A federal court recently found that the government committed an “illegal exaction” when it agreed to provide a loan to AIG during the 2008 financial crisis but only if AIG agreed to give the government an equity share in the company and control its operations. However, because the loan prevented AIG from going bankrupt, the court concluded that AIG was not entitled to any damages as a result of the government’s actions.
AIG was one of the financial institutions on the brink of bankruptcy in 2008. The federal government was concerned that this could trigger an economic collapse, so it provided an $85 billion loan to AIG. However, the conditions for the loan included a 12% interest rate, a 79.9% equity ownership of AIG and the right to install a CEO selected by the government. The court found that “the Government treated AIG much more harshly that other institutions in need of financial assistance” and “singled out AIG as the poster child” for causing the economic crisis in 2008. The court also found that the government had no right to demand an equity share in any company as a condition for a loan or demand that it be able to take over its operations, and that this constituted an illegal exaction.
As the court held, “AIG was at the Government’s mercy” and had to choose between bankruptcy and the Government’s offer. The court found that this same fact also meant that AIG was not entitled to any damages because, but for the loan, AIG would have gone bankrupt.