Judge Wheeler determined that Mr. Greenberg and the other shareholders did not suffer any economic damage because "if the government had done nothing, the shareholders would have been left with 100 percent of nothing." The judge cited John Studzinski, vice chairman of the Blackstone Group and an adviser to A.I.G., who had instructed the board to accept the government's offer in 2008, telling the room of directors: "Twenty percent of something [is] better than 100 percent of nothing."
Continue reading the main story Inexplicably, that line of logic did not extend to the judge's ruling that the government had unfairly taken advantage of A.I.G. by requiring tough loan terms, including the equity stake and a 12 percent interest rate.
"No matter how rationally A.I.G.'s board addressed its alternatives that night, and notwithstanding that A.I.G. had a team of outstanding professional advisers, the fact remains that A.I.G. was at the government's mercy," the judge wrote.
Judge Paul A. Engelmayer of Federal District Court in Manhattan, who had previously thrown out the case, had said that the claim that A.I.G.'s board was under the control of the government was specious. By the logic of Mr. Greenberg's case, the judge had written, "a loan shark whose usurious interest rate is agreed to by a small business so that it may stay afloat could equally be said to have had actual control over that business so as to compel its agreement to a loan."
Dennis Kelleher, president and chief executive of Better Markets, an advocacy group for financial reform, called Judge Wheeler's ruling perplexing.
"The court bizarrely expressed repeated sympathy for A.I.G. while failing to properly weigh the economic wreckage suffered by the American people," Mr. Kelleher said in an email. "It's the U.S. taxpayers that have been victimized here by A.I.G. when it acted recklessly, precipitated the crash of the financial system, took a $185 billion bailout, and then gave bonuses to some of the very same people who irresponsibly sold the derivatives that blew up the company."
Judge Wheeler's analysis, in comparing how A.I.G.'s rescue was handled relative to the big banks, appears to ignore the realities of the regulatory oversight rules at the time. The judge criticized the government for taking control of A.I.G. while not doing so for the banks. But the Fed did not have regulatory oversight of A.I.G., which is an insurance company, and therefore couldn't maintain the same kind of control it did over the banks. Similarly, the judge criticized the Fed for creating a trust to hold the shares of A.I.G. because the Fed technically can't own equity in companies. "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 government was sticking to its guns on Monday. "The court confirmed today that A.I.G. shareholders were not harmed by those actions," the Treasury Department said in a statement. "We disagree with the court's conclusion regarding the Federal Reserve's legal authority and continue to believe that the government acted well within legal bounds."
While the ruling is likely to be appealed, possibly all the way to the Supreme Court, the head-scratching decision will undoubtedly have an effect on future bailouts, intended or unintended.
Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University, who is reportedly among the candidates for a Republican seat on the Securities and Exchange Commission, wrote last year that if Mr. Greenberg prevailed in his case, "it would strike a blow to too-big-to-fail by adding to the bailout calculus the specter of subsequent courtroom payouts to allegedly aggrieved shareholders."