Lithuania Feels Squeeze in Sanctions War With Moscow

Slide Show | Trying Not to Cry Over Unsold Milk Caught in the sanctions war between NATO and Russia, small farms in Lithuania that can no longer count on exports to Russia are struggling to survive. By JACK EWING September 24, 2014

ZIBENAI, Lithuania — In the sanctions war between Russia and the West, Kasia Jankun's 80 dairy cows seem to be losing.

The sanctions, which are taking a toll on Russia's economy, cut both ways. And Ms. Jankun and other small farmers in this Baltic nation of three million people are bearing an overwhelming share of the pain from a Russian ban on European dairy products.

Former Soviet bloc countries that, like Lithuania, are part of the European Union and the NATO military alliance might seem safe from the Russian strong-arming that made Ukraine so vulnerable. But in economic standoffs, it is often the most vulnerable that suffer most.

The loss of the Russian market created an oversupply of milk, which pushed prices in Europe well below the break-even point for farmers like Ms. Jankun, whose 250-acre farm in eastern Lithuania lies at the end of a dirt road in rolling country dappled by groves of pine and alder.

A dairy product stand in a market in Vilnius, Lithuania.

"If nothing changes by spring, at these prices, it's bankruptcy, " Ms. Jankun, 50, said recently, as she served visitors thick slices of homemade cheese that she sells at outdoor markets to make up for lost income.

If the sanctions battle were not underway — and if the eurozone economy were not still so listless — Lithuania might seem to be heading in a positive direction. At the beginning of next year, it is set to become the 19th member of the euro currency union, joining its Baltic neighbors Latvia and Estonia in that inner circle of countries that the European Union ostensibly considers among the most economically worthy.

Mario Draghi, the president of the European Central Bank, was scheduled to speak in Lithuania's capital, Vilnius, on Thursday, symbolically putting his imprimatur on the country's eurozone membership.

And yet, a quarter-century after Lithuania, Latvia and Estonia won independence from the Soviet Union, their economies remain deeply intertwined with Russia's. Farming is a major industry in the Baltics, and Russia was the largest and most profitable market for Lithuanian products like cheese and yogurt. Unlike big industrial agricultural producers, Lithuania's small farmers — the most vulnerable segment of the country's dairy industry — cannot easily redirect their products to other markets.

Kasia Jankun on her 250-acre farm. "If nothing changes by spring, at these prices, it's bankruptcy," Ms. Jankun said.

Nor can they hope to replicate elsewhere the premiums on Baltic dairy goods — so meager are most Russian alternatives — that merchants in cities like Moscow and St. Petersburg have been willing to pay.

Without doubt, tensions stemming from the Ukrainian conflict are having a broader effect on world trade, especially in countries like Germany, where many auto and machinery companies until recently saw Russia as a promising and fast-growing market. General Motors' Opel unit said last week that it was cutting production and jobs at its car plant in St. Petersburg, mostly because of the sagging Russian economy and the sinking value of the ruble.

But the economic impact of the sanctions may be most acute in Lithuania, which is also a major processing center for milk produced by the other Baltic countries and, via ports on the Baltic Sea, a transportation hub for Russia-bound goods.

Food exports to Russia account for 2.7 percent of Lithuania's gross domestic product, according to the European Bank for Reconstruction and Development, a far greater share of the economy than in any other European Union country. More than a third of the companies on Lithuania's benchmark stock index are in agriculture or related industries.

The economic disruption is not likely to derail plans for Lithuania to join the eurozone on Jan. 1. On the contrary, many Lithuanians see euro membership as a milestone in the country's tighter integration with Europe, and validation of its recovery from a severe downturn in 2009, when gross domestic product plunged 15 percent.

But this month, the country's central bank reduced its growth forecasts because of slowing trade with Russia. This year, the Lithuanian economy will grow 2.9 percent instead of the 3.3 percent that was forecast earlier, the bank said. Next year, growth is expected to be 3.3 percent instead of 3.6 percent.

That would still be among the fastest growth rates in the European Union. "Our expectation is that it will influence our G.D.P. figures, but not so very significantly," said Vitas Vasiliauskas, chairman of Lithuania's central bank. He noted, though, that even before the sanctions, Lithuanian exports were squeezed by sputtering growth in Russia.

