A Partial Retraction on AIG

The story the other day that AIG was considering suing the taxpayers because the taxpayers did not give them a nice enough bailout was so vomit-inducing that I did not even look much further into it.

A couple of readers whom I trust both wrote me to say that the issues here are a bit more complex than I made them out to be.  The Wall Street Journal sounds a similar note today:

Every taxpayer and shareholder should be rooting for this case to go to trial. It addresses an important Constitutional question: When does the federal government have the authority to take over a private business? The question looms larger since the 2010 passage of the Dodd-Frank law, which gave the feds new powers to seize companies they believe pose risks to the financial system.

That vague concept of "systemic risk" was the justification for the AIG intervention in September 2008. In the midst of the financial crisis, the federal government seized the faltering insurance giant and poured taxpayer money into it. The government then used AIG as a vehicle to bail out other financial institutions.

But the government never received the approval of AIG's owners. The government first delayed a shareholder vote, then held one and lost it in 2009, and then ignored the results and allowed itself to vote as if the common shareholders had approved the deal.

In 2011 Mr. Greenberg's Starr International, a major AIG shareholder, filed a class-action suit in the U.S. Court of Federal Claims in Washington alleging a violation of its Constitutional rights. Specifically, Starr cites the Fifth Amendment, which holds that private property shall not "be taken for public use, without just compensation." The original rescue loans from the government required AIG to pay a 14.5% interest rate and were fully secured by AIG assets. So when the government also demanded control of 79.9% of AIG's equity, where was the compensation?

Greenberg is apparently arguing that he would have preferred chapter 11 and that the company and its original shareholders likely would have gotten a better deal.  Perhaps.   So I will tone down my outrage against Greenberg, I suppose.  But nothing about this makes me any happier about bailouts and corporate cronyism that are endemic in this administration.


  1. bigmaq1980:

    I understand the feeling. It is like a guilty criminal getting off on charges brought against them because the evidence was gathered without a warrant. Who do we have more to fear from? Government who will the ignore the law (e.g. here, GM, etc.), or cronys who will abuse the system for their own benefit and our risk? Neither is a good choice, but I think our long term interests probably reside with Greenberg's position. So we hold our nose.

  2. Matthew Slyfield:

    "or cronys who will abuse the system for their own benefit and our risk?"
    The way the WSJ blurb reads I don't think you can call Greenberg a crony. He isn't or at least he doesn't want to be a crony. He is claiming that the government should have let the AIG shareholders take there lumps in bankruptcy. If the WSJ article is accurate, then Greenberg's position is anti-cronyism.

  3. Zachriel:

    WSJ: That vague concept of "systemic risk" was the justification for the AIG intervention in September 2008.

    Coyote Blog: But nothing about this makes me any happier about bailouts and corporate cronyism that are endemic in this administration.

    Of course, "this administration" wasn't in place in September 2008.

  4. bigmaq1980:

    Right you are Matt. I really am siding with Greenberg's position, not accusing him specifically of cronyism. He may or may not be guilty of that charge, and my statement makes it seem that he his.

    The issue I think Coyote is making, and one I support, is that AIG shareholders, their elected board members, and corporate officers all "benefited" (prior to the blow up) from the "moral hazard" of "too big to fail" - the risk and the returns to these people were asymmetrical.

    It is highly debatable (after the fact) if the shareholders would have fared better, because of the volatility of the times (i.e. would normal bankruptcy proceedings have resulted in a going concern, or recovered more value from asset fire sale at a time of toxic panic, or given the complexity of the financial structures in play?). In a civil suit, they'd have to prove the value of their "damages", which may be very difficult in itself, even if one were to assume the judge/jury would be open minded enough to look past the culpability of their behavior. A 79.9% "haircut" might have been a blessing, even if onerous.

    Still, two wrongs do not make it right, and there is future hazard from the precedent set, as we know ambitious bureaucrats and politicians ALWAYS find a way to stretch current laws and policy beyond their original use and intent.

  5. bigmaq1980:

    One could seriously quibble on that, as the Fed continued support through to May 2009 (ref: AIG wiki), and as of the end of September in 2008 you might recall McCain suspended his campaign to focus on this crisis, effectively placing himself and Obama "at the table".

    Aside from AIG, Obama's administration was all over the GM and Chrysler "bailouts" with rather dubious justification in comparison (i.e. for circumventing normal bankruptcy proceedings, and for circumventing legal agreement/precedent by skewing the outcome to favored groups). Then there is the disastrous Solyndra cohort of crony (i.e. organizations with known leadership ties to campaign funding or other support for the Obama administration) support.

    Reality is that it may be different emphasis and different "favored" individuals/organizations/groups, but each administration is guilty of this. The financial crisis of 2008 has provided the "opportunity" (leveraging people's fear with dubious programs/actions - can't "waste" it!, and with annual $1T deficits monetized by the Fed) for this administration to kick it up an order of magnitude or two.

  6. Daublin:

    Yes, W. Bush was also broadly in favor of all the financial bailouts. It was a depressing aspect of that election: all the candidates agreed that the country is doomed unless we semi-nationalize the banks.

  7. Bram:

    Greenberg is a hard but fair guy who is pretty much always right.

  8. Username456:

    The only difference between "this" administration and the last is the current administration's zealousness in pursing W's old policys. Nobel peace drone attacks, holding prisoners without due process, corporate bail/handouts, etc.

  9. Username456:

    "t is highly debatable (after the fact) if the shareholders would have fared better . . ."

    Not for us or anyone else to debate. It was the shareholders' right to vote for something that may not turn out for the best. The problem is that the shareholders voted, and that vote was ignored.

  10. Eric Hammer:

    Wow, I wasn't aware of the angle the government had in seizing the assets to use as a nozzle to funnel bail out funds to other institutions. This whole case makes a lot more sense now, as the owners probably have a very good case that their company was seized directly against their wishes. Part of me wants to just relish the schadenfreude of seeing those in bed with the government get screwed, but really this isn't a precedent that can be allowed to stand. If it does, it won't be long till the government decides to appropriate any given firm to fulfill some stated public intention.

  11. bigmaq1980:

    And, hence, the validity of the suit. They may not end up with much for "damages", but they need to shut down or significantly limit government's ability to take this kind of action.

  12. sch:

    Elliott Spitzer, the ex gov NY state made his name filing suits against various wall street honchos and one of his 'victims' was Hank Greenberg, who as a result was forced out of
    AIG but remained a shareholder. WSJ opined several years ago that, in their opinion, AIG would not have gone off the deep end if Greenberg hadn't been forced out, that a
    large amount of the trillion or so in derivatives AIG was left holding the bag for where generated after Greenberg left.

  13. jhertzli:

    What we have here is a squeegee government analogous to the squeegee men who used to infest parts of Manhattan. The squeegee men would "clean" a car's windshield while the car stopped at a light and then demand money from the car's occupants. The squeegee government will "rescue" businesses and then demand money from the industry.

  14. bigmaq1980:

    Interesting write up on some of the details here...