Latest AIG 'Bailout' Benefits Hank Greenberg

(MoneyWatch)  Former American International Group CEO Hank Greenberg says that he's no longer a billionaire, but stop before you take up a collection for him. The latest decision by AIG should make life better for Hank, but worse for taxpayers.

After fighting a prolonged losing court battle with its feisty former boss, AIG agreed to settle and pay up to $150 million in legal fees and expenses for Greenberg and former AIG CFO Howard Smith, who left the insurer when Greenberg was ousted in 2005 and, at last report, still works with him at Greenberg owned-companies.

Taxpayers, who own 80 percent of AIG, should be used to paying the freight for AIG's mistakes. First there was the infamous $182 billion bailout that kept the insurer out of bankruptcy, then the payoff to the investment banks that it partnered with in the credit default swaps fiasco. Next came the $165 million in bonuses paid to the Financial Products unit that bought and sold bad investments. And now, finally, Messrs. Greenberg and Smith can collect what they deem to be their fair share.

Some would argue that Greenberg was the architect of the AIG debacle. After all, the Securities and Exchange Commission did fine him $15 million. But that's negligible in light of the up to $150 million that taxpayer-owned AIG now has to give him and Smith.

But let's look at it from a legal point of view, since Greenberg himself is a lawyer and since much of that $150 million will likely go to Greenberg's lawyer David Boies. Put in lawyerly terms: a signed contract is a binding contract. If you sign a contract with an insurer, they're going to hold you to it, and not cut you any slack. Gulf Coast residents found that out the hard way when they tried and failed to collect on many of their hurricane claims.

When the government agreed to bail out AIG - fearing that its bankruptcy would send the financial system into a tailspin - it signed on as the insurer's bankroll. And when the banks realized that the U.S. Treasury was the backer and there was no threat of bankruptcy, they demanded - and received - their full payment. Hank, who should know, says AIG would have been better off filing Chapter 11.

Then there were those ironclad bonuses negotiated with AIG's Financial Products unit just prior to the insurer's meltdown in early 2008. AIG was obligated to pay. And all the noise in Congress and threats by New York Attorney General Andrew Cuomo couldn't get most of that money back.

Finally there was AIG's badly-handled battle with Greenberg over the 12 percent of AIG's shares that he holds through the companies that he now runs. AIG wanted the stock back, saying that Greenberg, as AIG's boss at the time, had verbally agreed to use the stock for AIG executive bonuses. Hank said that he never agreed and that there was no contract to that effect. AIG lost, and now has to pay those legal fees.

But an AIG flack says not to worry; those legal costs could be covered, at least partially, by an insurance contract. And Hank will make sure that insurer pays. Lesson learned: sometimes it's better not to sign on the dotted line.