owner of an
insurance company.” PTX 1607-U at 1; Dahlgren, Tr. 2789 (Ms. Dahlgren attended the
conference).
G. The Creation of a Trust
In mid-September 2008, the Government recognized that the Treasury and
FRBNY might not have the legal authority to take the Series C Preferred stock given to
the Treasury under the terms of the September 22, 2008 Credit Agreement. See, e.g.,
PTX 320-U at 1 (“we agree that there is no power” for the Federal Reserve to “hold AIG
shares.”); PTX 370 at 3 (“Treasury lacks the legal authority to hold directly voting stock
of AIG.”); PTX 409 at 177 (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
443 at 1 (“Nice try on the preferred stock investments! We still don’t have that
authority.”). Thus, government officials began to look for ways to avoid the legal
restriction preventing the U.S. Treasury and FRBNY from holding AIG’s voting
preferred stock.
During the period September 16-20, 2008, Mr. Baxter conceived of the idea of
putting the Series C Preferred stock in a trust as a way to circumvent FRBNY’s and the
Treasury’s lack of authority to own AIG shares directly. Baxter, Tr. 791; PTX 580 at 3
(Baxter); see also JX 90. Mr. Baxter asked Davis Polk to consider various options to
avoid direct ownership by FRBNY and Treasury of a majority voting interest in AIG,
including “warrants that are exercisable upon sale” and “holding shares in a voting trust.”
JX 90.
Davis Polk developed two proposals, Options A and B. Option A contemplated a
combination of preferred shares with limited voting rights and warrants exercisable only
on transfer to a third party. Option B consisted of preferred shares with full voting rights
to be held by an independent trust. PTX 159-U at 6-7. The Government ultimately
selected Option B and began to draft a term sheet to reflect that the form of equity would
now be voting preferred stock, as opposed to the warrants originally approved by the
Board of Governors. See PTX 183 at 3-4; JX 63 at 6. On September 21, 2008, during a
noon conference call, the Government formally decided to issue the Series C Preferred
Stock to an AIG Credit Facility Trust, established for the benefit of the Treasury. JX 101
at 1-3; JX 107 at 137 (stating the AIG Credit Facility Trust was “established for the
29

 benefit of the United States Treasury” and changing the “purchaser” of the stock from
FRBNY to the Trust).
To administer the trust, FRBNY, in consultation with the Treasury, selected three
trustees who had close ties to the Federal Reserve System. Baxter, Tr. 986. Chester
Feldberg worked at FRBNY for 36 years and “had a close relationship with many Federal
Reserve employees and officials.” Feldberg, Tr. 3334-35. Jill Considine “had chaired
the audit and risk committee of the board of directors of the Federal Reserve Bank” and
had previously served a six-year term as a member of the board of the FRBNY. Baxter,
Tr. 988-89; Def.’s Resp. to Pl.’s 2nd RFAs No. 770. Douglas Foshee was the chair of the
Board of Directors of the Federal Reserve Bank of Dallas, Houston Branch, and Central
Houston, Inc. during the time he served as trustee. Foshee, Tr. 3453; Def.’s Resp. to Pl.’s
2nd RFAs No. 772.
Ms. Dahlgren and the trustees signed the final AIG Credit Facility Trust
Agreement on January 16, 2009 and the Trust received the Series C Convertible Preferred
Stock in March 2009. JX 172 at 1, 25; JX 191 at 2. There were at least eight key
provisions of the Trust Agreement. First, the trust was established for the “sole benefit of
the Treasury.” JX 172 at 5. Second, FRBNY had the power to appoint the trustees. Id.
Third, only the Board of Governors could terminate the trust or amend its authorization.
Id. at 6. Fourth, the trustees, in exercising their discretion with the trust stock, were
advised they were to “maximize[e] the Company’s (AIG’s) ability to honor its
commitments to, and repay all amounts owed to, the FRBNY or the Treasury
Department.” Id. at 10. Fifth, FRBNY was to control the defense of “any actual or
threatened suit or litigation of any character involving the Trust” and the trustees could
not make “any admissions of liability . . . or agree to any settlement without the written
consent of the FRBNY.” Id. at 13. Sixth, FRBNY, in consultation with the Treasury,
had the power to remove a trustee. The trustees also could only be removed in
exceptional circumstances such as those involving dishonesty, untrustworthiness, or
dereliction of duty. Id. at 14. Seventh, the trustees were required to act “in or not
opposed to the best interests of the Treasury.” Id. at 15 (providing indemnification rights
to the trustees). Last, the Trustees were to ask FRBNY for clarification regarding the
Trust Agreement and the Government had the right to seek specific performance from the
Trustees for compliance with their obligations. Id. at 19-20, 23. AIG representatives
had no involvement in the preparation or approval of the Trust Agreement, and no
participation in any trustee meetings. PTX 435 at 8-9 (lack of any notice to AIG);
Dahlgren, Tr. 2760-64 (no AIG involvement in trustees’ meetings).
In their capacity as trustees, Mr. Feldberg, Ms. Considine, and Mr. Foshee
understood they had fiduciary duties to the Treasury, and not to AIG’s common stock
shareholders. Feldberg, Tr. 3442; Huebner, Tr. 6272-73; PTX 372 at 1; PTX 3286 at 1.
30

 The trustees also knew they could not sell or dispose of the trust stock unless FRBNY
approved, and they questioned their level of independence. Feldberg, Tr. 3442; 3566-7l;
DX 630 at -312 to -313. On October 30, 2008, the trustees sent a memorandum to Mr.
Baxter seeking to clarify their level of independence. DX 630 at -312-13. The trustees
were concerned with Section 2.04(d) of the Trust Agreement which set forth two
potentially conflicting goals for the trustees to consider when exercising their discretion.
First, the trustees were to maximize AIG’s ability to repay advances under the Credit
Agreement. Second, the trustees were to manage AIG so as not to disrupt financial
market conditions as it was in the “best interests of the stockholders of the Company
[AIG].” Id. The Government never removed Section 2.04(d) from the Trust Agreement,
but did specify the two goals were “non-binding” on the trustees’ discretionary power to
vote the trust stock. JX 172 at 10. This position satisfied the trustees that they would be
independent in performing their fiduciary duties as trustees. Feldberg, Tr. 3407.
During their time as trustees, Mr. Feldberg, Ms. Considine, and Mr. Foshee
received information about AIG through FRBNY representatives, because the trustees
did not attend AIG’s board or committee meetings. Baxter, Tr. 1006; PTX 516 at 49-50.
The trustees engaged Spencer Stuart, an executive recruitment firm, to assist in
identifying potential new candidates for AIG’s board of directors. In June 2009, at the
annual shareholder meeting, the trustees proposed the candidates for election. Feldberg,
Tr. 3419-26; Foshee, Tr. 3521, 3524-26. Before voting on matters and selecting the
board of directors for AIG, however, the trustees consulted with FRBNY. Baxter, Tr.
842-43. The trustees also did not participate in matters affecting the Trust’s ownership
rights, including the reverse stock split. Feldberg, Tr. 3364, 3373-74.
H. The Restructuring of AIG’s Loan in November 2008
After FRBNY and AIG entered into the September 22, 2008 Credit Agreement,
AIG needed more liquidity support. Geithner, Tr. 1761 (“Over the course of the
succeeding weeks, really almost immediately, AIG was . . . facing escalating losses and a
dramatic escalation in their needs for liquidity.”). Ultimately, AIG received nearly $100
billion in additional support, including nearly $50 billion in new capital. On October 6,
2008, the Federal Reserve created an additional $37.8 billion lending facility to address
liquidity pressures AIG was facing from its securities lending program. PTX 696 at 1618.
Officials at FRBNY and AIG recognized that a restructuring of the Credit
Agreement would be necessary. Dahlgren, Tr. 2772-73 (“[T]he terms of the AIG Credit
Facility were viewed by the ratings agencies and ultimately by [Dahlgren] as being too
onerous and counterproductive.”). On October 4, 2008, the Treasury Department’s Dan
Jester asked FRBNY to “rethink the terms of the deal; deal was onerous.” PTX 279 at 2.
31

 On October 15, 2008, representatives of FRBNY and the Board of Governors met to
discuss the “need[] to press forward” with regard to restructuring the AIG deal. PTX 297
at 1.
From as early as September 16, 2008, many officials within the Government
recognized that the interest rate charged to AIG on FRBNY’s rescue loan was too high.
PTX 2211 at 10 (Mr. Baxter thought the interest rate assessed against AIG was “[m]ore
of a loan shark” rate.); PTX 318 (Ms. McConnell expressed dismay to Mr. Geithner
regarding the “crazily high” interest rate forced on FRBNY.); PTX 145 (Ms. McLaughlin
stated in a September 18, 2008 email that “[w]e should have been charging 3.5% . . . not
12% . . . it is wrong that this was done w/o [FRBNY’s] input.”). Financial analysts at
UBS felt that the terms for AIG were harsh. PTX 1665 at 3 (Sept. 25, 2008 report: “If
the [G]overnment wanted to help existing AIG shareholders, the terms of the [C]redit
[F]acility [A]greement would have been less onerous and dilutive in the first place.”).
Morgan Stanley made similar observations. PTX 246 at 1 (Sept. 24, 2008 report: “terms
are even more punitive than we originally expected, making us question the risk-reward
profile of the company.”). Mr. Geithner, recalling the AIG events in 2012, observed:
“We replaced the management and the boards of directors. We forced losses on
shareholders proportionate to the mistakes of the firm.” PTX 648 at 8.
Despite the initial $85 billion rescue loan and the October 2008 $37.8 billion
securities lending facility, AIG’s financial condition worsened. In November 2008, the
ratings agencies again threatened to downgrade AIG due to an expected $24.5 billion
quarterly loss. Baxter, Tr. 1016. AIG filed its SEC Form 8-K/A on November 10, 2008,
announcing a $24.47 billion loss for the third quarter of 2008. JX 149 at 4. That same
day, the Federal Reserve and the Treasury Department announced a restructuring of the
credit facility, and provided a package of new assistance to stabilize AIG. Id. at 16-18.
The restructuring package contained elements intended to avert an AIG
downgrade and bankruptcy, including: (a) $40 billion of TARP (“Troubled Asset Relief
Program”)11 capital support; (b) modifications to the original loan terms including a
reduction in interest rate by 5.5 percent, a reduction in the undrawn funds interest rate to
0.75 percent, and an extension of the loan term from two years to five years; (c) transfer
of AIG’s RMBS investments from its securities lending portfolio to a newly created
special purpose vehicle called Maiden Lane II; and (d) creation of another special
purpose vehicle called Maiden Lane III to eliminate AIG’s CDS posting obligations and
CDS-related liquidity risks. JX 147 at 2; JX 149 at 16-18; PTX 5362 (Cragg chart).
TARP was a program authorized under the Emergency Economic Stabilization Act of 2008 (“EESA”)
that permitted the Treasury Department to, among other things, purchase equity investments in troubled
companies. See 12 U.S.C. §5211(a)(1) (2008); see also Alvarez, Tr. 162-63.
11

32

 With the $40 billion in TARP assistance, the Treasury Department purchased
AIG’s Series D Preferred Stock, a newly created class of stock that had terms more
onerous than other TARP equity purchased by Treasury. JX 158 at 2. The Series D
Preferred Stock had an annual dividend rate to the Government of 10 percent. Id. at 10.
In contrast, the $125 billion in preferred stock purchased by Treasury under the Capital
Purchase Program from “eight of the country’s largest financial institutions” had an
annual dividend rate of 5 percent. PTX 622 at 30; see also PTX 422 at 57-59. The $40
billion purchase price paid by Treasury under the Capital Purchase Program was
immediately “used to pay down the current outstandings on the Fed loan,” also reducing
the maximum borrowing limit from $85 billion to $60 billion. Dahlgren, Tr. 2875-76;
PTX 622 at 34; PTX 5200.
I. The Walker Lawsuit
On November 4, 2008, a group of AIG shareholders filed a lawsuit in the
Delaware Chancery Court complaining that the Government’s Series C Preferred Stock
should not be converted into AIG common stock without a shareholder vote. Walker v.
AIG, Inc., Case No. 4142-CC (Del. Ch., Nov. 4, 2008). On November 5, 2008, Michael
Leahey, Associate General Counsel at AIG, forwarded the Walker complaint to AIG
General Counsel Stasia Kelly and to AIG’s outside counsel at Weil Gotshal, stating,
“[h]ere is a copy of the new shareholder complaint filed last night in Delaware seeking,
among other things, an order declaring that the Super Voting Preferred is not convertible
into common stock absent a class vote by the common stock to increase the number of
authorized shares.” PTX 3259 at 1.
Less than 20 minutes later, Davis Polk received the Walker complaint. Mr.
Huebner of Davis Polk observed “this is potentially serious.” PTX 3259 at 1. Within the
next 30 minutes, Ms. Beamon of Davis Polk notified FRBNY’s Ms. Dahlgren and Mr.
Baxter, “[p]lease find attached a new complaint filed last night against AIG that has some
potentially serious ramifications.” PTX 343 at 1. Defendant monitored the Walker
lawsuit and received updates from AIG’s outside counsel, Weil Gotshal, on the status of
the Walker lawsuit. PTX 377 at 1-2; PTX 3164 at 1-2; PTX 3302 at 1; PTX 3316 at 1-2;
PTX 3223 at 1-3.
On November 6, 2008, the Board of Governors legal staff prepared a
memorandum analyzing the Walker lawsuit and whether Delaware law would require
AIG to hold a separate class vote on the charter amendments. PTX 3221. The
memorandum concluded that “[t]he face of the Delaware statute cited above seems to
indicate that common shareholders would have the right to vote separately from the
33