For most Lithuanian farmers, there is not much room for reduction. More than 70 percent of Lithuanian farms are smaller than 25 acres, earning an annual average profit of only 5,849 litas, or $2,176, per farmworker, according to the Lithuanian Institute of Agrarian Economics.

Lithuania's large agricultural conglomerates are feeling the effect of sanctions, too, but are in a better position to find new markets.

"We are not in a desperate situation," said Andrius Pranckevicius, deputy managing director of Linas Agro, a Lithuanian company that trades grain and other agricultural commodities and is also a major milk and poultry producer.

But he added, "The situation for smaller farmers is very serious right now. They are absolutely below break-even."

Rightly or not, Lithuanians say they believe that President Vladimir V. Putin of Russia feels special resentment toward the Baltic countries because they were the first Soviet states to demand independence in the late 1980s. Last fall, well before Russia imposed formal sanctions, customs officials were blocking imports of Lithuanian farm products, ostensibly on health grounds.

In Lithuania, dismay about the economic impact of the sanctions is amplified by the fear that Mr. Putin intends to restore the old borders of the Soviet Union, using military force if necessary. Unlike Ukraine, of course, Lithuania is a member of NATO, whose members have pledged to defend one another. Still, Lithuanians feel exposed.

Vilnius, the picturesque capital, is only about 20 miles from the border of Belarus, which many Lithuanians regard as a state that Russia could use as a jumping-off point for a military incursion. Lithuania also shares a 136-mile border with Kaliningrad, the Russian enclave on the Baltic Sea.

As a result, despite the economic pain that sanctions have caused, many Lithuanians advocate a hard line in dealing with Russia.

"Everyone feels strong solidarity with Ukraine," said Linas Linkevicius, the Lithuanian foreign minister. He has pushed the NATO countries to establish a more demonstrative presence in the Baltics, for example, by staging maneuvers and stationing equipment in the region.

"We need some physical presence, a tangible something," said Mr. Linkevicius, a former defense minister.

Mr. Linkevicius has convened groups of business people to talk about ways to develop other markets for Lithuanian goods. But fully replacing Russian sales will be difficult. Lithuanian dairy products have a reputation for quality in cities like St. Petersburg and Moscow and command higher prices than in other markets.

Despite historical resentments, Russia's size and proximity make it the most logical market for Baltic goods. Although English has become the second language of choice for younger Lithuanians, after their native tongue, many people speak Russian.

"A lot of people feel more comfortable working with Russians in Russian than other cultures," said Kasparas Jurgelionis, deputy chairman of Koncernas Achemos Grupe, a Lithuanian fertilizer producer that is also involved in handling cargo passing through Baltic ports. "There is a lot of sacrifice in terms of lost opportunities."

Ms. Jankun, the farmer, said she was uncertain what the policy toward Russia should be. "I am in favor of Russian people buying my cheese," she said in her large but unfinished home next to the fields where she grows hay and potatoes and lets her cows graze. "I don't care about politics."

Dressed in a red sweater and battered rubber clogs, Ms. Jankun said she worried that her two grown children would despair and decide to emigrate, following tens of thousands of other Lithuanians who left during the economic turmoil in 2009.

Then no one will be able to take over the farm, which belonged to Ms. Jankun's family before the Soviet Union annexed Lithuania in 1940 and was returned after the collapse of communism.

Given that tortured history, Ms. Jankun was uncertain how to deal with Mr. Putin. "If we have a nervous and unpredictable neighbor, we avoid him," she said. "But," she added, "when he starts breaking your windows, you have to do something."

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Bits Blog: With Apple’s i0S 8, Your Fingerprint Can Become the Master Password

Photo Craig Federighi, Apple's senior vice president of software engineering, discussing the fingerprint sensor at the company's developer conference in June.Credit John G. Mabanglo/European Pressphoto Agency

Passwords stink. That was the lesson learned from the recent episode in which hackers broke into the Apple accounts of a number of celebrities.

And not only are passwords weak protection against break-ins, they are also tough to memorize when complex, and a pain to reset when you forget them.

But when I set up my new iPhone 6 earlier this week, I took a glimpse into a future without passwords. It was replaced with something no one could easily replicate, and something that was with me at all times: my fingerprint.

By following a few steps, I was able to set up my iPhone to log into websites I regularly use with a touch of my finger. No more passwords. I was relieved when I effortlessly logged in to my bank, my Facebook profile and my Amazon account.

Apple's fingerprint sensor, called Touch ID, is hardly new. It was introduced in the iPhone 5S as a feature for logging into the phone instead of punching in a code.

