American International Group won't join or take over a lawsuitchampioned by the company's former Chairman and CEO, Maurice “Hank”Greenberg, over the government's 2008 bailout of the insurancegiant.

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“The AIG board has determined to refuse Starr's demand in itsentirety, and will neither pursue these claims itself nor permitStarr to pursue them in AIG's name,” the board said in a statementissued at 3 p.m., following a meeting.

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The board cited certain reputational damage in deciding not topursue the action, a statement said.

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According to court documents, AIG had been postponing a decisionfor at least six months.

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The AIG board statement says the company expects to file withthe courts a formal statement detailing its determination and thereasons underlying it in the coming weeks.

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“In considering and ultimately refusing the demand before us,the board properly and fully executed our fiduciary and legalobligations to AIG and its shareholders,” says Robert S. “Steve”Miller, AIG chairman.

David Boies, chairman of Boies, Schiller & Flexner andlawyer for Starr International and Greenberg, says Starr andGreenberg “regret” that the AIG board had decided to act to try toprevent Starr from recovering damages in a lawsuit Starr filed onbehalf of AIG stockholders for anyone but Starr andGreenberg. One of the alternatives apparently presented to the AIG boardwas that Starr be allowed to file a full derivative lawsuit onbehalf of all AIG shareholders, Boies said. Boies adds, “We continue to believe that the attempt by theAIG board to prevent Starr International from pursing claims onbehalf of AIG shareholders is contrary to the shareholders'interests.” Moreover, he says, “Whether or not the AIG board will besuccessful in blocking Starr's efforts to recover damages for theirshareholders will ultimately be decided the Court of Claims.” It turns out that AIG was considering the lawsuit underduress, through a provision of Delaware law, where it isincorporated, that allows shareholders, such as its formerchairman, to file “derivative” lawsuits on behalf of shareholderswhen a firm decides not to pursue a claim. Starr, the predecessorcompany of AIG, owns 12 percent of AIG.

Industry lawyers say it is not likely that Starr and Greenbergwill re-file their lawsuits against the Federal Reserve Board andthe Treasury Department as derivative lawsuits.

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One lawsuit, against the Fed in New York, was dismissed inNovember, except for some constitutional claims.

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The second lawsuit, in Washington, seeks $25 billion. The suitclaims that the nature of the government rescue of AIG was punitivebecause the Fed originally charged AIG an interest rate of 14percent on its original $85 billion loan, and that the Fed unfairlypaid counterparties to credit default swaps issued by AIG'sFinancial Products subsidiary 100 cents on the dollar, when it waspossible that the counterparties would have accepted less.

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AIG acted today against the background of fierce criticism ofits decision to consider joining the lawsuit against the governmentthat bailed it out.

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Besides criticism from the general public and some lawyers,Democrats in Congress, both in the House and Senate, voiced outragethat AIG was considering joining the suit.

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“It is simply outrageous that the board of the AIG would evenconsider suing the federal government after America's taxpayersstepped up and bailed them out over their bad bets onmortgage-backed securities,” said Rep. Maxine Waters, D-Calif.,incoming ranking minority member of the House Financial ServicesCommittee.

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Sen. Elizabeth Warren, D-Mass., added, “AIG's reckless betsnearly crashed our entire economy.” She said, “Taxpayers acrossthis country saved AIG from ruin, and it would be outrageous forthis company to turn around and sue the federal government becausethey think the deal wasn't generous enough.”

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The issue had been simmering for many months and the courts inboth Washington and New York were forcing AIG to show its hand.

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Robert Benmosche, president and CEO of AIG, disclosed lateTuesday that Starr and Greenberg had made a “demand” to the boardSept. 12 to either take over the Starr/Greenberg suit against thegovernment, or have Starr/Greenberg do so under the Delawareprovision allowing outsiders to file derivative lawsuits on behalfof shareholders in cases where the company decides not to doso.

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The issue was discussed in the November court decision by JudgePaul A. Engelmayer of the Federal Court for the Southern Districtof New York dismissing Starr's suit against the Federal ReserveBank of New York, which oversaw the federal government's bailout ofAIG.

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In the final page of his 87-page decision, Engelmayer said hewas reserving decision on one aspect of the government's motion todismiss the Starr claim because that would have given Starr theauthority to pursue some claims against the government on behalf ofAIG shareholders without AIG's involvement.

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In the paragraph, Engelmayer had “strongly encouraged” AIG todecide whether it would take control of the suit on behalf of AIGshareholders during oral arguments on the suit in August.

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But, Engelmayer said, the AIG board had decided to postponeuntil January whether to do so.

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Benmosche noted that in his statement, “Under applicable law, aswell as according to certain court rulings, the AIG board mustconsider and respond to Starr's demand, and expects to do so by theend of January 2013.”

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The lawsuit in Washington remains outstanding. Judge ThomasWheeler is handling that case. He also had delayed action pendingthe AIG board decision.