 preferred shareholders both to increase the number of common shares and to decrease the
common shares’ par value.” Id. at 3.
Defendant made suggestions to AIG on how to litigate the Walker case. Davis
Polk’s Mr. Huebner stated on November 7, 2008: “I asked them to – if they think it
logical – point out to the plaintiffs that the lien claim is likely equally frivolous and
should be dropped from any amended complaint.” PTX 3164 at 2. AIG counsel
consulted with Defendant’s counsel about settling the lawsuit on November 20, 2008:
“Plaintiff is prepared to drop the lawsuit, but we may have a fight with respect to legal
fees. We would like to discuss with you before responding.” PTX 3223 at 1-2. Mr.
Huebner then forwarded the settlement proposal to Mr. Baxter. Id. at 1; see also PTX
376 at 1; Baxter, Tr. 1132-33.
Defendant provided approval to AIG to pay the Walker plaintiffs’ attorneys’ fees:
“The original ‘ask’ by the plaintiffs was $350,000, which has since been reduced to
$175,000. Weil believes that AIG should pay this amount, and that it would cost more to
litigate the issue further. They said that they plan to do so ‘unless the Fed objects.’ We
haven’t previously to my recollection, been asked to sign off on settlements of this
nature, but I think that, given the circumstances, Weil wants us to run this past you.”
PTX 3128, Beamon to FRBNY, at 2. Mr. Baxter responded: “No objection to the
compromise on [attorneys’] fees.” Id. at 1.
AIG, with Defendant’s agreement, represented to the Delaware Court on
November 7, 2008 that “there’s no dispute between the parties” on the question of
whether a separate class vote of the common stock shareholders would be required to
amend the certificate of incorporation to increase the number of authorized shares or to
change the stock’s par value (JX 143 at 7), which was reflected in the Consent Order
issued by the court (JX 176 at 2). Also on November 7, 2008, counsel for AIG informed
the Delaware Court that: “It is AIG’s position that any amendment to its certificate of
incorporation to increase the number of authorized shares of common stock or to change
the par value of that stock requires a class vote of holders of record of a majority of the
shares of common stock outstanding on the record date for that vote. . . . I think in view
of that representation, there’s no dispute between the parties.” JX 143 at 7.
On February 5, 2009, the Delaware Chancery Court entered a Consent Order
which included the following findings:
WHEREAS, during a conference with the Court on
November 7, 2008, AIG’s counsel stated that any amendment
to the Restated Certificate of Incorporation to increase the
number of authorized common shares or to decrease the par
34

 value of the common shares would be the subject of a class
vote by the holders of the common stock, and, based on this
representation, plaintiff’s counsel agreed that the plaintiff’s
request for an order granting this relief is moot;
WHEREAS, AIG publicly disclosed on November 10, 2008,
in its Form 10Q filing for the third quarter of 2008, that the
holders of the common stock will be entitled to vote as a class
separate from the holders of the Series C Preferred Stock on
any amendment to AIG’s Restated Certificate of
Incorporation that increases the number of authorized
common shares and decreases the par value of the common
shares.
JX 176 at 2-4. Kathleen Shannon, AIG’s Senior Vice President, Secretary, and Deputy
General Counsel, submitted an affidavit to the Delaware Chancery Court in February
2009 confirming AIG’s position from as early as September 2008 that a class vote of
common shareholders was required under Delaware law to increase the number of
authorized shares or to decrease the par value of common stock shares. JX 181.
On November 9, 2008, as a result of the Walker lawsuit, Defendant amended the
Credit Agreement to note that “common stockholders voting as a separate class” will vote
on “amendments to AIG’s certificate of incorporation to (a) reduce the par value of
AIG’s common stock to $0.000001 per share and (b) increase the number of authorized
shares of common stock to 19 billion. JX 147 at 9; JX 150 at 193. This amendment to
the Credit Agreement was intended “to implement the representation that had been made
to the Delaware court two days earlier.” Brandow, Tr. 5861-62.
Despite the representations to the Delaware Court, the entry of the Consent Order,
and the amendment to the Credit Agreement, there never was a shareholders’ meeting at
which the AIG common stockholders, voting as a class, had an opportunity to vote on
whether to reduce the par value of AIG’s common stock or to increase the number of
AIG’s authorized shares. Liddy, Tr. 3163-64.
J. Maiden Lane II and III
Soon after AIG and FRBNY executed the Credit Agreement on September 22,
2008, AIG began seeking concessions from various counterparties to unwind and
terminate the CDS transactions that were causing many of AIG’s liquidity issues. These
attempts generally were unsuccessful, and FRBNY representatives stepped in to take over
the negotiations with counterparties on behalf of AIG. PTX 333 at 1 (FRBNY asked
35

 Elias Habayeb of AIG to “stand down on all discussions with counterparties on tearing
up/unwinding CDS trades on the CDO portfolio.”); see also Dahlgren, Tr. 2994-95;
Herzog, Tr. 6998-7002. FRBNY’s short-lived attempts to negotiate concessions from
AIG’s counterparties also proved unsuccessful. Alvarez, Tr. 354-55; Baxter Tr. 1028.
FRBNY informed AIG of its unsuccessful negotiations with counterparties on
November 8, 2008, telling AIG and its outside counsel, Weil Gotshal, that the
counterparties would receive full par value. DX 2131 at -7727. AIG’s counterparties
also received complete releases from AIG for all legal action, including any potential
fraud or misrepresentation claims. Baxter, Tr. 1071 (the deal “negotiated by
representatives of the New York Fed with the counterparties” “involved 100 percent par,
plus the releases.”). In this way, FRBNY was able to assure that the major financial
institutions would be made whole and would not suffer any losses from their transactions
with AIG.
On November 10, 2008, some leading credit rating agencies informed AIG that
they expected to downgrade the company unless AIG presented a solution to stabilize the
company and improve its financial condition. Baxter, Tr. 1028; LaTorre, Tr. 2323, 2331.
A downgrade of AIG’s rating would have triggered additional collateral calls on AIG’s
CDS portfolio. To avoid a ratings downgrade, AIG asked the Government for additional
assistance. Liddy, Tr. 3222-25, 3231. AIG’s Board of Directors approved a new
Government proposal on November 9, 2008. JX 144 at 9-13. The Government’s
proposal included the creation of a new entity known as “Maiden Lane III.” Id. at 11, 5354; Liddy, Tr. 3235-36.12
Under the terms of Maiden Lane III, FRBNY loaned $30 billion and AIG
contributed $5 billion to have Maiden Lane III purchase certain multi-sector CDOs
underlying CDSs written by AIGFP. Baxter, Tr. 1020; DX 664 at -18; JX 149 at 17.
Using Maiden Lane III, FRBNY and AIG were able to terminate the CDSs, and thereby
remove AIG’s exposure to collateral calls from its CDS portfolio. Liddy, Tr. 3230-31
(Maiden Lane III “remove[d] that cash drain and liability off of [AIG’s] balance sheet.”);
Schreiber, Tr. 6623 (Maiden Lane III eliminated the “volatility and ongoing liquidity
drain” from AIG’s CDS exposures). FRBNY’s loan to Maiden Lane III was senior to
AIG’s contribution and was to be repaid in full before AIG received any payment on its
$5 billion contribution. PTX 2800 at 34-35. After the amounts were repaid in full,
FRBNY received 67 percent and AIG received 33 percent of any additional Maiden Lane
III net proceeds. Id.

The “Maiden Lane” entities are named for the street in New York City that runs behind FRBNY’s
office building. Baxter, Tr. 889-90.
12

36

 Between November 25 and December 31, 2008, Maiden Lane III purchased $62.1
billion in par amount of CDO securities from AIGFP’s counterparties and terminated the
associated CDSs. JX 188 at 41. By June 2012, AIG completely repaid the Government’s
Maiden Lane III loan with interest. By July 2012, AIG received repayment of its Maiden
Lane III contribution with interest. CDOs purchased by Maiden Lane III were then sold
through a series of auctions, culminating on August 23, 2012. PTX 2540 at 1. This
process resulted in a net gain to the Government of approximately $6.6 billion with $737
million in interest. Id.; DX 1883 at App’x C ¶ 29.
In addition to Maiden Lane III, the Government used another special purpose
vehicle, Maiden Lane II, to purchase AIG’s RMBS for $19.8 billion. JX 188 at 41, 250;
PTX 2800 at 34 (stating that the “nonagency RMBS . . . had an approximate fair value of
$20.8 billion.”). Under the terms of Maiden Lane II, the Government’s loan would be
repaid first, including accrued interest, and then any net proceeds from the transaction
would be divided: FRBNY was to receive five-sixths while AIG’s subsidiaries would
receive one-sixth. PTX 2800 at 34. In March 2011, the Government announced that it
would begin selling the securities in the Maiden Lane II portfolio. The sales of all the
securities as well as the cash flow they generated while held in Maiden Lane II created a
net gain of approximately $2.8 billion to FRBNY for the benefit of U.S. taxpayers. PTX
2539 at 1; see also DX 1883, Saunders Report, App’x C, ¶ 28.
Ultimately, as a result of Maiden Lane II and Maiden Lane III, AIG’s
counterparties received tens of billions of dollars in Government assistance. PTX 549 at
34 (“there is no question that the effect of FRBNY’s decisions . . . was that tens of
billions of dollars of Government money was funneled inexorably and directly to AIG’s
counterparties.”); Cragg, Tr. 5097-98 (noting $29 billion in payments to AIG’s
counterparties). Although AIG had offered to buy back the CDOs underlying Maiden
Lane II and III as part of a 2010 restructuring, Defendant refused to authorize this action,
despite the fact it would still make a profit on the transaction. See JX 324 at 3, 7 (“If the
FRBNY accepts this offer, the loans that the FRBNY made to Maiden Lane II will be
repaid in full, with interest, and the FRBNY will realize a profit of approximately $1.5
billion on its residual equity interest in Maiden Lane II.”); see also PTX 3366 at 1, 4.
K. Reverse Stock Split
During the weeks following the Credit Agreement, AIG’s stock continued to trade
at a low price. Herzog, Tr. 7011 (“the stock price had fallen below a dollar for a period
of time.”); JX 221 at 70 (“The share price of AIG Common Stock has declined
significantly since the third quarter of 2008, and, during February and March 2009, and
occasionally since then, it has closed below $1.00 per share.”). On October 14, 2008, the
NYSE sent a letter to Mr. Liddy warning that AIG was at risk of being delisted under
37

 NYSE rules. DX 601 (NYSE requires its listed companies to have an “[a]verage closing
share price of not less than $1.00 over a 30 trading day period.”). In response, Mr. Liddy
requested AIG management to develop a plan to keep AIG’s common stock from being
delisted. Liddy, Tr. 3264.
Mr. Herzog testified that he first proposed the idea of a reverse stock split to
increase the trading price of AIG common stock. Herzog, Tr. 7012-13. In December
2008, AIG’s outside counsel, Sullivan & Cromwell, drafted a proxy statement proposing
the reverse stock split. JX 164 at 26-28. After consultation with D.F. King, an
independent proxy solicitor, regarding the terms of the contemplated reverse stock split,
AIG proposed a reverse stock split at a twenty-to-one ratio. JX 178 at 7; Liddy, Tr. 328081. On May 20, 2009, AIG’s Board of Directors unanimously voted to include the
reverse stock split in the 2009 proxy statement. JX 218 at 4; Liddy, Tr. 3267-68.
On June 30, 2009,13 at AIG’s annual shareholder meeting, AIG included on its
proxy statement the resolution to amend AIG’s certificate of incorporation to effect a
reverse stock split of issued shares at a ratio of twenty-to-one. JX 221 at 2, 69-73
(Proposal Four). At the shareholder meeting, the preferred shareholders and 85 percent
of the voting common shareholders, including Starr, voted to approve the reverse stock
split. JX 226 at 6; DX 814-A at 1. Starr and other common stock shareholders knew that
by approving the reverse stock split, it would make almost five billion shares of common
stock available for future issuance. JX 221 at 68. AIG’s proxy statement also disclosed
that the shares “may be issued by AIG’s Board of Directors in its sole discretion. Any
future issuance will have the effect of diluting the percentage of stock ownership and
voting rights of the present holders of AIG Common Stock.” Id. at 70.
Plaintiff contends that the reverse stock split was proposed with a preferred-tocommon stock exchange in mind as a way to avoid a separate class vote of the common
stockholders, but there is insufficient evidence in the record to support Plaintiff’s claims.
Starr presented little evidence showing that the idea for the exchange preceded the
reverse stock split, or that the Government proposed the reverse stock split to avoid a
separate class vote of the common shareholders. Every witness at trial testified
unequivocally that Starr and AIG’s other shareholders voted for the twenty-to-one
reverse stock split to avoid a delisting on the NYSE. See, e.g., Liddy, Tr. 3267 (“It gave
us the best chance of keeping the stock listed on the New York Stock Exchange.”);
Herzog, Tr. 7014 (“Well, I know why I suggested it, and that was because I was
concerned about the delisting of the stock, and that’s why I suggested it to Morris
[Offit].”); Smith, 7711-12 (supported the one-for-twenty stock split “[s]olely for the
reason that it addressed the delisting issue.”). The proxy statement AIG filed with the
13

June 30, 2009 was also the day the NYSE suspension of its minimum price for listing expired. JX 221
at 2, 70 (day AIG’s stock would be delisted).

38

 Securities and Exchange Commission confirmed that the “primary purpose of the reverse
stock split [was] to increase the per share trading price of AIG Common Stock.” JX 221
at 69.
The first time FRBNY and the Treasury contemplated the idea of an exchange was
in 2010 when AIG began to explore various ways to end the Government’s involvement
in AIG’s affairs. Shannon, Tr. 3701-02 (Q: “[W]hen was the first consideration that
you’re aware of exchanging [the Series C preferred stock] for common shares?” A: “In
connection with the . . . recapitalization . . . in the fall of 2010.”). AIG wanted to
improve its credit rating and gain access to private capital and credit markets that were
unavailable while it had existing obligations to the Government. PTX 2248 at 28;
Langerman, Tr. 7165; PTX 609 at 16; JX 271 at 7. To achieve that goal, AIG along with
Treasury, the trustees, and FRBNY, began to negotiate a comprehensive plan that would
allow AIG to exit the Credit Facility and repay its outstanding debt. JX 271 at 26; PTX
578; Schreiber, Tr. 6667-68; Langerman, Tr. 7164-65, 7170-71. Both AIG and the Trust
engaged advisers to assist with the negotiations. Feldberg, Tr. 3393; Schreiber, Tr. 6727;
PTX 2249 at 2-3 (listing advisers present at the September 29, 2010 AIG Board meeting).
During the negotiations, the idea of exchanging the preferred shares for common stock
was developed, which would legally allow the Government to avoid a separate class vote
of the common shareholders.14 Brandow, Tr. 5854.
On September 30, 2010, following extensive negotiations, the Government and
AIG signed a term sheet setting forth the terms of the recapitalization transaction. JX
285; JX 306 (parties signed a Master Transaction Agreement on December 8, 2010 which
implemented the September 30, 2010 term sheet). The exchange was facilitated by the
twenty-to-one reverse stock split which had increased the number of authorized but
unissued shares. Zingales, Tr. 3850-51; Brandow, Tr. 5852. As a result of the reverse
stock split, the Government could exchange its preferred shares for common shares
without a separate class vote of the common shareholders. JX 302 at 8; Brandow, Tr.
5852.
There were three series of preferred stock (Series C, Series E, and Series F) that
were exchanged for common stock in the 2011 restructuring agreement. Each series of
preferred stock that was exchanged for common stock in 2011 is defined below,
including the Series D stock acquired under TARP that had already been exchanged for
Series E preferred stock prior to the 2011 restructuring agreement:
14

Under Delaware law, the exchange did not require a separate class vote of the common shareholders.
A separate class vote is only required if “the amendment would increase or decrease the aggregate
number of authorized shares of such class” or “increase or decrease the par value of the shares of such
class.” 8 Del. C. § 242(b)(2) (2014).