But along with the new iPhone 6, Apple recently released iOS 8, its new mobile software system for mobile devices. It includes an important feature that allows third-party apps to hook directly into Apple's native apps.

With iOS 8, Apple also opened the fingerprint sensor to work with third-party apps (whereas before it could primarily be used only to log in to the phone or buy apps through the App Store). With these tweaks, Apple only just recently unlocked the true potential of its fingerprint sensor.

One caveat: Setting up the device to accept fingerprints for entering passwords was not very simple. It required installing the free third-party app 1Password on my iPhone. Then I had to follow some steps to create a shortcut to 1Password that could be accessed inside Apple's Safari web browser.

After that was set up, I went into the security settings of the 1Password app and enabled Touch ID to work. And on top of that, I had to use 1Password to log in to every site by typing each of my passwords — just once — to store the password inside the app.

But from there, when logging in to the websites from Safari, I could use my fingerprint to enter my user name and password. You can also set this up to use your fingerprint to enter credit card numbers for shopping online. It saves valuable time, plus it feels safe because your fingerprint becomes the master password.

No more tedious memorization or typing. Imagine if and when the fingerprint sensor makes it way into not just Apple's iPads, but also its laptops. While it doesn't look like the password will go away anytime soon, memorizing and typing it in could soon become a thing of the past.

Good riddance.

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Markets Climb, Shaking 0ff Days of Losses

By THE ASSOCIATED PRESS September 24, 2014

Stock markets moved higher Wednesday, stabilizing after the previous day's losses on Wall Street. Investors were weighing stronger Chinese manufacturing data against Europe's economic malaise and heightened geopolitical risks after the United States and Arab nations attacked the Islamic State group's headquarters in Syria.

KEEPING SCORE In afternoon trading the Dow Jones industrial average was 0.9 percent higher. The Standard & Poor's 500-stock index gained 0.7 percent. The Nasdaq composite rose 0.9 percent. Germany's DAX ended the day up 0.7 percent while France's CAC 40 closed up 1.3 percent. Britain's FTSE 100 gained 0.5 percent.

HOME IMPROVEMENT Bed Bath & Beyond rose $4.62, or 7.4 percent, to $67.28 after the home furnishings company after reporting quarterly results well above analysts' expectations. It was the biggest gain of any stock in the S.&P. 500 index.

WAL-BANK Retail giant Walmart rose $1.60, or 2 percent, to $77.20 after the company announced it would start offering checking accounts to its customers in collaboration with a small banking company known as Green Dot. The news sent Green Dot shares soaring 24 percent.

HEALTH CARE REBOUND Among the names doing well Wednesday were health care stocks, particularly the ones that got hit hard earlier in the week when the Treasury Department announced rules that would stop companies from doing so-called corporate inversion deals. Such deals happen when a company merges with an overseas competitor to legally move its headquarters out of the United States to avoid paying corporate taxes. AbbVie, which fell nearly 2 percent on Tuesday, was up 2.6 percent Wednesday.

ASIA'S DAY Japan's Nikkei 225 stock average shed 0.2 percent to 16,167.45 while Seoul's Kospi rose 0.3 percent to 2,035.64. Hong Kong's Hang Seng gained 0.4 percent to 23,921.61. Australia's S&P/ASX 200 dropped 0.7 percent to 5.375.80. China's Shanghai Composite jumped 1.5 percent to 2,343.57. Southeast Asia markets mostly rose.

CHINA FACTORIES Asian stocks were still supported by a report released Tuesday showing China's manufacturing unexpectedly improved in September. According to a survey of businesses, new orders and exports increased at a faster rate, although employment fell. Overall, the report helped ease jitters about a deeper slowdown in the world's No. 2 economy.

EUROPE STAGNATES The Ifo business confidence index in Germany, Europe's largest economy, dropped for a fifth month in September. The drop in the index published Wednesday was larger than expected and confirms Europe's economy remains weak. The day before, a closely watched gauge of business activity for the region fell to a nine-month low. The eurozone economy has been flat or barely growing since April, hobbled by the lingering effects of a debt crisis, uncertainty over a conflict in Ukraine and a lack of confidence among consumers, businesses and banks.

THE QUOTE "It's clear now that the Russian sanctions are causing a slowdown in the European economy, particularly manufacturing," said Anastasia Amoroso, a global markets strategist at JPMorgan Funds. "But we see this as a temporary soft patch."

