US Federal Reserve not entitled to take over insurer in exchange for a loan

The US Court of Federal Claims decided that the Federal Reserve was not entitled to demand equity ownership and voting control of AIG as a consideration for the bailout loan in 2008. There was no law permitting the Federal Reserve to take over the company and to run the insurer’s business in the commercial world.

The court also refused to find that the insurer’s acceptance of the bailout offer precluded it from challenging the takeover. The company’s acceptance could not make an illegal government action legal. The fact that the government created a trust to hold the shares did not cure the illegality.

But the court found that the shareholders were not entitled to damages because the government’s illegal actions did not cause harm to shareholders.

South African law is similar in that an illegal government action may be void and the voidness cannot be cured by implementation. The passage of time and events may make it impossible to reverse the consequences of a wrong decision.