39

 Series C Preferred Stock: convertible stock issued to the Government on
September 22, 2008 under the $85 billion Credit Agreement, which
provided the Government with 79.9 percent equity and voting control in
AIG. PTX 196 at 3; JX 110 at 1, 3, 66. The stock was later placed into a
trust on January 16, 2009. Def.’s Resp. to Pl.’s 2nd RFAs No. 726.
Series D Preferred Stock: stock purchased by Treasury for $40 billion on
November 25, 2008 under TARP. JX 158 at 2. The Series D Preferred
Stock had an annual dividend rate to the Government of 10 percent and the
dividends owed were cumulative, meaning that dividends owed under the
stock accumulated until AIG made the payment. Id. at 10-11.
Series E Preferred Stock: stock acquired by the Government on April 17,
2009 as part of a March 2009 restructuring agreement that allowed the
Government to exchange its Series D Preferred Stock for Series E. The
Series E was noncumulative, and as such, was looked upon more favorably
by the credit agencies. Like the Series D Preferred Stock, it also had a
dividend rate of 10 percent per year. PTX 589 at 96 n.362 (noncumulative
stock more closely resembles common stock); JX 208 at 3 (reporting AIG’s
issuance of the Series E Preferred Stock).
Series F Preferred Stock: stock issued to Treasury on April 17, 2009
under a credit facility where Treasury agreed to provide $30 billion to AIG
in exchange for the preferred stock. The Series F Preferred Stock was
noncumulative and had a dividend rate of 10 percent. JX 209 at 3
(reporting AIG’s issuance of the Series F Preferred Stock).
The September 30, 2010 term sheet took effect on January 14, 2011 and
terminated the Credit Facility. AIG paid FRBNY $21 billion in cash, which represented
“complete repayment of all amounts owing under the Credit Agreement.” JX 314 at 2.
The Government earned a profit of $6.7 billion on the Credit Facility. Alvarez, Tr. 61112 ($6.7 billion represented interest and fees). As part of the Recapitalization Plan, the
Government also acquired 92.1 percent of AIG’s common stock through an exchange of
its preferred shares. Stip. ¶ 212. To acquire 92.1 percent of the common stock, the
Treasury exchanged its Series C preferred stock for 562.9 million shares of common
stock and exchanged the Series E and Series F preferred stock for 1.09 billion shares of
common stock. Id. AIG also issued ten-year warrants to existing shareholders with a
strike price of $45 on January 19, 2011. JX 285 at 9-10; JX 311 at 3; PTX 609 at 58
(“Exchange price of $45.00 per AIG common share, a 26.2% premium to market”). The
number of warrants received was equal to the number of shares held as of the Record
40

 Date (“the date on which one must be registered as a stockholder on the stock book of a
company in order to receive a dividend declared by the company”) multiplied by
0.533933. JX 311 at 3; Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 732
F.2d 859, 861 (11th Cir. 1984) (defining record date).
L. The Government’s Common Stock
From May 24, 2011 through December 14, 2012, the Government 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. PTX 2852 at 65 n.197. Assuming that the common
shares received in exchange for Series C Preferred Stock are treated as being sold pro rata
with common shares received in exchange for Series E and F Preferred Stock, the amount
received for the Series C Preferred Stock would be $17.6 billion. Id.
Defendant’s only payment to AIG for the Series C Preferred Stock was $500,000
in loan forgiveness that FRBNY provided to AIG in September 2008. JX 107 at 37-38 (§
402(e)); JX 185 at 2. AIG recorded the fair value for the Series C Preferred Stock as $23
billion. JX 188 at 293-94; Kothari, Tr. 4700. Ultimately, the Government received $22.7
billion in profit on the sale of all AIG stock it had acquired. PTX 658; see also Bernanke,
Tr. 2014 (return to the Government “on all of the assistance that was given to AIG,
whether it was from the Federal Reserve or TARP or some other place,” was $23
billion.); Schreiber, Tr. 6684-85 (stating the Government received “all of the money they
put into AIG back plus a profit of approximately $23 billion.”).
M. Treatment of Other Distressed Financial Entities
During the financial crisis, many financial institutions engaged in much riskier and
more culpable conduct than AIG, but received much more favorable loan treatment from
the Government. In fact, financial institutions that originated and marketed subprime
mortgage-backed securities made representations and disclosures that the Government
later concluded were false and misleading. There was fraud in the underwriting process.
Cragg, Tr. 4996; PTX 5321 (summarizing the results of government litigation against
Bank of America, Citigroup, JP Morgan, Merrill Lynch, and Countrywide). The
Department of Justice charged many firms with fraud related to the financial crisis. DOJ
press releases, PTX 2734 (Bank of America), PTX 2527 (Citigroup), PTX 2473 (JP
Morgan), PTX 2872 (Merrill Lynch and Countrywide).
Citigroup. The DOJ “has brought claims against a number of companies,
including Citi, alleging that these companies had engaged in fraudulent conduct that
caused the financial crisis.” Paulson, Tr. 1236. In July 2014, the Government announced
that “after collecting nearly 25 million documents relating to every residential mortgage
41

 backed security issued or underwritten by Citigroup in 2006 and 2007, our teams found
that the misconduct in Citigroup’s deals devastated the nation and the world’s economies,
touching everyone.” PTX 2527 at 2. Mr. Geithner concluded that Citigroup had taken
excessive risks. Geithner, Tr. 1675.
Bank of America. In March 2014, Bank of America agreed to pay $9.3 billion to
settle claims brought by the Federal Housing Finance Agency under its statutory mandate
to recover losses incurred by Fannie Mae and Freddie Mac accusing the Bank, and
subsidiaries Merrill Lynch and Countrywide Financial, of “misrepresenting the quality of
loans underlying residential mortgage-backed securities purchased by the two mortgage
finance companies between 2005 and 2007.” PTX 2504 at 1. In August 2014, Bank of
America paid $16.65 billion, approximately 10 percent of its market capitalization, to
settle a Department of Justice probe related to the Bank’s misconduct in originating
mortgage securities. The settlement was “the largest civil settlement with a single entity
in American history,” and Bank of America “acknowledged that it sold billions of dollars
of RMBS without disclosing to investors key facts about the quality of the securitized
loans. . . . The bank has also conceded that it originated risky mortgage loans and made
misrepresentations about the quality of those loans.” PTX 2734 at 1. The U.S. District
Court for the Southern District of New York held in a case brought by the United States
that Countrywide Financial engaged in conduct that “was from start to finish the vehicle
for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the
harms thereby visited, not just on the immediate victims but also on the financial system
as a whole.” United States ex. rel. O’Donnell v. Countrywide Home Loans, Inc., 33 F.
Supp. 3d 494, 503 (S.D.N.Y. 2014). According to then-Attorney General Eric Holder,
Merrill Lynch and Countrywide “knowingly, routinely, falsely, and fraudulently
[marketed] and sold these loans as sound and reliable investments.” PTX 2872 at 1.
Goldman Sachs. In July 2010, Goldman Sachs settled with the SEC, “paying a
record $550 million fine. Goldman ‘acknowledge[d] that the marketing materials for the
ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was
a mistake for the Goldman marketing materials to state that the reference portfolio was
“selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc.
in the portfolio selection process and that Paulson’s economic interests were adverse to
CDO investors.’” PTX 624 at 221.
JP Morgan. In November 2013, the Department of Justice announced a $13
billion settlement of claims brought by the United States “in which JP Morgan
acknowledges that it regularly represented to RMBS investors that the mortgage loans in
various securities complied with underwriting guidelines.
Contrary to those
representations, as the statement of facts explains, on a number of different occasions, JP
Morgan employees knew that the loans in question did not comply with those guidelines
42

 and were not otherwise appropriate for securitization, but they allowed the loans to be
securitized – and those securities to be sold – without disclosing this information to
investors. This conduct, along with similar conduct by other banks that bundled toxic
loans into securities and misled investors who purchased those securities, contributed to
the financial crisis.” PTX 2473 at 1.
Morgan Stanley. In February 2014, Morgan Stanley “agreed to pay $1.25 billion
to the Federal Housing Finance Agency to resolve claims that it sold shoddy mortgage
securities to Fannie Mae and Freddie Mac.” “According to the agency’s lawsuit, Morgan
Stanley sold $10.58 billion in mortgage-backed securities to Fannie and Freddie during
the credit boom, while presenting ‘a false picture’ of the riskiness of the loans.” “Many
of the loans involved were originated by subprime lenders, like NewCentury and
IndyMac, bundled into bonds and sold to Fannie and Freddie. One group of loans had
default and delinquency rates as high as 70 percent, according to the lawsuit.” PTX 2485
at 1. Mr. Geithner concluded that Morgan Stanley had taken excessive risks. Geithner,
Tr. 1675.
In contrast to the wrongful conduct of the above entities, no claims of fraud or
misconduct have been brought by the Department of Justice against AIG for any of
AIG’s actions in the years leading up to or during the financial crisis. Paulson, Tr. 1236.
The Federal Reserve, following the Bagehot Principle,15 used Section 13(3) of the
Federal Reserve Act a number of times in 2008 to lend to institutions in need of liquidity.
Mr. Bernanke explained the Federal Reserve’s approach to lending in 2008:
During the financial crisis, the Federal Reserve provided two
basic types of liquidity support under section 13(3) – broadbased credit programs aimed at addressing strains affecting
groups of financial institutions or key financial markets, and
credit directed to particular systematically-important
institutions in order to avoid a disorderly failure of those
institutions. In both cases the purpose of the credit was to
mitigate possible adverse effects on the broader financial
sector and the economy. Liquidity facilities of the first type
included the Primary Dealer Credit Facility (PDCF), the Term
Securities Lending Facility (TSLF), the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity
Bagehot’s Principle, first enunciated in Walter Bagehot’s 1873 book, “Lombard Street,” is that in a
time of financial crisis or panic, the central bank should freely lend to entities or persons in need of cash
liquidity if they have adequate collateral to post for the loan.
15

43

 Facility (AMLF), the Commercial Paper Funding Facility
(CPFF), the Money Market Investors Funding Facility
(MMIFF), and the Term Asset-Backed Securities Loan
Facility (TALF). Liquidity support provided to particular
institutions to avert a disorderly failure included credit
provided through Maiden Lane LLC to facilitate the
acquisition of Bear Stearns by J.P. Morgan Chase, and credit
provided to American International Group (AIG) through a
revolving credit line and through Maiden Lane II LLC and
Maiden Lane III LLC. The Federal Reserve, acting with the
U.S. Treasury and FDIC, also agreed to provide loss
protection and liquidity support to Citigroup and Bank of
America on designated pools of assets utilizing authority
provided under section 13(3), but ultimately did not extend
any credit to either of these institutions.
PTX 616 at 10 (Bernanke).
On March 16, 2008, the Federal Reserve authorized FRBNY to establish the
PDCF to provide a source of liquidity to primary dealers, including Goldman Sachs,
Morgan Stanley, Bear Stearns, and Lehman Brothers. PTX 12 at 3-4; PTX 1202 at 1;
PTX 693 at 4-5; Alvarez, Tr. 83. The terms of the PDCF included an interest rate at the
primary credit rate with very small fees. The primary credit rate was “somewhere on the
order of 2-1/2 to 3 percent.” Bernanke, Tr. 1995-97. The Government did not demand
any equity in exchange for PDCF lending. PTX 12 at 3-4; Baxter, Tr. 1085. The Federal
Reserve provided assistance to primary dealers without monitoring the way the primary
dealers were managed. Baxter, Tr. 1093.
There were 20 firms that were eligible to use the PDCF. Cragg, Tr. 5051; PTX
5348. Countrywide continued to be a primary dealer despite the fact that it was in
“significant financial trouble.” Baxter, Tr. 1101. “Lehman Brothers continued to be a
primary dealer until after the parent had gone into bankruptcy.” Baxter, Tr. 1101-02.
In September 2008, the Federal Reserve expanded the range of collateral that
borrowers could pledge at the PDCF. PTX 59 at 2-3; PTX 696 at 2-3. Borrowers could
post non-investment grade bonds and equities. Paulson, Tr. 1234-35. The collateral
included “mortgage-backed securities and asset-backed securities,” and there “wasn’t
very much trading” in either at that time. Bernanke, Tr. 2278-79. On September 21,
2008, FRBNY expanded the range of collateral that Morgan Stanley, Goldman Sachs,
and Merrill Lynch could pledge at the PDCF to include foreign currency denominated
44

 securities. McLaughlin, Tr. 2411-12.
McLaughlin, Tr. 2445.

The expanded collateral “had more risk.”