SYRIA Along with bad economic news, investors had geopolitical concerns to worry about. The United States and five Arab nations attacked the Islamic State group's headquarters in eastern Syria in nighttime raids Tuesday. American aircraft as well as Tomahawk cruise missiles launched from Navy ships in the Red Sea and the northern Persian Gulf were used. "Geopolitical risk, which has been simmering in the background, is back to the fore" said a CMC analyst, Desmond Chua. "Helping to limit losses in the equity markets, however, was the continual outperformance of economic indicators, with US manufacturing activity clocking a four-year high," he said. "Better-than-expected Chinese factory day also alleviated concerns that the second largest economy was facing a slowdown."

ENERGY Benchmark United States crude was up 20 cents at $91.76 a barrel in electronic trading on the New York Mercantile Exchange.

CURRENCIES The euro slid to $1.2784 from $1.2841 late Tuesday. The dollar rose to 108.87 yen from 108.80 yen.

77.21 +1.61 (2.12%)
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DealBook: Valeant Switches to Sugar, but Allergan Still Not Biting

Photo Allergan is the maker of Botox.Credit Win McNamee/Getty Images Related Links

In the nastiest takeover battle of the year, one side is now trying to play nice, but the other appears uninterested in any peacemaking efforts.

On Wednesday, Valeant Pharmaceuticals, the Canadian pharmaceuticals company that is trying to take over Allergan, the maker of Botox, released a series of letters exchanged between the two companies in recent days.

In the first, sent Monday from Valeant's chief executive, J. Michael Pearson, to his counterpart at Allergan, David E. I. Pyott, Mr. Pearson tried to ease the tensions between the two companies.

"While I recognize that takeover battles can become very heated, it is regrettable that the tone of our public back and forth has become acrimonious at times," Mr. Pearson said. "I have not appreciated what I believe are baseless attacks on our business model, and I am sure there are things that have not sat well with you."

Photo J. Michael Pearson is the chief executive of Valeant Pharmaceuticals.Credit Christinne Muschi/Reuters

Mr. Pearson invited Allergan to the bargaining table once more and even suggested Valeant might consider paying more. "It may be too late, but I believe we still have an opportunity to take the temperature down and come together to see if we can begin a conversation that could lead to even more value for your stockholders, while still being the right transaction for ours," he said. "We are open to seeing any information you may have that would show that there is more value for your company."

Mr. Pearson wasn't all carrot and no stick. He also said Valeant was prepared to follow through with his hostile takeover attempt if Allergan refused to engage. "We are committed to this transaction," he said. "While we would much prefer avoiding a three-month proxy contest, we will pursue it if we need to."

But mostly, Mr. Pearson was playing peacemaker. "I think your shareholders and ours would prefer to see a constructive discussion about value, rather than more mudslinging," he said. "Please consider the olive branch extended. I hope you will accept it."

Allergan, unsurprisingly, did not.

In a response sent later on Monday, Mr. Pyott replied by reiterating his analysis that Valeant's $53 billion offer is "grossly inadequate" and continued his pointed criticism of Valeant's business model.

"Instead of creating an 'unrivaled platform for growth and value creation in health care,' as you suggest, we believe that the application of Valeant's business model to Allergan would erode and ultimately destroy considerable stockholder value," Mr. Pyott said.

He also pushed back on Valeant's suggestion that Allergan shareholders' support for a special meeting to be held on Dec. 18 indicated support for a Valeant takeover.

"A substantial number of stockholders who consented to the special meeting have informed Allergan that they share Allergan's perspectives on Valeant and its offer and have no intention of voting in favor of the proposal to remove Allergan's directors," Mr. Pyott said. "To the contrary, their consent related solely to a desire to adhere to best practices in connection with corporate governance and the stockholder franchise, which Allergan respects and appreciates."

The latest exchange between the companies comes as Allergan is engaged in talks with Salix Pharmaceuticals about a potential deal that could derail Valeant's bid. Allergan has also drawn interest from Actavis, a big Irish drug maker, about a potential deal.

On Wednesday, Valeant replied. In a letter, Mr. Pearson said Allergan's attacks on Valeant's business model were unfounded, and he released new figures about the company's growth to support his claims.

By the end of the letter, Mr. Pearson seemed to acknowledge that he was back at square one and didn't hesitate at lashing out at Allergan once more.

