Hank Greenberg, former chairman and CEO of AIG (NYSE:AIG), sued the government last year for $25 billion, related to the 2008 bailout of the company he founded and built. 

The common response when hearing that AIG's old boss is suing the government that saved his company is something between utter disgust and anger. It feels like the ultimate "thanks for nothing" move.

I sat down with Mr. Greenberg last week and asked him to explain the motive for the lawsuit. Here's what he had to say (transcript follows):

Morgan Housel: You've recently been involved in a $25 billion lawsuit against the government, specifically the New York Federal Reserve.

Hank Greenberg: Not involved. We have commenced a lawsuit against the U.S. government.

Morgan Housel: Some people, when they hear about the lawsuit after the AIG bailout, they respond with a sense of shock. What was the purpose of that lawsuit?

Hank Greenberg: Several things. First of all, we have a Constitution in the United States, and there's a provision against unlawful taking by the government. You can take anything you want, but you have to pay for it.

If you go back into the book and you see it started with Spitzer, it led to management changes and those management changes led to the company becoming deeper and deeper into the need for liquidity, so they sought liquidity from the New York Fed, from the window. They were turned down.

They tried to get a broker-dealer license, which would give them access to the window. They were turned down.

At the very last moment, Hank Paulson, then Secretary of the Treasury, calls Willumstad, who was then the Chairman of AIG and CEO. He says, "There's only one deal we're going to give you." That was $85 billion at 14.5% interest. At the window, if they were borrowing, it would have been 1.5%.

As an aside, they opened the window to the Arab Bank, which was then 26% owned by Libya when Gaddafi was running it, so Libya could get access to the window, but AIG couldn't.

So "14.5%, $85 billion, and we're taking 79.5% of the equity of the company," and incidentally he tells Willumstad, "You're fired." Here's the Secretary of the Treasury, calling a public company CEO and firing him. Is this America? Does the government fire CEOs? I hadn't heard that before.

He then says to Willumstad, "Sign that agreement" that I just related to you.

He says, "Just fire me. I'm not signing the agreement," so Paulson sends in his replacement, a guy called Ed Liddy who's on the Board of Goldman Sachs. He signs the agreement, still as the director of Goldman Sachs and resigns from Goldman Sachs three days later, retroactively. Very unusual, to say the least.

Of the $85 billion that they lent AIG ... AIG had about $800 billion of assets. They had plenty of collateral. They didn't have to take 79.5% of the equity at the time.

Now you've got the $85 billion; $60 billion goes out the back door almost immediately, $12 billion goes to Goldman Sachs, of the $85 billion. They force AIG to give a complete release to those who got the back-door bailout so AIG can't sue them later on for unlawful pass-through, and they put a gag order on AIG that they can't talk about it.

It took us years to get the information that's in the book, and it's all verified in there. Why are we suing the government? I just told you why. 

TMFHousel has no position in any stocks mentioned. The Motley Fool recommends American International Group and Goldman Sachs. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days.

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