By September 29, 2008, the Federal Reserve had loaned $155.7682 billion through
the PDCF, including $15 billion to Barclay’s Capital, $10 billion to Goldman Sachs, $5
billion to Goldman Sachs’ London branch, $29.694 billion to Merrill Lynch, $6.589
billion to Merrill Lynch’s London branch, $40.0621 billion to Morgan Stanley, and
$21.23 billion to Morgan Stanley’s London branch. PTX 728 at 11. Although FRBNY
provided Section 13(3) loans to many institutions in 2008 and 2009, FRBNY did not take
an equity stake in any of those institutions, including Citigroup, Bank of America, Bear
Stearns, JP Morgan, Morgan Stanley, or Goldman Sachs. Baxter, Tr. 1083-85; Bernanke,
Tr. 1989-90 (only AIG was required to provide its equity as compensation); Geithner Tr.
1396-97. The shareholders of Citibank, Goldman Sachs, Bear Stearns, and all the firms
that had access to the PDCF got “a windfall as a result of government assistance.”
Geithner, Tr. 1903. On September 21, 2008, the Federal Reserve Board of Governors
permitted Morgan Stanley and Goldman Sachs to become bank holding companies while
waiving the normal five-day antitrust waiting period for such an application. PTX 200,
201, 220; Bernanke, Tr. 2116-17.
The following chart shows a comparison of the Federal Reserve’s financial
assistance to AIG and Morgan Stanley during September 16-30, 2008:
Date

AIG

Morgan Stanley

Sept.16, 2008

$14B
loan

12% Interest Rate

$16.5B
loan

2.25% - 3% Interest Rate

Sept. 22, 2008

$37B
loan

12% Interest Rate

$60.6B
loan

2.25% - 3% Interest Rate

Sept. 29, 2008

$55B
loan

2% Commitment Fee

No Commitment Fee

8.5% Undrawn Amounts
Fee

No Undrawn Amounts Fee

79.9% Equity

$97.3B
loan

No Equity

$85 Billion
Commitment Ceiling

No Commitment Ceiling

25% Collateral Haircut

6-10% Collateral Haircut

45

 PTX 5356 (Cragg chart, citing source exhibits, PTX 728, 2565, 2857 at 152-171; JX 107,
108).
N. Expert Testimony
Plaintiff and Defendant offered the testimony of four experts each during the trial.
The Court summarizes below the main points of each expert’s testimony.
Plaintiff’s experts:
Dr. Michael Cragg. The Court accepted Dr. Cragg as an expert in “economics
and financial markets.” Cragg, Tr. 4928; 4934. Dr. Cragg summarized his testimony in
five main points. First, Dr. Cragg assessed AIG’s financial condition. He asserted that
“[t]he liquidity crisis at AIG was caused by the same market forces that affected every
major financial institution during one of the worst financial panics in world history.” Dr.
Cragg then explained the Federal Reserve’s role as lender of last resort. According to Dr.
Cragg, “[t]he punitive terms imposed by the Federal Reserve on AIG’s shareholders,
including the onerous interest rate and equity taking, were inconsistent both with (1) the
Federal Reserve’s central banking function of lender of last resort, and (2) the manner in
which the Federal Reserve exercised its lender of last resort powers with respect to other
institutions.” Moreover, “[t]he Federal Reserve was able to impose punitive terms on
AIG’s shareholders by misusing its monopoly position as lender of last resort to
expropriate AIG shareholder equity in a manner entirely inconsistent with any legitimate
economic policy or rationale.” Dr. Cragg addressed the explanations given for the
Government’s treatment of AIG. Dr. Cragg asserted that the “Government’s alleged
justifications for treating AIG in this manner, i.e., punishment, addressing moral hazard,
preventing a windfall, and compensating for credit risk, [were] not economically
supportable.” Finally, if “there [were] an economically rational explanation for the
Government’s abuse of power, it [was] one of political expediency: AIG was a political
scapegoat.” PTX 5300 at 1; see also Cragg, Tr. 4935-37.
Dr. S.P. Kothari. The Court accepted Dr. Kothari as an expert in “accounting
and finance.” Kothari, Tr. 4525-26; 4529. Dr. Kothari was a damages expert for
Plaintiff. During the trial, Dr. Kothari provided the Court with his valuations of the
Credit Agreement Class and the Reverse Stock Split Class takings. Dr. Kothari valued
the 79.9 percent equity and voting interest (Credit Agreement Class) acquired by the
Defendant at $35.4 billion or $13.16 a share using a market-based approach. A “marketbased approach” is an assessment of the fair market value of equity as of a given date.
Kothari, Tr. 4543-44; PTX 5202; PTX 2852 at 21. For the Reverse Stock Split Class, Dr.
Kothari valued the Series E and F Preferred stock at $4.33 billion or $1.61 per share and
the Series C Preferred Stock at $0.34 billion or $0.13 per share as of June 30, 2009. Dr.
46

 Kothari also valued the Government’s return on all the liquidity and financing it provided
to AIG as of January 14, 2011, stating that the Government earned a total return of $37.5
billion.
Dr. Christopher Paul Wazzan. The Court accepted Dr. Wazzan as an expert in
prejudgment interest. Wazzan, Tr. 4416, 4420. At trial, Dr. Wazzan testified that the
appropriate prejudgment interest rate would be best determined by looking at a rate of
return on a synthetic portfolio comprised of competitors of AIG. Wazzan, Tr. 4423-26.
Looking at such a portfolio, the appropriate prejudgment interest rate to compensate
Plaintiff would be 7.0 percent for the Credit Agreement Class and 20.1 percent for the
Reverse Stock Split Class. Wazzan, Tr. 4428; see also PTX 2841.
Professor Luigi Zingales. The Court accepted Professor Zingales as an expert in
“economics and corporate governance.” Zingales, Tr. 3796; 3799. Professor Zingales
offered expert testimony on Defendant’s effective economic control of AIG, asserting
that Defendant took “effective economic control” on September 16, 2008, which
continued well beyond July 1, 2009. The effective economic control Defendant took
over AIG was evidenced by the Government’s equity ownership, ability to select
directors, its direct and indirect control or influence over management, and its monopoly
position as the lender of last resort. PTX 5045 (noting only one of these factors is
necessary to find control). “Direct or indirect control is shown by hiring, firing, and
compensating executive officers;” “engaging in new business lines;” “making substantial
changes in operations;” “raising additional debt or equity capital;” “merging and
consolidating;” and “selling, transferring, or disposing of material subsidiaries or major
assets.” PTX 5046. The trust created to hold AIG’s assets did not remove the
Government’s effective economic control over AIG, as it was established for the sole
benefit of the Treasury, the trustees were required to act in the best interests of the
Treasury, and Defendant appointed the trustees and had the power to replace them. PTX
5059.
Defendant’s Experts
Professor Robert Daines. The Court accepted Professor Daines as an expert in
“corporate governance, corporate finance, and the economic analysis of corporate
control.” Daines, Tr. 8432-33. Professor Daines summarized his testimony into three
main points. First, he critiqued Professor Zingales’s analysis of effective economic
control. Daines, Tr. 8436. Professor Daines testified that Professor Zingales’s analysis
was fundamentally flawed for three reasons: (1) the board’s incentives were aligned with
AIG’s shareholders; (2) effective economic control does not explain whether the AIG
board acted in the shareholders’ interests; and (3) “[e]ffective economic control [did] not
mean that the Government’s conditions made AIG worse off.” DX 2801; DX 2802.
47

 Second, Professor Daines explained the difference between warrants and preferred stock.
According to Professor Daines, the “equity participation terms of the September 22, 2008
Credit Agreement were not materially different from the terms approved by AIG’s board
on September 16, 2008.” DX 2801; see also Daines, Tr. 8436. Professor Daines
critiqued Professor Zingales’s analysis of the reverse stock split. He testified that
Professor Zingales’s analysis of the reverse stock split was fundamentally flawed because
the primary purpose of the stock split was to increase AIG’s trading price, many
companies also conducted reverse stock splits that did not reduce the number of
authorized shares, and common shareholders, including at least some of whom were the
plaintiff shareholders, voted for the reverse stock split. DX 2801; DX 2816; see also
Daines, Tr. 8436.
Dr. Jonathan Neuberger. The Court accepted Dr. Neuberger as an expert in
“financial economics, the quantification of economic harm, and the determination of
prejudgment interest rates.” Neuberger, Tr. 5557-59. Dr. Neuberger offered testimony
on prejudgment interest. He asserted that if prejudgment interest is awarded, it should be
at a rate equal to a risk free rate of return since Plaintiff should not be compensated for
risks it did not bear. DX 2403; DX 2407. A good proxy for a risk free rate of return
would be government securities such as one-year Treasury bills or the five year Treasury
Inflation Protected Securities (“TIPS”) rate. Using Treasury bills or the TIPS rate as
proxies would yield interest rates of 0.5 and 0.3 percent or 2.9 and 3.2 percent to
compensate Plaintiff for the two alleged takings.
Dr. David K. A. Mordecai. The Court accepted Dr. Mordecai as an expert in
“financial economics, fixed income and credit markets, credit default swap markets, and
distressed lending.” Mordecai, Tr. 7445, 7457. Dr. Mordecai was a damages expert for
Defendant. At trial, Dr. Mordecai summarized his testimony into four main points. First,
he provided an opinion on the initial rescue, asserting that it “did not result in an
economic loss to AIG’s shareholders.” Second, Dr. Mordecai addressed the need for the
Government to obtain an equity component in AIG. Dr. Mordecai opined that “[w]ithout
the equity component, the Revolving Credit Facility (“RCF”) [would] not [have]
provide[d] a return to adequately compensate for the significant risk of lending to AIG.”
He critiqued Dr. Kothari’s estimate of the alleged harm suffered by both the Credit
Agreement Class and the Reverse Stock Split Class as being fundamentally flawed. DX
2601. According to Dr. Mordecai, Dr. Kothari’s estimates of the alleged harm suffered
by both classes was flawed because share dilution does not equal economic loss, Dr.
Kothari ignored that AIG’s stock price actually increased as a result of the initial rescue,
and Dr. Kothari did not estimate a value for the losses to shareholders.
Professor Anthony Saunders. The Court accepted Professor Saunders as an
expert in “financial economics.” Saunders, Tr. 8067-68. Professor Saunders summarized
48

 his testimony in eight main points. First, Professor Saunders addressed AIG and its
financial condition. He asserted that “AIGFP’s un-hedged Multi-Sector CDS portfolio
exposed AIG to significant liquidity risk.” Further, the “deterioration in AIG’s financial
condition and risk profile were primarily caused by factors unique to AIG, not marketwide forces as Dr. Cragg claim[ed].” Professor Saunders testified that the “ex-ante risk
of lending to AIG was extremely high as of September 16, 2008.” Next, he addressed
whether AIG could have become a primary dealer. According to Professor Saunders,
AIG did not meet the requirements to become a primary dealer and, “in any event, access
to the PDCF would not have solved AIG’s liquidity crisis.” Professor Saunders critiqued
Dr. Kothari’s valuations of the Credit Agreement Class and the Reverse Stock Split
Class. He claimed that Dr. Kothari’s valuation of the Credit Agreement Class claims as
being worth $35.4 billion or $13.16 per share did not make economic sense as AIG’s
“stock price did not approach the value Dr. Kothari claims was lost under his ‘bounce
back’ theory.” Similarly, Dr. Kothari’s valuation of the Reverse Stock Split Class claims
as of June 30, 2009 did not make economic sense because there was no economic loss to
the shareholders as a result of increasing the number of unissued authorized shares. DX
2701-02, 2753; see also Saunders, Tr. 8069-71.
O. AIG Epilogue
AIG survived the 2008 economic crisis. AIG repaid all loan amounts to the U.S.
Government, although it sold valuable insurance assets worth billions of dollars to
achieve this objective. PTX 5371 (Cragg chart). The Government’s extension of the
loan term from two years to five years was critical to AIG’s survival. Schreiber, Tr. 6627
(Extension of the loan term “was the most important asset we had. It avoided a rapid-fire
sale of our businesses.”). AIG did not file for bankruptcy protection, and it continues
today as a publicly-traded company on the New York Stock Exchange.
History of Proceedings
The Court’s docket sheet for this case, currently containing 442 docket entries,
provides a detailed chronological history of every judicial filing. With few exceptions,
all of the filings are available to the public. The proceedings began with Starr’s filing of
the original complaint on November 21, 2011.
The Court has issued seven published decisions thus far in this case. On February
10, 2012, the Court added AIG as a nominal defendant for Starr’s shareholder derivative
claims. Starr Int’l Co. v. United States, 103 Fed. Cl. 287 (2012). On July 2, 2012, the
Court granted in part and denied in part Defendant’s motion to dismiss, allowing most of
Starr’s causes of action to proceed. Starr Int’l Co. v. United States, 106 Fed. Cl. 50
(2012).
On September 17, 2012, the Court denied Defendant’s motion for
49

 reconsideration of the July 2, 2012 ruling. Starr Int’l Co. v. United States, 107 Fed. Cl.
374 (2012). On March 11, 2013, the Court certified two classes of plaintiff shareholders
who could proceed with this action under Rule 23: (a) the Credit Agreement Class,
consisting of persons or entities who owned shares of AIG common stock during
September 16-22, 2008, excluding Defendant and the named trustees; and (b) the Stock
Split Class, consisting of persons or entities who owned shares of AIG common stock on
June 30, 2009, AIG’s annual shareholder meeting date, excluding Defendant and the
named trustees. Starr Int’l Co. v. United States, 109 Fed. Cl. 628 (2013). On June 26,
2013, the Court granted AIG’s and the Government’s motions to dismiss Starr’s
shareholder derivative claims, and denied the Government’s motion to dismiss Starr’s
direct claims. The Court also dismissed AIG as a party to this action. Starr Int’l Co. v.
United States, 111 Fed. Cl. 459 (2013). On July 29, 2013, the Court authorized Plaintiff
to take the deposition of Ben S. Bernanke. Starr Int’l Co. v. United States, 112 Fed. Cl.
56 (2013). On September 27, 2013, the Court denied Defendant’s motion to certify the
Court’s June 26, 2013 ruling for interlocutory review. Starr Int’l Co. v. United States,
112 Fed. Cl. 601 (2013).
The Court also has issued various unpublished rulings and orders, including a
denial of Defendant’s motion for summary judgment (Dkt. No. 282, issued Aug. 25,
2014), and Discovery Orders No. 1-11. Of these, Discovery Order No. 6 perhaps is the
most significant, where the Court ruled upon multiple claims of the attorney-client
privilege and the deliberative process privilege. Dkt. No. 182, issued Nov. 6, 2013.
Jurisdiction – Section 13(3) of the Federal Reserve Act
As noted above, the Court has addressed a number of jurisdictional and standing
questions at earlier stages of this case. The Court dismissed some of Starr’s allegations in
the amended complaints, and dismissed AIG as a nominal defendant, but ruled that the
two classes of shareholders could proceed to trial on the taking and illegal exaction
claims under the Fifth Amendment to the U.S. Constitution. The Court’s earlier rulings
on these issues need not be repeated here. However, there is one jurisdictional issue
where the Court previously granted an inference in Starr’s favor, but which now requires
further analysis. See Starr Int’l Co., 107 Fed. Cl. at 378 (deferring ruling on whether a
money-mandating statute is required for an illegal exaction claim).
The Government contends that the Court lacks jurisdiction over Starr’s illegal
exaction claim because Section 13(3) of the Federal Reserve Act is not a moneymandating source of law. The general rule is that the Court of Federal Claims possesses
jurisdiction under the Tucker Act, 28 U.S.C. § 1491, of claims based upon a
constitutional provision, statute, or regulation when “the constitutional provision, statute,
or regulation is one that is money-mandating.” Def.’s Post-Trial Concl. of Law at 108
50