"While we continue to believe it's in the best interest of your shareholders for you and your team to conduct due diligence on our business, you seem intent on avoiding constructive engagement at all costs," he said.

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U.S. New Home Sales at Six-Year High; Supply 1ncreases

By REUTERS September 24, 2014

WASHINGTON — Sales of new U.S. single-family homes surged in August and hit their highest level in more than six years, offering confirmation that the housing recovery remains on course.

The Commerce Department said on Wednesday sales jumped 18.0 percent to a seasonally adjusted annual rate of 504,000 units. That was the highest level since May 2008 and marked the second straight month of gains.

Economists polled by Reuters had forecast new home sales rising to only a 430,000-unit pace last month.

While the new home sales segment accounts for only 9.1 percent of the housing market, the increase last month should allay fears of renewed housing weakness after a surprise decline in home resales last month.

Existing home sales fell in August for the first-time in four months as investors, who have been supporting the market, stepped away. Some economists, however, think the departure of investors, who have been bidding up prices, is a positive development for housing.

A survey last week showed homebuilder sentiment hit its highest level in nearly nine years in September, with builders reporting a sharp pick-up in buyer traffic.

But housing continues to be hobbled by relatively high unemployment and sluggish wage growth.

In a separate report, the Mortgage Bankers Association said mortgage applications fell last week. The decline, however, followed a jump in the week ending Sept. 12.

U.S. financial markets were little moved by the data, but housing shares tumbled after home builder KB Home reported earnings that missed Wall Street's expectations.

KB HOME shares fell 6.89 percent, while Pulte Group slipped 1.74 percent. Toll Brother dropped 1.27 percent.

In August, new home sales soared 50 percent in the West to their highest level since January 2008.

Sales in the populous South increased 7.8 percent to a 10-month high. In the Northeast, sales rose 29.2 percent, but were flat in the Midwest.

Despite the rise in sales, the stock of new houses on the market hit its highest level in four years, giving buyers more choice. At August's sales pace it would take 4.8 months to clear the supply of houses on the market. That compared to 5.6 months in July.

Six months' supply is normally considered a healthy balance between supply and demand. The median new house price increased 8.0 percent in the 12 months to August.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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Companies Are Taking the Baton in Climate Change Efforts

Old-forest growth is cleared for palm oil plantations, like this one in Riau province, Indonesia. Forty companies signed a pledge on Tuesday to halve deforestation by 2020 and end it by 2030. By JUSTIN GILLIS September 23, 2014

With political efforts to slow global warming moving at a tortuous pace, some of the world's largest companies are stepping into the void, pledging more support for renewable energy, greener supply chains and fresh efforts to stop the destruction of the world's tropical forests.

Forty companies, among them Kellogg, L'Oréal and Nestlé, signed a declaration on Tuesday pledging to help cut tropical deforestation in half by 2020 and stop it entirely by 2030. They included several of the largest companies handling palm oil, the production of which has resulted in rampant destruction of old-growth forests, especially in Indonesia.

At a United Nations climate summit in New York this week, companies are playing a larger role than at any such gathering in the past — and issuing a blizzard of promises. Several environmental groups said they were optimistic that at least some of these would be kept, but they warned that corporate action was not enough, and that climate change could not be solved without stronger steps by governments.

The corporate promises are the culmination of a trend that has been building for years, with virtually every major company now feeling obliged to make commitments about environmental sustainability, and to report regularly on progress. The companies have found that pursuing such goals can often help them cut costs, particularly for energy.

A solar array at a Facebook data center in Oregon. Apple and Google have taken similar steps.

Technology companies are at the forefront of this week's announcements, in part because their own employees have been demanding action on climate issues.

Apple, which has won plaudits from environmental groups for supporting renewable power in the United States, said that it would start focusing on emissions at its suppliers, which are mainly located abroad and account for some 70 percent of the greenhouse gases that come from production and use of the company's products.

"We're really turning our attention now to the supply chain in a major way," Apple's chief executive, Timothy D. Cook, said on Monday in New York.

Apple, Google and Facebook, which did not sign the forest pledge as their industries have little connection to deforestation, have all made strong commitments to power their huge, electricity-hungry data centers with renewable power. They sometimes build their own solar or wind arrays, but have also demanded that power companies in places like Iowa and North Carolina generate and sell them renewable power as a condition of putting new facilities in those states.

