The first known whistle-blower lawsuit to assert that the taxpayers were defrauded when the US federal government bailed out the American International Group (AIG) was unsealed on Wednesday, joining a number of suits seeking to settle the score on losses related to the financial crisis of 2008.
The lawsuit, filed by a pair of political activists from the La Jolla area of San Diego, asserts that AIG and two large banks engaged in a variety of fraudulent and speculative transactions, running up losses well into the billions of dollars. Then the three institutions persuaded the Federal Reserve Bank of New York to bail them out by giving AIG two rescue loans, which were used to unwind hundreds of failed trades.
The loans were improper, the lawsuit said, because the Fed made them without getting a pledge of high-quality collateral from AIG, as required by law.
“To cover losses of those engaged in fraudulent financial transactions is an authority not yet given to the Fed board,” said the plaintiffs, Derek and Nancy Casady, in their complaint.
The lawsuit names AIG, Goldman Sachs and Deutsche Bank as defendants, but not the Fed. Senior Fed officials have stated that they had to take unusual steps in 2008 because the global financial system was close to breaking down. The Casadys’ lawyer, Michael J Aguirre, argued that even so, the Fed was required to comply with its own governing statutes. He said that when the Fed bailed out a nonbank, it was required to secure the loan with the same liquid, high-quality collateral it required when lending to a troubled bank.
A spokesman for AIG, Mark Herr, said the Casadys’ lawsuit was “devoid of merit” and said Aguirre appeared to be recycling old and discredited legal theories. Separately, AIG is now among the companies turning to the courts in hopes of recovering losses from 2008, and seeking restitution from some banks.
A spokesman for Goldman Sachs said he was not familiar with the Casadys’ lawsuit and could not comment on it. A spokeswoman for Deutsche Bank declined to comment.
(The New York Times)