 (citing Fisher v. United States, 402 F.3d 1167, 1173 (Fed. Cir. 2005) (en banc)). While
Fifth Amendment taking claims are based upon the money-mandating language “nor
shall private property be taken for public use without just compensation,” illegal exaction
claims are based upon the Due Process Clause of the Fifth Amendment. See, e.g., Casa
de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d 1356, 1363 (Fed. Cir. 2002).
The Due Process Clause does not contain a money-mandating provision, and therefore an
illegal exaction claim requires reference to another statute or regulation to create
jurisdiction in this Court. See Hamlet v. United States, 873 F.2d 1414, 1416-17 (Fed.
Cir. 1989) (this Court can adjudicate constitutional claims if they are made in conjunction
with a money-mandating source of law).
This Court ordinarily lacks jurisdiction of due process claims under the Tucker
Act, but possesses jurisdiction of illegal exaction claims “when the exaction is based on
an asserted statutory power.” Aerolineas Argentinas v. United States, 77 F.3d 1564, 1573
(Fed. Cir. 1995). As defined, an illegal exaction claim involves money that was
“improperly paid, exacted, or taken from the claimant in contravention of the
Constitution, a statute, or a regulation.” Eastport S.S. Corp. v. United States, 178 Ct. Cl.
599, 605, 372 F.2d 1002, 1007 (1967). Illegal exaction claims often arise in tax disputes.
A classic illegal exaction claim is a tax refund suit alleging that taxes have been
improperly collected or withheld by the Government. See, e.g., City of Alexandria v.
United States, 737 F.2d 1022, 1028 (Fed. Cir. 1984). However, illegal exaction claims
arise in many other contexts as well, such as the AIG shareholders’ lawsuit here.
Fifth Amendment taking claims and illegal exaction claims are two sides of the
same coin: taking claims are based upon authorized actions by government officials,
whereas illegal exaction claims are based upon unauthorized actions of government
officials. See Aerolineas Argentinas, 77 F.3d at 1579 (Nies, J., concurring):
As recognized in United States v. Testan, 424 U.S.
392, 401-402, 96 S. Ct. 948, 954-55, 47 L. Ed. 2d 114 (1976),
a Tucker Act claim for damages against the United States
based upon a statute may take one of two forms: a claim
under a money-mandating statute or a claim for money
improperly exacted or retained. A claimant must rely either
on a statute that mandates payment of money from the
government to the claimant or on an illegal exaction, that is, a
payment to the government by the claimant that is obtained
without statutory authority. See Clapp v. United States, 127
Ct. Cl. 505, 117 F. Supp. 576 (1954). The first is founded on
statutory authorization; the second on the absence of statutory
authorization. One is the flip side of the other.
51

 Id. Intuitively, taking claims and illegal exaction claims ought to be on equal
jurisdictional footing in this Court, but a problem is created because taking claims stem
from explicit money-mandating language in the Fifth Amendment, while illegal exaction
claims do not.
In addressing this jurisdictional problem for illegal exaction claims, some
decisions have dispensed with the requirement for a money-mandating statute, seemingly
embracing the concept that the Government should not escape responsibility for its
unauthorized actions based on a jurisdictional loophole. See Figueroa v. United States,
57 Fed. Cl. 488, 495-96 (2003) (“In the context of an illegal exaction, the court has
jurisdiction regardless of whether the provision relied upon can be reasonably construed
to contain money-mandating language.”); Bowman v. United States, 35 Fed. Cl. 397, 401
(1996) (“In illegal exaction cases, in contrast to other actions for money damages,
jurisdiction exists even when the provision allegedly violated does not contain
compensation mandating language.”); Aerolineas Argentinas, 77 F.3d at 1573 (“[A]n
illegal exaction has occurred when ‘the Government has the citizen’s money in its
pocket.’ Suit can then be maintained under the Tucker Act to recover the money
exacted.”) (quoting Clapp, 127 Ct. Cl. at 513, 117 F. Supp. at 580); Auto. Club Ins. Ass’n
v. United States, 103 Fed. Cl. 268, 273 (2012) (Where an illegal exaction is alleged, the
Tucker Act “enables suit even in the absence of a money-mandating statute.”).
Other decisions have espoused a slightly tighter standard, but one that is still
broader than simply requiring a “money-mandating” source of law. The lead case in this
category is Norman v. United States, 429 F.3d 1081 (Fed. Cir. 2005), which states:
An illegal exaction involves a deprivation of property without
due process of law, in violation of the Due Process Clause of
the Fifth Amendment to the Constitution. See, e.g., Casa de
Cambio Comdiv, 291 F.3d at 1363. . . . To invoke Tucker Act
jurisdiction over an illegal exaction claim, a claimant must
demonstrate that the statute or provision causing the exaction
itself provides, either expressly or by “necessary
implication,” that “the remedy for its violation entails a return
of money unlawfully exacted.” Cyprus Amax Coal Co. v.
United States, 205 F.3d 1369, 1373 (Fed. Cir. 2000)
(concluding that the Tucker Act provided jurisdiction over an
illegal exaction claim based upon the Export Clause of the
Constitution because the language of that clause “leads to the
ineluctable conclusion that the clause provides a cause of
action with a monetary remedy”).
52

 Id. at 1095 (emphasis added).
Even under the more demanding test of Norman, the words “by necessary
implication” would lead to a finding of jurisdiction in this case. Certainly, where the
Government has imposed unlawful conditions in connection with an emergency loan
under Section 13(3) of the Federal Reserve Act, the Government should not be permitted
to insulate itself from liability by arguing that Section 13(3) is not “money-mandating.”
If this were true, the Government could nationalize a private corporation, as it did to AIG,
without fear of any claims or reprisals. Section 13(3) does not contain express “moneymandating” language, but “by necessary implication,” the statute should be read to allow
the shareholders’ cause of action here. By taking 79.9 percent equity and voting control
of AIG, the Government exacted the shareholders’ property interests. The two certified
classes of AIG common stock shareholders were the parties directly affected by the
Government’s unlawful action, and “by necessary implication,” they should be permitted
to maintain their lawsuit.
The Government also argues that Section 13(3) of the Federal Reserve Act is a
discretionary statute and cannot be money-mandating because of the language stating
“the Board of Governors . . . may authorize” a loan, (citing Doe v. United States, 463
F.3d 1314, 1324 (Fed. Cir. 2006)). Def.’s Post-Trial Resp. Br. at 20-21. However, in the
case of Section 13(3), the discretionary part of the statute is in allowing the Government
to consider whether it would extend an emergency rescue loan to AIG. Section 13(3) did
not require the Government to make an emergency loan to any entity, including AIG.
Once it decided to make an emergency loan to AIG, the Government’s discretion ended.
At that point, the Government had to abide by the restrictions of Section 13(3), which did
not include the steps it took in taking 79.9 percent equity and acquiring voting control to
nationalize AIG. Further, Doe is an overtime pay case, not an illegal exaction case, and
does not apply in the circumstances presented here.
Last, the Government argues that even if Section 13(3) of the Federal Reserve Act
were money-mandating, Starr could not recover because it is not an intended beneficiary
of Section 13(3). Def.’s Post-Trial Concl. of Law at 109. Rather, the Government says
that “[S]ection 13(3) exists for the benefit of the financial system.” Id. If the
Government means that “financial system” includes only the Federal Reserve System and
the Department of Treasury, this assertion is incorrect.
Starr is entitled to sue for the return of its money or property because it is an
intended beneficiary under the Federal Reserve Act. See 12 U.S.C. § 343; see also
Alyeska Pipeline Serv. Corp. v. United States, 224 Ct. Cl. 240, 261-62, 624 F.2d 1005,
1018 (1980) (“Where the payments were exacted in violation of a statute intended to
53

 benefit the person seeking recovery, it is immaterial that the person failed to protest when
making the payment.”). The Court declines to read Section 13(3) in a way that limits its
benefits to only the governmental side of the financial system, and not to the individual
businesses, corporations, partnerships or investors that comprise the entire financial
system. Such a reading would allow the Federal Reserve Board to impose any conditions
it desired on a Section 13(3) loan and avoid any judicial complaint of its unauthorized
acts. The remedies for the financial system must be available to all who comprise it,
including the common stock shareholders of a nationalized AIG.
Legal Analysis
A. The Illegal Exaction Claim
Upon a full consideration of the record and the arguments of counsel, the Court
finds that FRBNY’s taking of 79.9 percent equity ownership and voting control of AIG
constituted an illegal exaction under the Fifth Amendment. The Board of Governors and
the Federal Reserve Banks possessed the authority in a time of crisis to make emergency
loans to distressed entities such as AIG, but they did not have the legal right to become
the owner of AIG. In the Federal Reserve’s history of making hundreds of emergency
loans to commercial entities, the loan to AIG represents the only instance in which the
Federal Reserve has demanded equity ownership and voting control. There is no law
permitting the Federal Reserve to take over a company and run its business in the
commercial world as consideration for a loan.
Prior to 1932, the Federal Reserve Banks generally could lend only to banks that
were members of the Federal Reserve System. PTX 742 at 135. In 1932, Congress
recognized that, in a financial crisis, solvent but illiquid companies may require
emergency assistance. Congress enacted Section 13(3) of the Federal Reserve Act, which
authorized the Federal Reserve to issue loans to any “individual, partnership, or
corporation” in the “unusual and exigent circumstances” where the borrower was unable
to secure adequate credit from private sources, but had sufficient assets to secure the loan.
Emergency Relief and Construction Act of 1932, Pub. L. No. 72-302 § 210, 47 Stat. 709,
715.
The text of Section 13(3) of the Federal Reserve Act provides:
In unusual and exigent circumstances, the Board of
Governors of the Federal Reserve System, by the affirmative
vote of not less than five members, may authorize any Federal
reserve bank, during such periods as the said board may
determine, at rates established in accordance with the
54

 provisions of section 357 of this title, to discount for any
individual, partnership, or corporation, notes, drafts, and bills
of exchange when such notes, drafts, and bills of exchange
are indorsed or otherwise secured to the satisfaction of the
Federal reserve bank: Provided, That before discounting any
such note, draft, or bill of exchange for an individual or a
partnership or corporation the Federal reserve bank shall
obtain evidence that such individual, partnership, or
corporation is unable to secure adequate credit
accommodations from other banking institutions. All such
discounts for individuals, partnerships, or corporations shall
be subject to such limitations, restrictions, and regulations as
the Board of Governors of the Federal Reserve System may
prescribe.
12 U.S.C. § 343 (2006). Four requirements must be met in order for Section 13(3) to
apply: (1) unusual and exigent circumstances; (2) the loan must be authorized by an
affirmative vote of not less than five members of the Board of Governors; (3) the loan
must be secured to the satisfaction of the lending Federal reserve bank; and (4) the
borrower must be unable to secure adequate credit accommodations from other banking
institutions. Id. In Section 14(d) of the Federal Reserve Act, Congress also provided
that the consideration for a Section 13(3) loan must be an interest rate “subject to review
and determination of the Board of Governors” and “fixed with a view of accommodating
commerce and business.” 12 U.S.C. § 357.
Section 13(3) achieves the purpose of assisting a broad range of entities and
persons during a time of economic crisis. PTX 708 at 14 (Bernanke); see also PTX 682
at 6. Long ago, Walter Bagehot described the responsibility of central banks in financial
crises in his book “Lombard Street,” published in 1873. The Bagehot Principle is that,
during a panic, central banks should lend freely to whomever comes to the door; “as long
as they have collateral, give them money.” PTX 708 at 14. The Bagehot Principle is
widely accepted in the financial world, and is endorsed by the Federal Reserve and its
officials. PTX 709 at 126 (Geithner) (‘Lombard Street’ is the “bible of central
banking.”); PTX 708 at 14 (Bernanke) (“If a central bank follows Bagehot’s rule, it can
stop financial panics.”); see also Cragg, Tr. 5421-22; Zingales, Tr. 4126-27.
Since its enactment in 1932, the Federal Reserve has used Section 13(3) to assist
individual, non-bank institutions. From 1932 to 1936, the Federal Reserve made 123
loans under Section 13(3) to various individual, non-bank institutions for non-marketable
collateral. PTX 2816 at 4 (“During this period, the Board authorized the Federal Reserve
55

 Banks to make discounts only for individuals and nonbank entities.”). Examples of the
loans made in the early years of Section 13(3) are:
1932 – A $300,000 loan to Smith-Corona Company, a
typewriter company.
1932 – A $250,000 loan to Miller Cummings Company, a
vegetable grower.
1933 – A $25,000 loan to L.N. Renault and Sons secured by
5,000 shares of common stock in a brewing company and
certificates representing ten barrels of brandy and 89 barrels
of rum to pay farmers for grapes.
1936 – A $13,060.73 loan to Phenix Marble Company
secured by shipments of marble products.
Id. at 5-6. In 1966 and 1969, the Federal Reserve authorized extensions of credit to
institutions in the thrift industry, although no credit was actually extended. PTX 2814 at
1. The Federal Reserve then utilized Section 13(3) again in 2008 in the billion dollar
transactions described in this opinion.
An illegal exaction occurs when the Government requires a citizen to surrender
property the Government is not authorized to demand as consideration for action the
Government is authorized to take. Aerolineas Argentinas, 77 F.3d at 1572-73 (Illegal
exaction occurs when “the plaintiff has paid money over to the Government, directly or
in effect, and seeks return of all or part of that sum that was improperly paid, exacted, or
taken from the claimant in contravention of the Constitution, a statute, or a regulation.”);
see also Trayco, Inc. v. United States, 994 F.2d 832, 837-38 (Fed. Cir. 1993); Eastport
S.S. Corp., 178 Ct. Cl. at 605, 372 F.2d at 1007-08.
In Suwannee S.S. Co. v. United States, 150 Ct. Cl. 331, 279 F.2d 874 (1960), for
example, the Government, through the Maritime Administrator, required a citizen to
surrender $20,000 it was not authorized to demand as a condition for receiving the
Government’s approval to sell two of its ships to a foreign purchaser. Id. at 875-76.
Under the Shipping Act, the plaintiff could not sell the ships without the Administrator’s
permission. Id. at 874. The Administrator agreed to the sale on the condition that the
plaintiff pay $20,000 to the Government. Id. at 875. The plaintiff accepted the terms
proposed by the Administrator, paid the $20,000, and later sued the United States
claiming that the “Maritime had no legal authority to condition its approval of the
requested transfer upon the payment of $20,000.” Id. at 875-76.
56