A large array of solar panels outside an Apple data center in Maiden, N.C. The data center powers services like iTunes and Siri.

Mr. Cook, in his most forceful statements yet about the environment, rejected the idea that society must choose between economic growth and environmental protection. He pointed to a huge solar farm his company built in North Carolina to help power a data center there.

"People told us it couldn't happen, it couldn't be done, but we did it," Mr. Cook said. "It's great for the environment, and by the way it's also good for economics."

In another indicator of how focused the companies have become on ecological issues, Google said this week that it would withdraw from the American Legislative Exchange Council, a conservative-leaning group that has urged repeal of state renewable power standards and other pro-renewable policies.

In a radio interview, the company's executive chairman, Eric E. Schmidt, said that people opposed to climate action "are really hurting our children and our grandchildren and making the world a much worse place. And so we should not be aligned with such people — they're just, they're just literally lying."

In a statement, Lisa B. Nelson, chief executive of the legislative council, said it was "unfortunate" that Google would withdraw, adding that the decision was "a result of public pressure from left-leaning individuals and organizations who intentionally confuse free-market policy perspectives for climate change denial."

Many of this week's promises focused on the supply chain for major commodities like soybeans, beef and palm oil, often produced on cleared forest land in the tropics. The destruction of these forests imperils some of the earth's richest biological regions, endangering animals like tigers, elephants and orangutans. The trees are generally burned, sending vast amounts of carbon dioxide into the air, which worsens global warming.

Brazil has made progress in slowing the destruction of the Amazon, but deforestation in Indonesia remains an acute problem, in part because the production of palm oil there is so lucrative.

Tuesday's declaration on forests was also endorsed by 32 governments, by numerous advocacy groups and by organizations representing indigenous people. Among corporations, it also included consumer goods companies that have pledged to impose tough standards on their suppliers of the oil, an ingredient in thousands of everyday products.

Cargill, the huge American commodity processor, went even further, extending a previous no-deforestation pledge that it had made on palm oil and soybeans to cover every commodity the company handles — one of the most sweeping environmental pledges ever made by a large agricultural company.

"We want to make sure we are treating the environment with respect," David W. MacLennan, the company's chief executive, said in an interview. "It's the right thing to do for the planet, for indigenous peoples, for our customers and for our employees."

The major Indonesian palm oil processors, including Cargill, issued a separate declaration on Tuesday pledging a crackdown on deforestation, and asking the Indonesian government to adopt stronger laws. Forest Heroes, an environmental group, called the declaration "a watershed moment in the history of both Indonesia and global agriculture. We should not underestimate the significance of what is happening."

Perhaps the leading company in trying to clean up the palm oil business has been Unilever, which took action several years ago after being targeted in demonstrations by Greenpeace, the environmental group. Unilever, which owns brands like Ben & Jerry's ice cream, Dove soap, Lipton tea and Hellmann's mayonnaise, has pledged that it will be able to trace all its palm oil to known sources by the end of this year.

In another major commitment, five large refrigeration companies said on Tuesday that they would form a global coalition to seek improvements in the huge refrigerators used in grocery stores, fast-food chains and the like. One goal will be to phase out a type of refrigerant that acts as a powerful greenhouse gas when it escapes to the atmosphere.

In an interview in New York, Kumi Naidoo, the executive director of Greenpeace International, said that his group and others would be watching to see that the corporate promises made this week were kept.

Mr. Naidoo said he believed the leaders of some companies were sincere in wanting to tackle global warming, singling out the head of Unilever, Paul Polman. But he added that their efforts would only go so far without stronger action by governments.

"We cannot just depend on the good will of corporate leaders," Mr. Naidoo said. "The situation is too urgent now."

Correction: September 24, 2014

An earlier version of this article misidentified where Timothy D. Cook,  Apple's chief executive, made remarks on Monday. He spoke at the Morgan Library and Museum in New York at a climate event, not at the United Nations.

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DealBook: Wall St. Bankrolls Ex-Executive as He Sues 0ver A.1.G. Bailout

Photo Maurice R. Greenberg, the former chief of A.I.G., still holds a large stake in the company.Credit Spencer Platt/Getty Images Related Links

One might call it "chutzpah," as several irate lawmakers did, or "rubbing salt in the wounds" of the American taxpayer. But to a few Wall Street financiers, a lawsuit that accuses the government of shortchanging the American International Group in its 2008 bailout is something else: a promising investment in a cause they support.

