Finance & economics | AIG

Pyrrhus would be proud

A judge rules a government takeover was illicit but caused no harm

|NEW YORK

THE endless and costly litigation regarding the nationalisation at the height of the financial crisis of AIG, the world’s biggest insurer at the time, has always had a Dickensian air. The case, which was initiated in 2011 by Hank Greenberg, AIG’s disgruntled former boss, involves more than 1,600 exhibits, a transcript of 8,812 pages and 442 docket entries. On June 15th the element of farce was heightened when a court ruled in Mr Greenberg’s favour in every respect except the one that matters.

The punitive terms of AIG’s bail-out involved “plain violations of the Federal Reserve Act”, Judge Thomas Wheeler of the Court of Federal Claims decided. Yet, “If the government had done nothing, the shareholders would have been left with 100 per cent of nothing.” In other words, Mr Greenberg is right to question the legality of the government’s actions, but wrong to expect compensation.

Mr Greenberg had sought damages in “excess of $40 billion” on behalf of Starr International, AIG’s largest shareholder, which he controls. He has already said he will appeal. The government, too, may want to appeal to clarify its authority to rescue struggling financial firms and to ward off more lawsuits challenging its conduct during the crisis—especially from the shareholders of Fannie Mae and Freddie Mac, two government-backed mortgage giants it also took over.

Soon after Lehman Brothers collapsed in 2008, AIG found itself in trouble due to insurance it had written against defaults on mortgage-backed securities. The government decided it could not let AIG collapse, since it was likely to bring other big financial institutions down with it. But Uncle Sam obliged the insurer to pay a daunting price for the $85 billion loan that saved it, including 79.9% of its equity and yearly interest of 12%. AIG’s CEO at the time, Robert Willumstad, was also forced to resign. Taxpayers ultimately made a profit of $22.7 billion on the loan.

Mr Greenberg maintains that AIG was treated unfairly. The interest rate it was required to pay, after all, was vastly more than the 3.5% or less imposed on other desperate institutions, including Citibank. Mr Wheeler agreed: “The government did not demand shareholder equity, high interest rates or voting control of any entity except AIG. Indeed, with the exception of AIG the government has never demanded equity ownership from a borrower in the 75-year history of…the Federal Reserve Act,” he wrote. In short, “the Government treated AIG much more harshly than other institutions in need of financial assistance”.

The ruling dismisses the idea that AIG’s board accepted the terms of the bail-out voluntarily, since “a complete mismatch of negotiating leverage” had left AIG “at the government’s mercy”. It also laments the fact that the deal was specially structured to avoid a shareholder vote.

Mr Wheeler attributes the severity of the bail-out to an exaggeration of AIG’s role in the crisis. “While the government publicly singled out AIG as the poster child for causing the September crisis…the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions.” So the “unduly harsh treatment of AIG in comparison to other institutions…had no legitimate purpose,” the judge harrumphs.

The government’s actions were not just unfair, Mr Wheeler says, but also illegal. It had no right to demand a controlling stake in the firm: “There is nothing in the Federal Reserve Act or any other federal statute that would permit a Federal Reserve Bank to take over a private corporation and run its business as if the government were the owner. Yet that is precisely what the [Federal Reserve Bank of New York] did.”

No wonder, then, that Mr Wheeler finds it “troubling” that the government gets off scot-free. Indeed, he suggests it can continue to break the law when offering bail-outs, since firms that would otherwise go bankrupt can never show they have been harmed. The authorities, meanwhile, are presumably thrilled to be denounced for treating Wall Street too harshly.

This article appeared in the Finance & economics section of the print edition under the headline "Pyrrhus would be proud"

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