 In response to the plaintiff’s claim in Suwannee, the Government argued that it
“had the power to deny the plaintiff permission to make the desired transfer” and that
under the statute, it had “complete freedom to impose conditions upon any permission
granted.” Id. at 876. The Court rejected the Government’s argument, stating:
We suggest that no statute should be read as
subjecting citizens to the uncontrolled caprice of officials,
unless the statute has to do with the powers of the President in
dealing with foreign relations, the powers of a military
commander in the field, or some comparable situation. . . .
The vice of the $20,000 is its irrelevance. There can hardly
be a more serious defect in the carrying on of government
than allowing matters which have nothing to do with the case
to be dragged in, and to affect decisions. If the Government
has valuable privileges to award, and if it desires to get
money for them, it should, as it does in many situations,
invite bids or negotiation. If it does not, its officials have no
authority to add to their function of determining the
compatibility of the application with the public interest, the
supererogatory function of picking up a few dollars for the
public treasury.
Id. at 876-77 (emphasis added); see also Clapp v. United States, 127 Ct. Cl. at 514, 117 F.
Supp. at 581 (Shipping Act did not authorize the Government to condition sale on the
payment of a fee because, if the provision were read to permit such a condition, “[t]aken
literally that section would permit the Administration to impose any condition whatever,
however irrelevant.”).
When the Government has no obligation to confer a benefit, as in the case of a
Section 13(3) loan under the Federal Reserve Act, if it decides in its discretion to provide
the benefit, the Government cannot demand the surrender of rights it lacks authority to
demand. Koontz v. St. Johns River Water Mgmt. Dist., 133 S. Ct. 2586, 2596 (2013)
(“[W]e have repeatedly rejected the argument that if the government need not confer a
benefit at all, it can withhold the benefit because someone refuses to give up
constitutional rights.”); United States v. Chicago, M., St. P. R. Co., 282 U.S. 311, 328-29
(1931) (“[T]he right to continue the exercise of a privilege granted by the state cannot be
made to depend upon the grantee’s submission to a condition prescribed by the state
which is hostile to the provisions of the federal Constitution.”); Frost v. R.R. Comm’n of
State of Cal., 271 U.S. 583, 594 (1926) (“If the state may compel the surrender of one
constitutional right as a condition of its favor, it may, in like manner, compel a surrender
57

 of all. It is inconceivable that guaranties embedded in the Constitution of the United
States may thus be manipulated out of existence.”).
The Government’s inability to require forfeiture of rights and property in
exchange for discretionary benefits is unchanged during times of crisis, when the rule of
law is maintained by requiring that government acts be authorized by statute and the
Constitution. Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 425-26 (1934)
(“Emergency does not create power. Emergency does not increase granted power or
remove or diminish the restrictions imposed upon power granted or reserved. . . .
‘Although an emergency may not call into life a power which has never lived,
nevertheless emergency may afford a reason for the exertion of a living power already
enjoyed.’”) (quoting Wilson v. New, 243 U.S. 332, 348 (1917)); Youngstown Sheet &
Tube Co. v. Sawyer, 343 U.S. 579, 653 (1952) (Jackson, J., concurring) (“In view of the
ease, expedition and safety with which Congress can grant and has granted large
emergency powers, certainly ample to embrace this crisis, I am quite unimpressed with
the argument that we should affirm possession of them without statute. Such power
either has no beginning or it has no end.”).
In the present case, it is undisputed that the Government required from AIG the
surrender of 79.9 percent of Plaintiff’s equity and voting control, as consideration for a
Section 13(3) loan under the Federal Reserve Act. There is nothing in the Federal
Reserve Act that authorized the Government to demand equity or voting control as
consideration for a Section 13(3) loan. As the Court previously has held in this case, “the
only consideration for a loan prescribed by ‘Section 13(3) is an interest rate subject to the
determination of the Board of Governors.’” Starr Int’l Co., 107 Fed. Cl. at 378 (quoting
Starr Int’l Co., 106 Fed. Cl. at 85).
Defendant contends that the terms imposed upon AIG and its shareholders are
authorized by the language in Section 13(3) stating that the Federal Reserve loans are
“subject to such limitations, restrictions, and regulations as the Board of Governors of the
Federal Reserve System may prescribe.” 12 U.S.C. § 343 (2006). Section 4 of the
Federal Reserve Act grants to the reserve banks “all powers specifically granted by the
provisions of this chapter and such incidental powers as shall be necessary to carry on the
business of banking within the limitations prescribed by this chapter.” 12 U.S.C. § 341
(emphasis added).
A federal entity’s incidental powers cannot be greater than the powers otherwise
delegated to it by Congress. Federal Reserve Bank of Richmond v. Malloy, 264 U.S.
160, 167 (1924) (“[A]uthority to do a specific thing carries with it by implication the
power to do whatever is necessary to effectuate the thing authorized – not to do another
and separate thing, since that would be, not to carry the authority granted into effect, but
58

 to add an authority beyond the terms of the grant.”); First Nat’l Bank in St. Louis v.
Missouri, 263 U.S. 640, 659 (1924) (“Certainly an incidental power can avail neither to
create powers which, expressly or by reasonable implication, are withheld nor to enlarge
powers given; but only to carry into effect those which are granted.”); California Nat’l
Bank v. Kennedy, 167 U.S. 362, 369 (1897) (“The power to purchase or deal in stock of
another corporation, as we have said, is not expressly conferred upon national banks, nor
is it an act which may be exercised as incidental to the powers expressly conferred.”).
Thus, because there is no express power to demand consideration for a Section 13(3) loan
beyond an interest rate fixed with a view of accommodating commerce and business, the
acquisition of equity and voting control of AIG was not incidental to any Federal Reserve
power.
Defendant’s reliance on Lucas v. Federal Reserve Bank of Richmond, 59 F.2d 617
(4th Cir. 1932), is misplaced. Lucas stands for the proposition that a reserve bank can
accept collateral as additional security for a loan, to be released after the loan is repaid.
Id. at 620. Here, the AIG equity and voting control were not returned after the loan was
paid off. Defendant retained and profited from its sale of this property, even after the
loan amounts had been repaid.
The Court’s interpretation of Section 13(3) of the Federal Reserve Act is
buttressed by Congress’s passage in 1945 of the Government Corporation Control Act,
31 U.S.C. § 9102, which prohibits government entities from acquiring a controlling stake
in a corporation so as to make the corporation an agency of the Government without
express congressional authorization. The Court’s interpretation also is consistent with
Federal Reserve Circulars published after the passage of Section 13(3). Bd. of Governors
of the Fed. Reserve Sys., 44 Fed. Reserve Bulletin 241, 269 (Mar. 1958) (“[B]ank
discounts as commonly understood do not apply to a bank’s acquisition through purchase
of other assets, securities or obligations, such as, for example, corporate stocks, bonds or
debentures.”); 1936 Circular, 22 Fed. Reserve Bulletin 71, 123 (Feb. 1936) (“[D]iscounts
may be made only at rates established by the Federal Reserve banks, subject to review
and determination by the Board of Governors of the Federal Reserve System.”).
Defendant and its outside counsel from Davis Polk & Wardwell performed legal
analysis of the Federal Reserve’s authority under Section 13(3), and concluded that the
Federal Reserve most likely lacked authority to demand equity and voting control from
AIG. PTX 3283 at 1 (Davis Polk email, Sept. 17, 2008) (“There is no express authority,
which is one of the reasons Treasury and the Fed discussed their actions with
congressional leaders of both parties. Maybe it's an implied power of setting the
conditions for lending money under 13(3) of the [F]ederal [R]eserve [A]ct, but the
[Government] is on thin ice and they know it. But who’s going to challenge them on this
ground?”); see also PTX 336 at 1 (Board of Governors Legal Division memorandum,
59

 Nov. 1, 2008) (“No provision of the Federal Reserve Act expressly authorizes the Federal
Reserve to acquire the equity of any entity.”); JX 386 at 3 (FRBNY’s independent
auditor, Deloitte) (FRBNY “is prohibited by law from holding equity securities in a
commercial enterprise.”).
The legal staffs of FRBNY and the Federal Reserve acknowledged that they could
not obtain or hold equity, or acquire voting control, of a commercial entity. FRBNY’s
General Counsel, Mr. Baxter, noted during an interview on May 11, 2010:
Neither the Fed nor the [T]reasury had authority to hold the
shares. When we saw equity on term sheet – problem of legal
ownership and the conflict. Maybe strike that and not take
equity. But then thought of taxpayer. Create a trust, put
shares in trust. For benefit of American people. We had to
decide that right away.
PTX 2211 at 10. Mr. Baxter notified the Board of Governors’ counsel, Mr. Alvarez, on
October 23, 2008, “we agree that there is no power” for the Federal Reserve “to hold AIG
shares.” PTX 320-U at 1. Mr. Alvarez’s notes of a September 18, 2008 conference call
among FRNBY, the Board of Governors, Treasury, and Davis Polk, attribute to Mr.
Baxter the following comments: “signif issues w/Fed controlling AIG;” “legal, conflicts,
regulatory, etc.;” “don’t have statutory authority to control.” PTX 148 at 1. Legal
Division of Board of Governors, November 1, 2008: The Fed “[c]an’t acquire equity.”
PTX 336 at 2. The Federal Reserve is “prohibited from acquiring and holding stock as an
equity kicker in connection with a loan by the Bank, as are commercial banks.” PTX
370-A at 2 (Nov. 2008). Mr. Alvarez to Mr. Baxter on September 21, 2008: “Just to
confirm, ownership of stock along the lines in this term sheet will not work for the Fed –
trust or no trust. It’s fine if Treasury takes the stock, which I thought from the discussion
last week was foreclosed.” PTX 183 at 1; see also DX 118 (Mr. Baxter’s email to Mr.
Geithner referring to the need for “loophole lawyering” in operating under a 75-year old
statute).
Mr. Alvarez testified in detail about FRBNY’s conflict of interest problem. He
stated “I was concerned about the conflicts that would arise if we were viewed as both the
lender and as the owner of AIG. The owner and the lender don’t always have the same
interests, and that can create a conflict internally.” Alvarez, Tr. 553. Mr. Alvarez further
testified:
I also was concerned that the Federal Reserve has access to
substantial amounts of confidential information about a
variety of financial institutions and that there would be the
60

 perception that AIG would have – if the Federal Reserve were
the owner for an extended period of time, that the – that AIG
would have access to that information or the New York
Reserve Bank would use that information to benefit AIG. So,
I was concerned about the public perception that AIG was in
a privileged place.
Id. Mr. Alvarez also believed that the Federal Reserve should not be “running AIG and .
. . responsible for its decisions.” Alvarez, Tr. 554. He also was concerned that, if the
Federal Reserve owned AIG, the accountants “would consolidate the balance sheet of
AIG onto the balance sheet of the Federal Reserve.” Id. Such a consolidation of two
trillion dollar entities would “double the size of the Federal Reserve’s balance sheet.” Id.
It is debatable whether the vote of the AIG Board of Directors on September 16,
2008 was voluntary, or whether acceptance of the Government’s terms was the only
realistic choice. However, as a matter of law, the vote of AIG’s Board to accept the term
sheet offered by the Government does not constitute a defense to an illegal exaction
claim. A person or entity cannot ratify an illegal government action. Many cases have
found illegal exactions where citizens have voluntarily paid money to the Government as
a result of a demand that the Government was not authorized to make. American
Airlines, Inc. v. United States, 551 F.3d 1294, 1302 (Fed. Cir. 2008) (user fees charged to
airline were an illegal exaction despite airline’s failure to protest initial payments of the
fee, because “failure to challenge an improper agency action does not ratify such actions
or insulate [Government] from later objections and litigation.”); Alyeska Pipeline, 224
Ct. Cl. at 248, 624 F.2d at 1010 (unauthorized fee imposed on, and paid by, plaintiff as a
condition of obtaining a right-of-way agreement for a pipeline was an illegal exaction);
Finn v. United States, 192 Ct. Cl. 814, 820, 428 F.2d 828, 831 (1970) (wage
garnishments made to recover moving costs of former FBI agent under a contract were an
illegal exaction because “[i]f officials of the Government make a contract they are not
authorized to make, the other party is not bound by estoppel or acquiescence or even
failing to protest.”); Chris Berg, Inc. v. United States, 192 Ct. Cl. 176, 183, 426 F.2d 314,
317 (1970) (same holding involving Government’s refusal to consider errors made in
plaintiff’s contract bid); Eastport S.S., 178 Ct. Cl. at 603-04, 372 F.2d at 1006
(imposition of a fee charged to, and paid by, plaintiff to obtain the legally required
permission to sell two ships to a foreign purchaser was an illegal exaction even though
the payment was made without protest.).16
Other cases rejecting a voluntariness defense to an illegal exaction claim are: O’Bryan v. United
States, 93 Fed. Cl. 57 (2010); Bautista-Perez v. Mukasey, No. C 07-4192 TEH, 2008 WL 314486 (N.D.
Cal. Feb. 4, 2008); Continental Airlines, Inc. v. United States, 77 Fed. Cl. 482 (2007); PSI Energy Inc. v.
United States, 411 F.3d 1347 (Fed. Cir. 2005); Aerolineas Argentinas, 77 F.3d at 1564; United States v.
Best Foods, Inc., 47 C.C.P.A. 163, 170 (1960); Suwannee S.S. Co., 279 F.2d at 877; Sprague S.S. Co. v.
16

61

 In arguing that voluntariness is a defense, Defendant chiefly relies on the Supreme
Court’s decision in United States v. Edmonston, 181 U.S. 500 (1901). Edmonston
establishes voluntariness as a defense only in the narrow circumstances where there is a
mutual mistake of law regarding the calculation of how much – not whether – the
Government is entitled to charge or take, and where there is no clear congressional
purpose that would be defeated by the assertion of such a defense. In Edmonston, the
plaintiff paid the United States $2.50 per acre of land even though the statutory sale price
was $1.25 per acre. The Supreme Court held that the plaintiff was not entitled to the
amount of overpayment because “the transaction was purely voluntary on [the plaintiff’s]
part, and that while there was a mistake it was mutual and one of law, a mistake on his
part not induced by any attempt to deceive or misrepresentation by the government
officials.” Id. at 515. In the present case, the Government’s actions were not mistaken,
but were deliberate.
Similarly, the Government’s creation of a trust to hold the shares of AIG stock
does not cure the illegal exaction. FRBNY’s counsel, Mr. Baxter, developed the idea of a
trust during September 16-22, 2008 as a way to circumvent the Federal Reserve’s lack of
authority to hold equity. Baxter, Tr. 791; see also PTX 368 at 3 (Alvarez) (“The creation
of the Trust is necessary . . . because neither the Reserve Bank nor the Treasury
Department has the legal authority to hold the equity in the form of preferred or common
stock directly.”). In an April 30, 2010 interview, Mr. Baxter stated: “We didn’t have the
legal authority to own shares, we didn’t want to control the company. That’s why the
credit facility trust and the equity participation went to trust – legal ownership was in the
trust, which has three independent trustees, so there’s no control in Treasury or the Fed.”
PTX 580 at 3. The trust was not executed until January 16, 2009, four months after the
Government took control of AIG.
The creation of the trust in an attempt to circumvent the legal restriction on
holding corporate equity is a classic elevation of form over substance. The three
appointed trustees had lengthy historical ties to the Federal Reserve. The trust was
created “for the sole benefit of the Treasury.” JX 172 at 5, § 1.01 (Trust Agreement).
FRBNY, in consultation with Treasury, had the power to appoint the trustees. Id. at §
1.02. The trust was revocable only by the Federal Reserve Board of Governors. Id. at §
1.03. FRBNY, in consultation with Treasury, had the power to remove a trustee. Id. at §
3.02(d). The trustees’ standard of care was to act “in or not opposed to the best interests
United States, 145 Ct. Cl. 642, 172 F. Supp. 674 (1959); Eversharp Inc. v. United States, 129 Ct. Cl. 772,
125 F. Supp. 244 (1954); Clapp, 127 Ct. Cl. at 515, 117 F. Supp. at 582; Lancashire Shipping Co. v.
United States, 4 F. Supp. 544 (S.D.N.Y. 1933); James Shewan & Sons v. United States, 73 Ct. Cl. 49
(1931); Star Motor Co. of Cal. v. United States, 71 Ct. Cl. 348, 41 F.2d 901 (1930).

