The AIG Merits Ruling May Be Bizarre, But the Remedies Portion Makes Great Sense

Andrew Ross Sorkin writes in the NY Times about this decision from a federal claims court judge:

When the Federal Reserve propped up A.I.G. in September 2008, unlike its approach with most of the big banks, it threw out the company’s chief executive and took control of 79.9 percent of the company, nearly wiping out many of its shareholders. Taxpayers got all of their money back, and then some, receiving a profit of more than $20 billion.

But in a stunning ruling, Judge Thomas C. Wheeler of the United States Court of Federal Claims said on Monday that those terms were too “draconian.” In other words, he suggested taxpayers should have offered A.I.G. a more generous deal.

The judge’s decision could have far-reaching consequences should another financial crisis occur — and if history is any guide, one will. Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted.

Should that happen, and the government decides it is handcuffed by the law from any intervention, taxpayers can thank Maurice Greenberg, the company’s former chief executive and one of its largest shareholders. He sued the government on behalf of shareholders, contending its takeover was illegal and unfair to investors. The judge largely sided with Mr. Greenberg, confounding many legal experts who considered the case a long shot. A federal judge had previously thrown the case out of court, calling Mr. Greenberg’s accusations “worthy of an Oliver Stone movie.”

However, Judge Wheeler had a more sympathetic ear than his peers. He determined that the takeover of A.I.G. was orchestrated to “maximize the benefits to the government and to the taxpaying public.” Contrary to the conventional wisdom — and common sense — he said that goal was troubling. “The government’s unduly harsh treatment of A.I.G. in comparison to other institutions seemingly was misguided and had no legitimate purpose,” he wrote.

Still, the judge did not award any monetary damages to Mr. Greenberg, making it a moral victory, but not an economic one. Mr. Greenberg had sought $40 billion and has spent millions bringing his case.

I can’t speak to the judge’s ruling on whether the federal government exceeded its authority.  But the court’s determination that there are no damages seems to make perfect sense as a matter of remedies:

Ultimately, Starr must prove that it suffered some economic harm from the Government’s taking or illegal exaction. In applying this standard, the Court must consider the value of the Plaintiff’s property but for the challenged government actions. In other words, what would the value of Plaintiff’s property have been if the Government had done nothing? Brown, 538 U.S. at 240-41 (plaintiffs had lost nothing because they would not have received any interest even in the absence of a challenged government program).

A closely analogous case is A&D Auto Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014). At the trial court level, former owners of Chrysler and General Motors car dealerships alleged an uncompensated taking of their property from the Government’s Troubled Asset Relief Program (“TARP”), 12 U.S.C. § 5211…

Applying the reasoning of A&D Auto Sales, the Court must examine what would have happened to AIG if the Government had not intervened. The inescapable conclusion is that AIG would have filed for bankruptcy, most likely during the week of September 15-19, 2008. In that event, the value of the shareholders common stock would have been zero. By loaning AIG $85 billion under the September 22, 2008 Credit Agreement, the Government significantly enhanced the value of the AIG shareholders’ stock. While the taking of 79.9 percent equity ownership and the running of AIG’s business were not permitted under the Federal Reserve Act, the Government did not cause any economic loss to AIG’s shareholders, because as Mr. Studzinski said, “[twenty] percent of something [is] better than [100] percent of nothing.” Studzinski, Tr. 6937. Under the economic loss analysis, the Credit Agreement Class is entitled to zero damages.

 

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