Maurice R. Greenberg, 89, the former A.I.G. chief executive who still holds a large stake in the insurance company, filed the lawsuit on behalf of fellow shareholders. He has now raised several million dollars from three Wall Street companions to help cover the cost of the case. The investors, who are entitled to a cut of any damages Mr. Greenberg collects from the government, contributed about 15 percent of the tens of millions of dollars in legal costs, according to people with knowledge of the arrangement.

Six years after the government saved Wall Street from the brink of collapse, the lawsuit is coming to trial, reopening one of the ugliest chapters in modern financial history. The trial, which begins next week in Washington, will most likely hinge on testimony from the policy makers who orchestrated A.I.G.'s rescue, including former Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Timothy F. Geithner.

With the legal bills mounting in the three-year case, Mr. Greenberg sought support from a certain breed of investor — those who have misgivings about the government. Kenneth G. Langone, the former director of the New York Stock Exchange who spent years fending off accusations from the New York attorney general's office, contributed to Mr. Greenberg's legal fund, the people said. Steven A. Cohen, whose hedge fund was indicted on charges of insider trading last year, considered investing, too, but ultimately declined.

The investments from Mr. Greenberg's friends — their decisions and the details of their arrangement have not been previously reported — have breathed new life into a case that the government thought would never reach trial. After all, by the government's reckoning, A.I.G. had only one alternative to the bailout: bankruptcy.

The lawsuit, which seeks more than $40 billion from the government, does not dispute that A.I.G. needed a $182 billion lifeline to survive the financial crisis. It instead challenges the onerous nature of the rescue. The government took what became a 92 percent stake in the company — a step it did not pursue with other bailed-out Wall Street giants — imposed a steep interest rate and steered billions of dollars to the insurer's trading partners. Those decisions, the suit says, cheated A.I.G. shareholders and violated the Fifth Amendment, which prohibits the taking of private property for "public use, without just compensation."

Mr. Greenberg also contends that the Fed lacked the legal authority to demand a stake in A.I.G. That argument stems partly from past rulings, including a Supreme Court case that challenged President Truman's takeover of the steel industry during the Korean War.

The case thrusts A.I.G. into a fight that the company itself does not support. For the insurer, which has since repaid the bailout and regained its footing, Mr. Greenberg's case is a reminder of a time when it was synonymous with the excessive risk-taking that nearly imploded the economy.

The trial, at the United States Court of Federal Claims in Washington, will also place an unwelcome spotlight on the government, forcing Mr. Bernanke and Mr. Geithner to justify their unconventional policies. The government, which turned a $22.7 billion profit on the A.I.G. bailout, senses a broader public policy threat from the case as well, warning that a verdict in Mr. Greenberg's favor could set a precedent that Wall Street firms are legally entitled to bailouts on their own terms. Mr. Greenberg's lawyers dispute that notion.

Photo Treasury Secretary Timothy Geithner, left, and Ben Bernanke, chairman of the Federal Reserve, at a House panel in 2010.Credit Chip Somodevilla/Getty Images

At times, the case has pitted one government agency against another. The Treasury Department, dismayed that the case made it to trial, briefly considered hiring Neil H. MacBride, a prominent former prosecutor now at the law firm Davis Polk, to supplement the Justice Department lawyers assigned to the case, according to people with knowledge of the matter. That idea irritated some Justice Department officials, the people said, particularly since the law firm Debevoise & Plimpton was already advising the government. Ultimately, Mr. MacBride was not retained.

For his fight, Mr. Greenberg hired David Boies, the litigator who led the Justice Department's antitrust trial against Microsoft and later helped overturn California's ban on same-sex marriage.

Mr. Boies, 73, has become de facto counsel for Mr. Greenberg, steering him through accusations of accounting impropriety during his tenure as chief executive and handling his litigation with A.I.G. after his departure. Their ties extend to Yale Law School, where professorships are named for both men. Mr. Boies, an alumnus, and his wife, Mary, financed the professorship in Mr. Greenberg's name.

In the A.I.G. case, Mr. Greenberg is sparing no expense. His legal team, which has taken over nearly an entire floor of a downtown Washington hotel near the courthouse, also includes the Wall Street law firm Skadden, Arps, Slate, Meagher & Flom.

To help finance the fight, Mr. Greenberg turned to his friends on Wall Street, putting a personal twist on so-called litigation financing, a growing industry for hedge funds and specialty firms.