62

 of the Treasury.” Id. at § 3.03(a)(i). The trustees were the “protectors of the Federal
equity stake in AIG” and “should not care about the AIG minority shareholders.” PTX
3286 at 1 (Baxter); see also Huebner, Tr. 6272-73 (trustees had no “separate duties to the
common shareholders.”). The manner in which FRBNY controlled AIG with its handpicked CEO, carefully selected board members, and its hundreds of on-premises advisers
belies any conclusion that the operations of the trust were independent.
B. The Fifth Amendment Taking Claim
As the Court indicated at the beginning of closing arguments on April 22, 2015,
Starr’s illegal exaction and taking claims under the Fifth Amendment actually are
asserted in the alternative. An illegal exaction claim “by its name suggests an illegal
action,” whereas a Fifth Amendment taking “has to be by a legal action.” Closing Arg.,
Tr. 8. Starr’s counsel, Mr. Boies, agreed with this assertion, and confirmed that Starr
“only need[ed] one” of those claims in order to prevail. Id. at 8, 10. Since the Court has
ruled in Starr’s favor on the illegal exaction claim, the Court does not need to consider
Starr’s Fifth Amendment taking claim. This ruling is in line with applicable case law,
holding that the same government action cannot be both an unauthorized illegal exaction
and an authorized taking. See Alves v. United States, 133 F.3d 1454, 1456-58 (Fed. Cir.
1998) (taking must be based on authorized government action); Figueroa, 57 Fed. Cl. at
496 (If the government action complained of is unauthorized, “plaintiff’s takings claim
would fail on that basis.”); see also Short v. United States, 50 F.3d 994, 1000 (Fed. Cir.
1995) (same).
Damages
A. Summary of Starr’s Damages Claim
Starr asserts that, in an illegal exaction case, the plaintiff’s damages recovery
should be the return of the monetary value of property seized or obtained by the
Government. Casa de Cambio Comdiv S.A. de C.V. v. United States, 48 Fed. Cl. 137,
145 (2000), aff’d, 291 F.3d 1356 (Fed. Cir. 2002); see also Bowman v. United States, 35
Fed. Cl. 397, 401 (1996) (“Were an illegal exaction to be found, Plaintiff could receive
the value of his forfeited property.”).
For the Credit Agreement Class, Starr contends that the fair value of the seized
property should be calculated as of September 22, 2008, the effective date of the Credit
Agreement. Prior to that date, no legally binding agreement existed between AIG and
FRBNY entitling the Government to an equity interest and voting control of AIG. The
only document existing before the Credit Agreement was the September 16, 2008 term
sheet, which on its face was legally nonbinding and unenforceable. The term sheet states
63

 that “it is not intended to be legally binding on any person or entity.” JX 63 at 5; see, e.g.
Richbell Info. Sys., Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 297 (N.Y. App. Div.
2003) (explaining that a term sheet is a “classic example of an unenforceable ‘mere
agreement to agree,’” and holding that “we recognize that term sheets, such as those used
here, will not support a claim of breach of contract or of the duty of good faith.”). All
versions of the term sheet in this case state that the term sheet will be governed by New
York law.
According to Starr, the fair market value of the Series C Preferred shares acquired
by the Government is best determined by referring to the New York Stock Exchange per
share price of AIG’s common stock on September 22, 2008. The Series C Preferred
Stock was economically equivalent to AIG’s common stock, which 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. Def.’s Resp. to Pl.’s 3rd Interrog. No. 18; Kothari, Tr.
4543-44.
Defendant paid only $500,000 into the Trust to obtain 79.9 percent of AIG’s
common stock equity. Plaintiff’s expert, Dr. Kothari, placed a value of $35.378 billion
on the Government’s 79.9 percent equity ownership. PTX 5212. Dr. Kothari begins with
a per share value of $3.31 as of the market’s closing on September 24, 2008. The $3.31
per share price was the lowest price for AIG common stock during the three-day period
of September 22-24, 2008, and thus is conservatively based. PTX 5209. He then
multiplies the per share price by 14.691 billion outstanding shares, yielding a total of
$48.626 billion for all of AIG’s common stock. PTX 5212. As the next step, Dr. Kothari
adjusts the total for the 79.9 percent of equity owned by the Government ($38.852
billion), and then reduces the amount by another 8.9 percent to exclude certain equity
units. Id. The total value in this calculation is $35.378 billion. Id. To determine the
damages award for each class member, the calculation would be $35.378 billion times the
shares held by the class member, divided by the 14.691 billion outstanding common
shares. PTX 5202; see also PTX 5212.
The record contains other valuations of the Government’s 79.9 percent equity
stake in AIG. The other valuations relied upon the AIG per share stock price for
September 16, 2008, the date of the term sheet, but otherwise were very similar to Dr.
Kothari’s analysis. Deloitte, serving as FRBNY’s auditor, used a stock price of $2.29 per
share, and valued the Government’s equity at $24.5 billion. PTX 5204; JX 385 at 1-2.
KPMG, serving as AIG’s valuation consultant, used a stock price of $2.05 per share, and
valued the Government’s equity at $23 billion. PTX 5203, 5204; PTX 375 at 21. AIG in
its own behalf, used a stock price of $2.05 per share, and valued the Government’s equity
at $23 billion. PTX 5203, 5204; JX 137 at 2, 7.
64

 B. Economic Loss Analysis
Common sense suggests that the Government should return to AIG’s shareholders
the $22.7 billion in revenue it received from selling the AIG common stock it illegally
exacted from the shareholders for virtually nothing. However, case law construing “just
compensation” under the Fifth Amendment holds that the Court must look to the property
owner’s loss, not to the Government’s gain. Brown v. Legal Found. of Wash., 538 U.S.
216, 235-36 (2003) (The “‘just compensation’ required by the Fifth Amendment is
measured by the property owner’s loss rather than the [G]overnment’s gain.”); Kimball
Laundry Co. v. United States, 338 U.S. 1, 5 (1949) (“Because gain to the taker . . . may
be wholly unrelated to the deprivation imposed upon the owner, it must also be rejected
as a measure of public obligation to requite for that deprivation.”); United States v.
Miller, 317 U.S. 369, 375 (1943) (“Since the owner is to receive no more than indemnity
for his loss, his award cannot be enhanced by any gain to the taker.”); Boston Chamber of
Commerce v. Boston, 217 U.S. 189, 195 (1910) (Holmes, J.) (“And the question is, What
has the owner lost? not, What has the taker gained?”).
Ultimately, Starr must prove that it suffered some economic harm from the
Government’s taking or illegal exaction. In applying this standard, the Court must
consider the value of the Plaintiff’s property but for the challenged government actions.
In other words, what would the value of Plaintiff’s property have been if the Government
had done nothing? Brown, 538 U.S. at 240-41 (plaintiffs had lost nothing because they
would not have received any interest even in the absence of a challenged government
program).
A closely analogous case is A&D Auto Sales, Inc. v. United States, 748 F.3d 1142
(Fed. Cir. 2014). At the trial court level, former owners of Chrysler and General Motors
car dealerships alleged an uncompensated taking of their property from the Government’s
Troubled Asset Relief Program (“TARP”), 12 U.S.C. § 5211. Plaintiffs alleged that the
takings occurred when the Government required Chrysler and General Motors to
terminate dealerships as a condition of obtaining financial assistance. The property rights
in question were franchise contracts, ongoing automobile businesses, and automobile
dealer rights under state law. The Court denied the Government’s motion to dismiss for
lack of subject matter jurisdiction and for failure to state a claim upon which relief may
be granted. Colonial Chevrolet Co. v. United States, 103 Fed. Cl. 570 (2012); Alley’s of
Kingsport, Inc. v. United States, 103 Fed. Cl. 449 (2012) (Hodges, J.). The Court,
however, granted Defendant’s motion to certify for interlocutory appeal the issue of
whether a plaintiff must plead a known, specific takings theory to survive a dispositive
motion on the pleadings. Alley’s of Kingsport v. United States, 106 Fed. Cl. 762 (2012);
Colonial Chevrolet v. United States, 106 Fed. Cl. 619 (2012).
65

 On appeal, the Federal Circuit consolidated the cases for review, and styled the
appeal as A&D Auto Sales, Inc. The Federal Circuit held that the car dealers’ complaints
failed to state a takings claim without “allegations regarding the but-for economic loss of
value of the plaintiffs’ franchises.” 748 F.3d at 1158. The Federal Circuit reasoned:
Absent an allegation that GM and Chrysler would have
avoided bankruptcy but for the Government’s intervention
and that the franchises would have had value in that scenario,
or that such bankruptcies would have preserved some value
for the plaintiffs’ franchises, the terminations actually had no
net negative economic impact on the plaintiffs because their
franchises would have lost all value regardless of the
government action.
Id. Since the cases were at the motion to dismiss stage, before any trial on the merits, the
Federal Circuit permitted plaintiffs the opportunity to amend their complaints to include
the necessary factual allegations.
Applying the reasoning of A&D Auto Sales, the Court must examine what would
have happened to AIG if the Government had not intervened. The inescapable
conclusion is that AIG would have filed for bankruptcy, most likely during the week of
September 15-19, 2008. In that event, the value of the shareholders common stock would
have been zero. By loaning AIG $85 billion under the September 22, 2008 Credit
Agreement, the Government significantly enhanced the value of the AIG shareholders’
stock. While the taking of 79.9 percent equity ownership and the running of AIG’s
business were not permitted under the Federal Reserve Act, the Government did not
cause any economic loss to AIG’s shareholders, because as Mr. Studzinski said,
“[twenty] percent of something [is] better than [100] percent of nothing.” Studzinski, Tr.
6937. Under the economic loss analysis, the Credit Agreement Class is entitled to zero
damages.
Defendant’s Procedural Defense of Waiver
The Government contends that Starr waived its illegal exaction claim by accepting
the terms of FRBNY’s rescue, and failing to allege the illegality of the credit agreement
or the reverse stock split until after Starr had received the full benefits of the rescue
between September 2008 and January 2011. Def.’s Post-Trial Concl. of Law at 116-17.
The Government asserts that this decision precludes Starr from now seeking to undo
AIG’s September 2008 agreement. Id.
66

 The statute of limitations for Starr’s action is “six years after such claim first
accrues.” 28 U.S.C. § 2501. By filing suit in November 2011, Starr is well within the
six-year range of operative events that began in September 2008. As this opinion
demonstrates, the circumstances relating to the Government’s rescue and takeover of AIG
continued to evolve through 2011, and the Government did not complete its sale of AIG
common stock on the open market until December 2012. Starr and its counsel acted
reasonably in filing suit when it did. Although the media reported much of the
information about AIG during the years in question, Starr’s Mr. Greenberg was not privy
to any of the significant FRBNY, Treasury, or AIG Board of Directors meetings.
The record supports a conclusion that FRBNY, Treasury, and their outside counsel
from Davis Polk & Wardwell carefully orchestrated the AIG takeover so that
shareholders would be excluded from the process. These entities avoided at all cost the
opportunity for any shareholder vote. Having intentionally kept the shareholders in the
dark as much as possible, it rings hollow for Defendant to contend that the shareholders
waived the right to sue by failing to object.
Case law strongly supports this conclusion. In American Airlines, 551 F.3d at
1302, the Federal Circuit observed that “[f]ailure to challenge an improper agency action
does not ratify such action or insulate it from later objection and litigation.” The Federal
Circuit saw no reason to disturb the trial court’s holding. Id. Similarly, in Clapp, 127 Ct.
Cl. at 515, 117 F. Supp. at 582, the Court of Claims ruled “[w]e find it hard to imagine a
case where the Government can take a citizen’s money, by refusing him something to
which he is entitled, and then keep the money on the ground of estoppel. This defense is
beneath the dignity of the Government.” Id.
Accordingly, Defendant’s waiver argument is without merit.
Conclusion
Based upon the foregoing, the Court concludes that the Credit Agreement
Shareholder Class shall prevail on liability due to the Government’s illegal exaction, but
shall recover zero damages, and that the Reverse Stock Split Shareholder Class shall not
prevail on liability or damages. The Clerk is directed to issue final judgment consistent
with this opinion.

