“Remember the big financial crisis, 2008? Well, when was the last time you got good and angry about it? Want to?”
That was how America’s legendary satirist Jon Stewart introduced a segment on one of the most outrageous, obscene and ridiculous (pick your adjective) court cases to grip the US.
It features Hank Greenberg, once the largest shareholder in the insurer AIG, and a former chief executive, suing the US government over its $180bn (£112bn) bailout of the company back in 2008.
Mr Greenberg, whose shareholding was held through his company Starr International, is in effect alleging that the bailout amounted to an unconstitutional land grab of AIG’s assets by the government.
Seeking at least $25bn in compensation, he also argues that the terms of the bailout, which eventually saw the government taking an 80 per cent stake, were punitive – and even if they weren’t, were far worse than anything that various other banks had to accept as part of their bailouts.
Having had his claim thrown out in New York, he tried again at Washington’s Court of Federal Claims, where he has succeeded in getting in heard. As a result, members of the American political and financial aristocracy have trooped before the judge to testify, including the former Treasury Secretaries Hank Paulson and Tim Geithner and the former governor of the US Federal Reserve, Ben Bernanke.
The US government has described the case as frivolous, and argued that it bailed AIG out to save the world from the company. Its lawyers have also made the point that the 20 per cent of something that shareholders got was far preferable to 80 per cent of nothing. Mr Stewart concurred, albeit in rather more colourful language, as have others. To the above listed adjectives you can add asinine, far-fetched, farcical, contemptible and insane.
But there is also a revisionist movement in the US holding that, while the lawsuit might be unconscionable, it is serving a useful purpose.
Support from the more antediluvian parts of the pro-business right, and from elements within the tax and government-hating tea party, which always despised the bailouts, isn’t all that surprising. But intriguingly, it is also coming from unlikely sources much more in tune with Mr Stewart’s liberal sentiments, spanning the Democrat-leaning New Republic magazine and The New York Times together with those on the more radical shores of the Occupy Wall Street movement.
What on earth is going on?
Most agree that, morally, Mr Greenberg has no case. Today’s AIG is now capitalised at a jaunty $74bn. Just before the bailout it plumbed the depths of $15.4bn. So AIG’s shareholders have an awful lot to thank the US government for.
The company briefly considered joining the case, but after hearing presentations from both sides, and in the face of mounting public outrage, it decided to steer clear.
When The Independent contacted AIG, we received a terse “decline to comment”. But the company did explain its decision to staff in an internal email. “The board’s decision today was about continuing to move this company forward, not backward,” Robert Benmosche, the chief executive, wrote.
But those who are quietly cheering the lawsuit, if not Mr Greenberg’s arguments, don’t want to move on. They believe the case – and the fact that the likes of Messrs Geithner, Paulson and Bernanke are having to testify under oath – could ultimately answer important questions about the bailouts and the government’s actions during the financial crisis.
They also believe that, in essence, the rescue of AIG represented a “back-door bailout” of certain less than popular financial institutions, on very favourable terms. Did anyone say “Goldman Sachs”?
That’s because the cash injection into AIG meant that the insurer was able to meet the bill for the bad bets it made on US sub-prime mortgages, rather than having it fall on AIG’s counterparties, largely big investment banks.
David Dayen wrote in New Republic that the case has allowed Mr Greenberg and his attorneys to get their hands on a vast amount of government documents – documents that may be released if the trial records are unsealed. That could prove hugely embarrassing to the government.
“Future policymakers will have to keep the AIG case in mind when determining how to save troubled firms. They will maybe not attempt a back-door bailout, or demand the same rigid, penalising terms on everyone who beseeches them for aid,” he opined.
Noam Scheiber, in The New York Times, made a similar case, arguing that the government should have leaned on Goldman and other AIG counterparties to accept considerably less than 100 per cent of what AIG owed them, before putting any money into AIG.
But those views miss the point. It’s easy to forget, in hindsight, how bad things got in 2008 when Lehman Brothers was allowed to collapse. The world came perilously close to a global financial meltdown. Hedge fund managers were even said to be paying top dollar for flocks of sheep to use as bartering chips.
The AIG situation didn’t, in fact, represent a back-door bailout. As Andrew Sorkin at the news service DealBook has argued, it was a front-door bailout designed to buttress confidence in the financial system and inject liquidity into it.
You could make the case (and Mr Stewart did) that the terms should have been much, much stiffer on AIG (although the US taxpayer has got its money back). In fact, it has made a decent a profit.
The rescue of AIG certainly remains deeply unpalatable. Ditto for the rescues of the banks that followed – and they were offered more favourable terms, another bone of contention for Mr Greenberg.
But given that it was a question of bailouts or using sheep for barter in the wake of a global financial crisis, the bailouts were the least worst option.
The focus should continue be on tightening the regulation of banks, and insurers, to make them safer and ensure that there is no repeat. Mr Greenberg’s case is little more than a grotesque sideshow. And he richly deserves the expletive-laden raspberry that Mr Stewart blew at him.Reuse content