His pitch resonated with Mr. Langone, a close friend and vocal supporter of Mr. Greenberg. J. Christopher Flowers, a private equity executive who happened to warn the Treasury Department in September 2008 that A.I.G. was careering toward collapse, also invested in the legal fund, the people with knowledge of the financing arrangement said. The identity of the third investor could not be learned.

Mr. Greenberg's effort came to light in a report by Fox Business Network in June. While it is unclear whether that report scared off some potential investors, Mr. Cohen, the hedge fund manager, declined to invest. Peter G. Peterson, an outspoken fiscal conservative who served in the Nixon administration and helped found the giant private equity firm the Blackstone Group, also turned down Mr. Greenberg.

Mr. Greenberg delivered his pitch to the investors at a meeting in his office this March, according to the people with knowledge of the financing arrangement. He also made personal appeals. Mr. Greenberg was seen having lunch with Mr. Cohen at the Four Seasons restaurant in Manhattan in April.

The trial is the latest front in Mr. Greenberg's long campaign to keep a finger on A.I.G., a company he presided over for nearly 40 years and fashioned into the most valuable insurer in the world. Since his resignation in 2005 in the face of accounting investigations — he settled an S.E.C. action in 2009 and is going to trial next year in a 10-year-old lawsuit from the New York Attorney General's Office — Mr. Greenberg has fought to maintain his influence.

The bailout presented a threat to that power. When the government took what became a 92 percent equity stake, it diluted the value and voting rights of shares belonging to existing stockholders, including Mr. Greenberg's company, Starr International. At the time of the bailout, Starr was A.I.G.'s largest investor.

Mr. Greenberg, a veteran of two wars who continues to lift weights well into his 80s, registered his complaint with Mr. Geithner, who was president of the Federal Reserve Bank of New York before becoming Treasury secretary. He called Mr. Geithner at least six times, according to Treasury Department calendars, and met him in 2010 to suggest restructuring the bailout.

Unsatisfied, Mr. Greenberg filed suit a year later. Initially, the case hit a dead end. A federal judge in Manhattan dismissed the case, a decision that a federal appeals court upheld.

Now, however, Mr. Greenberg's legal team could benefit from trying the case before the claims court in Washington, which typically hears more obscure lawsuits over issues like tax rebates and government contracts. Recently, the court has become a go-to site for Wall Street to pursue its grievances with the government, including hedge funds that filed claims over the bailout of the mortgage finance companies Fannie Mae and Freddie Mac.

Driving Mr. Greenberg's case is the argument that the government singled out A.I.G. to receive the harshest of bailouts.

For one, it initially paid more than 14 percent interest on a line of credit from the government, which the lawsuit contends was "an extortionate interest rate." The decision to use taxpayer and A.I.G. money to repurchase soured mortgage deals that the company insured for big banks in the form of credit-default swaps amounted to a "backdoor bailout" of Wall Street, the lawsuit says. And the government's equity stake "took control of A.I.G. away from its shareholders."

The final straw, according to the lawsuit, came when the government "deliberately ignored and evaded" a shareholder vote against an increase in shares that would accommodate the government's equity stake. A.I.G. created a reverse stock split, the lawsuit claims, that effectively allowed the company to circumvent that vote.

The government has dismissed that argument as a "conspiracy theory." And government lawyers note that A.I.G.'s board accepted the terms of the bailout, which they argue benefited Mr. Greenberg in the long run, saying that "the common shareholders' 20.1 percent equity stake in A.I.G. after the rescue was worth more than their 100 percent equity stake before the rescue."

"Neither the Constitution nor the Federal Reserve Act required American taxpayers to rescue A.I.G. and cushion the fall of its shareholders, much less to do so on terms even more favorable to Starr," the government said in court papers.

Michael Corkery, Jessica Silver-Greenberg and Andrew Ross Sorkin contributed reporting.

Greenberg Sues U.S. Over A.I.G. Takeover

By GRETCHEN MORGENSON

Maurice R. Greenberg, the former chief of A.I.G., contends that the takeover of the insurer in the fall of 2008 was improper and that the Fed breached its duty to A.I.G. shareholders.

A version of this article appears in print on 09/24/2014, on page A1 of the NewYork edition with the headline: Wall St. Bankrolls Ex-Executive as He Sues Over A.I.G. Bailout.

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