(Bloomberg) -- U.S. regulators feared they lacked authority to structure the rescue of American International Group Inc. in a way that would allow them to take control of the insurer and head off shareholder opposition, according to e- mails introduced as part of a Starr International Co. lawsuit.

Maurice “Hank” Greenberg’s Starr is challenging the 2008 bailout of the insurance giant, arguing that the assumption of AIG stock by the Federal Reserve Bank of New York in 2008 violated shareholders’ constitutional rights. Starr was AIG’s largest shareholder when the financial crisis struck.

Today, Starr attorney David Boies introduced e-mails and other correspondence revealing U.S. uncertainty about whether regulators were on solid ground in granting Starr an $85 billion loan in exchange for 80 percent of AIG’s equity.

“Did you agree the New York Fed didn’t have authority to purchase equity?” Boies asked Scott Alvarez, general counsel of the Federal Reserve Board of Governors and the trial’s first witness.

“It depends what you mean by purchase,” Alvarez replied, saying he couldn’t respond because “‘purchase’ is too ambiguous a word.”

Boies then confronted Alvarez with e-mails including one written to him by Thomas Baxter, general counsel of the Federal Reserve Bank of New York, on Oct. 23, 2008.

“We agree there is no power” to hold AIG shares, Baxter wrote.

Six Hours

The back-and-forth was one of several strained exchanges between Boies and Alvarez, who was supposed to testify for 2 1/2 hours and has now been on the stand for about six hours at the nonjury trial in the U.S. Court of Federal Claims in Washington. Throughout the day, Judge Thomas Wheeler repeatedly overruled government objections to Starr’s exhibits.

Greenberg, who built AIG into the world’s biggest insurer before leaving in 2005, claims the government’s assumption of 80 percent of the equity was an unconstitutional “taking” of property that requires at least $25 billion in compensation. He argues that banks including Morgan Stanley and Citigroup Inc. got bailout loans at rates of less than 4 percent without surrendering shares while AIG was charged 14 percent.

The government says Starr’s alternative to the Fed’s bailout was bankruptcy. AIG returned to profitability and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.

In his testimony today, Alvarez told Boies he believed the central bank, while lacking power to hold shares for a long period, could acquire and hold them on an interim basis.

‘Shareholder Action’

Boies also asked Alvarez about the government’s attitude toward AIG shareholders. The lawyer highlighted an e-mail sent to Alvarez on Sept. 21, 2008, days after the bailout, by a New York Fed lawyer who wrote, “I am trying to keep this moving because of a concern that there will be a shareholder action.”

Alvarez testified that regulators were concerned shareholders would “do things that would not be in the interest of repaying the loan.”

The trial, which began yesterday, is expected to last six weeks. Alvarez is among 85 prospective witnesses. Former Federal Reserve Chairman Ben Bernanke, ex-Treasury Secretary Henry Paulson and former Treasury Secretary Timothy Geithner, the head of the New York Fed at the time of the bailout, are scheduled to appear next week.

The case is Starr International Co. v. U.S., 11-cv-779, U.S. Court of Federal Claims (Washington).

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