A judge ruled that the 2008 bailout and takeover of insurance giant AIG was "unduly harsh" and unconstitutional The long running suit brought by the former chairman of AIG and shareholders sought billions in damages. But while the judge ruled in their favor, he declined to award any monetary damages, saying that the company would have disintegrated without the bailout cash.

The Hill:

In his ruling, Judge Thomas Wheeler determined the federal government violated the Constitution by stepping in and effectively seizing the insurance company during the crisis, even if the takeover was intended to save the company from imminent bankruptcy.

However, since AIG would have ceased to exist almost immediately had the government not stepped in, the judge also determined that Greenberg and the shareholders were not due the billions of dollars in damages sought.

In his U.S . Court of Federal Claims opinion, Wheeler found merit in the argument that the Federal Reserve overstepped its bounds in providing AIG with a critical cash infusion at the height of the crisis, but also taking over the company and ousting its leadership. Wheeler said the government’s bailout of the insurance firm, which came immediately following the collapse of Lehman Brothers, was “misguided and had no legitimate purpose.”

“What is clear from the evidence is that the Government carefully orchestrated its takeover of AIG in a way that would avoid any shareholder vote, and maximize the benefits to the government and to the taxpaying public, eventually resulting in a profit of $22.7 billion to the U.S. Treasury,” Wheeler wrote.

In his ruling, Wheeler pointed out that other major financial institutions were also under significant stress during the crisis, and did not face the same onerous terms, which effectively resulted in the government taking over the insurance company. In fact, he argued AIG was actually treated more harshly than institutions that contributed more significantly to the financial downturn.

Wheeler went on to say the Federal Reserve had no legal authority to step in and take over AIG, even though the company accepted the terms of the deal, facing imminent collapse otherwise.

While Greenberg had sought billions of dollars in damages, arguing in his suit that the government effectively stole the company from him, Wheeler found that argument less compelling. The “Achilles’ heel” of the claim that AIG shareholders were owed damages as a result of the bailout was the fact that if the government did not step in, AIG would have gone bankrupt.

The $85 billion in taxpayer funds AIG recieved were paid back with interest a few years later. But the judge's harsh words for the Federal Reserve and the Bush administration uphold the idea that "too big to fail" is not only ridiculous, but illegal as well. The world would not have ended if AIG had gone belly up and that goes for the big banks who also claimed they were too big to fail. After all, how much worse could the recession have been if those who decided to gamble trillions of dollars paid the price for their stupidity? 

Of course, the Fed maintains that it's actions were "legal, proper and effective." Since the Federal Reserve won't let us take a look at their books, we'll never know if that's true.