Lawsuit Alleges Fraud in Federal Bailout of AIG
The American International Group and four large banks engaged in a widespread and systematic fraud of U.S. taxpayers in connection with the federal bailout of the insurance giant during the financial crisis of 2008, according to a lawsuit unsealed April 28.
The lawsuit (PDF), filed last September in federal district court in San Diego by Derek and Nancy Casady of suburban La Jolla, two veteran political activists, was first reported Wednesday by the New York Times. Additional details were disclosed in a follow-up report Thursday by Bloomberg News.
The suit, which the Times describes as the first known whistle-blower case to come out of the financial crisis, alleges that AIG and the banks engaged in a variety of fraudulent and speculative transactions that ran up their losses into the billions of dollars. Then they persuaded the Federal Reserve Bank of New York to bail them out by giving AIG two rescue loans totaling $85 billion.
The loans were improper, the suit alleges, because the Fed made them without getting a pledge of high-quality collateral from AIG, as required by law.
Besides AIG, the suit names Goldman Sachs, Merrill Lynch, Societe Generale, Deutsche Bank and 100 unnamed “John Does” as defendants.
The companies are referred to in the complaint as “the five major players” in the market for over-the-counter collateralized debt obligations, or CDOs, used to repackage individual loans and resell them on the secondary market. Insuring such securities with AIG-issued credit default swaps was AIG’s “most ambitious fraudulent conduct,” the complaint says.
A spokesman for AIG said the suit was “devoid of merit.” Spokespeople for three of the four banks declined comment. The fourth could not be reached.