67

 The parties are invited to brief the issues relating to costs and attorneys’ fees in
accordance with the Court’s rules and applicable law.
IT IS SO ORDERED.
s/Thomas C. Wheeler
THOMAS C. WHEELER
Judge

68

 APPENDIX OF RELEVANT ENTITIES AND PERSONS
Plaintiff and the Plaintiff Classes
Plaintiff Starr International Company, Inc. (“Starr International”) is a privately
held Panama corporation with its principal place of business in Switzerland. Maurice R.
“Hank” Greenberg is the Chairman of Starr International. Until 2005, Howard Smith
was chief financial officer and chief administrative officer of AIG. He now serves as
vice chairman of finance of C.V. Starr and as a director of Starr International. Smith, Tr.
7673-74.
The “Credit Agreement Class” is the class of persons and entities allegedly
injured by the Fifth Amendment taking or illegal exaction of a 79.9 percent equity
interest in AIG pursuant to the Credit Agreement. The “Credit Agreement Class”
consists of “All persons or entities who held shares of AIG common stock on or before
September 16, 2008 and who owned those shares as of September 22, 2008, excluding
Defendant, any directors, officers, political appointees, and affiliates thereof, as well as
members of the immediate families of Jill M. Considine, Chester B. Feldberg, Douglas L.
Foshee, and Peter A. Langerman.” Opinion and Order Regarding Class Certification,
Starr Int’l Co. v. United States, 109 Fed. Cl. 628, 636-37 (2013).
The “Reverse Stock Split Class” is the class of persons and entities allegedly
injured by the events and actions resulting in the reverse stock split. The Reverse Stock
Split Class consists of “All persons or entities who held shares of AIG common stock on
June 30, 2009 and were eligible to vote those shares at the annual shareholder meeting
held on that date, excluding Defendant, any directors, officers, political appointees, and
affiliates thereof, as well as members of the immediate families of Jill M. Considine,
Chester B. Feldberg, Douglas L. Foshee, and Peter A. Langerman.” Id. at 637.
American International Group, Inc. (“AIG”)
AIG was incorporated as a holding company for various general and life insurance
businesses in 1967. Stip. ¶ 22. At all relevant times, AIG has been a Delaware
corporation with its principal executive offices located in New York City. Stip. ¶ 20. In
2008, AIG Financial Products (“AIGFP”) was a separate wholly-owned subsidiary of
the AIG parent company. Stip. ¶ 49. AIG guaranteed all of AIGFP’s obligations, and
prior to March 2005, AIGFP benefited from AIG’s AAA rating. Stip. ¶ 41.
From 2004 to 2009, Jacob Frenkel was AIG’s Vice Chairman and Vice Chairman
of AIG’s Global Economic Strategies Group. Bernanke, Tr. 2189; JX 188 at 20.
69

 From July 2005 through October 2008, David Herzog served as Senior Vice
President and Comptroller of AIG. Since October 2008, Mr. Herzog has been the Chief
Financial Officer of AIG. Herzog, Tr. 6953-55.
In 2008, Anastasia “Stasia” Kelly served as General Counsel and Vice Chairman
of AIG. Huebner, Tr. 6115; JX 188 at 20. Ms. Kelly left AIG on December 30, 2009.
JX 251 at 523-28.
During the relevant period, Paula Reynolds served as Vice Chairman and Chief
Restructuring Officer of AIG. Liddy, Tr. 3250; Herzog, Tr. 7036; JX 188 at 20.
In 2008, Brian Schreiber served as Senior Vice President for Strategic Planning at
AIG. Mr. Schreiber currently serves as AIG’s Deputy Chief Investment Officer.
Schreiber, Tr. 6533.
In 2008 and 2009, Kathleen Shannon served as Deputy General Counsel, Senior
Vice President and Corporate Secretary for AIG. As Deputy General Counsel, Ms.
Shannon was the senior securities and corporate finance lawyer at AIG. Shannon, Tr.
3646.
During the relevant period, Anthony Valoroso served as head of accounting policy
for AIG. Farnan, Tr. 4165.
On June 15, 2008, Robert Willumstad replaced Martin Sullivan as AIG’s Chief
Executive Officer. Mr. Willumstad served as AIG’s CEO until September 16, 2008.
PTX 589 at 59, 72. From December 2006 until September 16, 2008, Mr. Willumstad was
Chairman of the AIG Board of Directors. Willumstad, Tr. 6328-29.
On September 22, 2008, AIG’s Board of Directors consisted of the following
members: Stephen F. Bollenbach, Martin S. Feldstein, Suzanne Nora Johnson, Fred H.
Langhammer, Edward M. Liddy, George L. Miles, Jr., Morris W. Offit, James F. Orr III,
Virginia M. Rometty, Michael H. Sutton, and Edmund S.W. Tse. JX 103 at 1.
Edward Liddy joined AIG’s Board of Directors after September 18, 2008 upon
being named Chairman and CEO. JX 94 at 2-3. Mr. Liddy was recruited for this position
by Christopher Cole, then Chairman of Goldman Sachs’ investment banking division,
and by Ken Wilson, a former Goldman Sachs banker who then worked for Mr. Paulson at
the U.S. Treasury Department. Liddy, Tr. 3024-27.

70

 AIG’s Consultants and Advisers
BlackRock served as an outside financial adviser for AIG. AIG retained
BlackRock in June 2008 to value its credit default swap portfolio. In October 2008,
FRBNY engaged BlackRock to evaluate various issues relating to AIG’s credit default
swap exposure. Stip. ¶¶ 57, 156, 157.
Blackstone Advisory Partners LLP was hired as AIG’s adviser the weekend prior
to September 12, 2008. Blackstone remained as AIG’s adviser when AIG’s Board
discussed the credit agreement proposed by FRBNY. Studzinski, Tr. 4500. John
Studzinski led Blackstone’s work for AIG in September 2008. JX 74 at 17.
KPMG was retained by AIG in October 2008 to conduct a valuation of the Series
C Preferred Stock. PTX 375 at 3.
JP Morgan Chase & Co. is a large financial institution that provides commercial
and investment banking services. AIG hired JP Morgan to help develop funding options
in late August 2008. Stip. ¶ 67. Mr. Geithner later requested JP Morgan (along with
Goldman Sachs) to explore a private sector solution for AIG during the weekend of
September 13-14, 2008, and continuing into the first part of the following week. PTX
709 at 208. James Lee is JP Morgan’s senior investment banker who headed this effort
for Mr. Geithner. Lee, Tr. 7067-69.
PricewaterhouseCoopers (“PwC”) has served as AIG’s independent auditors for
several decades. Farnan, Tr. 4160. During the relevant time period, Donald Farnan was
the primary accountant on the PwC team serving AIG. Farnan, Tr. 4298.
Simpson, Thacher & Bartlett LLP served as outside counsel to AIG’s Board of
Directors in 2008. Stip. ¶ 31. Lawyers Richard Beattie and James Gamble of Simpson
Thacher advised AIG’s Board of Directors during the time periods relevant to this case.
JX 94 at 1.
Sullivan & Cromwell LLP served as outside counsel to AIG in 2008. JX 74 at 1.
Rodgin Cohen, Chairman of Sullivan & Cromwell, advised not only AIG, but also “just
about every other firm that got in trouble during the crisis,” including Fannie Mae,
Lehman Brothers, and Bear Stearns. PTX 709 at 163. Lawyers Michael Wiseman and
Robert Reeder of Sullivan & Cromwell also advised AIG during the periods relevant to
this case. JX 74 at 1; Reeder, Tr. 6851.

71

 Weil, Gotshal & Manges LLP served as one of AIG’s outside counsel, including
from 2008 through the present. Stip. ¶ 30. Joseph Allerhand of Weil Gotshal advised
AIG during the periods relevant to this case. JX 74 at 1-2.
The Federal Government and its Agents
The Department of the Treasury is an executive agency of the United States. The
Secretary of the Treasury is appointed by the President and is an official of the U.S.
Government. Def.’s Resp. to Pl.’s 2nd RFAs Nos. 1-3.
From July 10, 2006 until January 20, 2009, Henry “Hank” Paulson was the
Secretary of the Treasury. Prior to becoming Secretary of the Treasury, Mr. Paulson
worked at Goldman Sachs for more than 20 years, serving as CEO from 1999 until May
2006. Def.’s Resp. to Pl.’s 2nd RFAs Nos. 45, 47. In August 2008, Mr. Paulson
recruited Dan Jester, a former Goldman Sachs executive, to join the Treasury Department
as a contractor. PTX 706 at 190-91.
From January 26, 2009 through January 25, 2013, Timothy F. Geithner was
Secretary of the Treasury. Prior to being Secretary of the Treasury, Mr. Geithner served
as President of the Federal Reserve Bank of New York. Def.’s Resp. to Pl.’s 2nd RFAs
Nos. 46, 56.
The Federal Reserve System is the central bank of the United States, established
by Congress in 1913. The Federal Reserve System is comprised of the Board of
Governors and twelve regional Federal Reserve Banks. Stip. ¶ 1.
The Board of Governors of the Federal Reserve System is an agency of the United
States. The Board of Governors supervises and regulates the operations of the Federal
Reserve Banks. Stip. ¶ 2. The Board of Governors is responsible for, among other
things, regulating and supervising banks that are members of the Federal Reserve System,
bank holding companies, and international banking facilities in the United States. Stip. ¶
11.
The Board of Governors is comprised of up to seven members, called
“Governors.” Governors are appointed by the President and confirmed by the U.S.
Senate. The Chairman and Vice Chairman of the Board of Governors also are appointed
by the President and confirmed by the Senate. The nominees to these posts must already
be members of the Board or must be simultaneously appointed to the Board. The terms
for these positions are four years. Members of the Board of Governors are officials of the
United States. Stip. ¶ 3.
72

 The Federal Open Markets Committee (“FOMC”) is responsible for conducting
open market operations – the purchase and sale of securities by the central bank. The
Federal Reserve uses open market operations to adjust the supply of reserve balances to
manage the federal funds rate (the rate at which banks lend reserve balances overnight).
The FOMC consists of the members of the Board of Governors, the President of the
Federal Reserve Bank of New York, and four of the remaining Reserve Bank presidents,
who rotate through one-year terms. Stip. ¶ 13.
From February 1, 2006 through January 31, 2014, Ben Bernanke was the
Chairman of the Federal Reserve System. Def.’s Resp. to Pl.’s 2nd RFAs No. 53.
From June 23, 2006 through June 23, 2010, Donald Kohn was Vice Chairman of
the Federal Reserve System. Def.’s Resp. to Pl.’s 2nd RFAs No. 54.
During the relevant period, Mr. Bernanke, Mr. Kohn, Elizabeth Duke, Randall
Kroszner, and Kevin Warsh were members of the Board of Governors. JX 63 at 1;
Alvarez, Tr. 510.
The members of the Board of Governors are in continual contact with other policy
makers in government. The Board has regular contact with members of the President’s
Council of Economic Advisers and other key economic officials. The Chairman also
meets from time to time with the President and has regular meetings with the Secretary of
the Treasury. Stip. ¶ 4. The Federal Reserve Banks operate under the general
supervision of the Board of Governors. Stip. ¶ 7.
Since 2004, Scott Alvarez has been the General Counsel for the Federal Reserve.
Alvarez, Tr. 79-80. During the relevant period, Richard Ashton was deputy general
counsel in the Legal Division for the Federal Reserve. Alvarez, Tr. 300.
The Federal Reserve Bank of New York (“FRBNY”) is one of the twelve
regional Federal Reserve Banks. Among other functions, FRBNY performs fiscal agency
functions for the U.S. Treasury, certain federal agencies, and other entities. Def.’s Resp.
to Pl.’s 2nd RFAs Nos. 28-29. FRBNY and other Federal Reserve Banks process federal
payments and deposits to Treasury’s account and service Treasury securities. Def.’s
Resp. to Pl.’s 2nd RFAs No. 35.
Thomas Baxter has served as General Counsel of FRBNY for nearly 20 years.
Baxter, Tr. 796.

73

 In 2008, Alejandro LaTorre was an Assistant Vice President working on
FRBNY’s Open Market Desk, the monetary policy implementing arm of the Federal
Reserve System. LaTorre, Tr. 2080-82.
From July 2007 to 2011, Margaret McConnell was the FRBNY Deputy Chief of
Staff for Policy. McConnell, Tr. 2506-07.
In September 2008, Susan McLaughlin was the senior officer with oversight
responsibility for the discount window, leading a function that was called “financial
management and discount window.” McLaughlin, Tr. 2394.
From December 2006 through 2008, Patricia Mosser was a Senior Vice President
in the Markets Group at FRBNY. Mosser, Tr. 1159-60; Def.’s Resp. to Pl.’s 2nd RFAs
No. 62.
On September 17, 2008, FRBNY established an on-site team at AIG led by
FRBNY employee Sarah Dahlgren to help FRBNY understand and monitor the
company. Def.’s Resp. to Pl.’s 2nd RFAs No. 416. The monitoring team represented the
interests of the Federal Reserve as the lender to AIG, to ensure compliance with the terms
of the Credit Agreement, and to supervise the company’s decision-making. PTX 516 at
50.
On January 16, 2009, Jill M. Considine, Chester B. Feldberg, and Douglas
Foshee became trustees for the AIG Credit Facility Trust Agreement, creating the AIG
Credit Facility Trust. JX 172 at 4. Peter Langerman became a trustee on February 26,
2010 following Mr. Foshee’s departure. Langerman, Tr. 7158; Foshee, Tr. 3453; DX 843
at -567.
Beginning on September 16, 2008, Davis Polk & Wardwell LLP served as legal
counsel to Defendant in connection with the drafting and execution of the terms of the
AIG Credit Agreement and the related agreements, including the AIG Credit Facility
Trust Agreement and Stock Purchase Agreement. Stip. ¶¶ 109, 110. Davis Polk also
provided advice and counsel to FRBNY and the Treasury Department concerning a
variety of issues relating to AIG. Def.’s Resp. to Pl.’s 3rd Interrog. No. 25. Lawyers
from Davis Polk who advised Defendant included partners John Huebner, John
Brandow, and Ethan James. Brandow, Tr. 5790, 5869-69; Huebner, Tr. 5933.
On September 19, 2008, FRBNY retained Ernst & Young (“E&Y”) to perform
services for FRBNY in connection with Defendant’s loan to AIG. Def.’s Resp. to Pl.’s
3rd Interrog. No. 25. Mark Symons was E&Y’s engagement partner in connection with
its retention by FRBNY. Symons, Tr. 3588.
74

 Morgan Stanley began advising FRBNY on the morning of September 15, 2008
regarding AIG. Head, Tr. 3714. Morgan Stanley also provided advice to FRBNY in
connection with the drafting of the terms of the Credit Agreement. Stip. ¶ 35. FRBNY
formally engaged Morgan Stanley in October 2008 to provide assistance with “strategic
alternatives” for AIG. PTX 303 at 1; Head, Tr. 3720-21. James Head has worked at
Morgan Stanley for 20 years in mergers and acquisitions and was a member of the
Morgan Stanley team advising Defendant on matters relating to AIG. Head, Tr. 3713-14.
Goldman Sachs Group, Inc. is a large financial institution with a significant
investment banking business. PTX 706 at 392. Goldman Sachs was involved in
exploring a private solution for AIG during September 13-15, 2008, and in selecting a
new Chief Executive Officer for AIG, Mr. Edward Liddy, at the request of government
officials.
Wachtell, Lipton, Rosen & Katz provided legal services to the Treasury
Department relating to AIG, including assisting Treasury in drafting the terms of
Defendant’s loan to AIG, beginning on or around September 14, 2008 through September
19-20, 2008. The United States did not memorialize its retention of the Wachtell law
firm for services rendered regarding AIG, and Wachtell did not seek compensation for
such services. Def.’s Resp. to Pl.’s 3rd Interrog. No. 25; PTX 98-U at 1-3; JX 85 at 1; JX
376-U at 1, 3-7; Alvarez, Tr. 290. In September 2008, Wachtell represented Morgan
Stanley in its successful efforts to become approved by the Federal Reserve as a bank
holding company. JX 377 at 1-2.

75