The Fed came in and gave AIG an emergency loan it (literally) couldn't refuse, took it over and began running the company completely illegally and in violation of the constitution.
So what do you get when the scandal-soaked former chairman of an intelligence-connected insurance agency sues the Federal Reserve? If you guessed "absolutely nothing" then BING BING BING! We have a winner!
First, the factoid bullet point nutshell: In the wake of the Fed's $182 billion bailout of American International Group in 2008, AIG's largest shareholder Maurice Greenberg argued the government violated the constitution (and the Fed charter) by assuming 80% of the insurer's stock in the company, thus illegally seizing his property. That argument came to court last fall and a ruling was issued earlier this week.
Next, the more detailed background. In September 2008 the Lehman Bros. collapse threatened to destabilize hundreds of billions of dollars of collateralized debt obligations (CDOs) built on toxic subprime loans that had been packaged as AAA securities, as well as credit default swaps insuring banks against the risk of those loans. One of the first major financial institutions on the firing line of the collapse was AIG, the fourth largest insurance company in the world by market cap and a company that boasts that it services 99.6% of Fortune 500 member companies (AIG was #10 on that list before the meltdown but now has to settle for #46). At the time of the Lehman collapse AIG was holding the bag on $57.8 billion of subprime CDOs, the majority of which were downgraded or in default. When Fitch downgraded AIG's credit rating (with the S&P and Moody's following predictably behind), the company's plummeting stock price and widening debt yields left it essentially bankrupt, unable to meet daily liquidity demands to operate its business.
In the midst of that (perfectly predictable (and predicted)) crisis, the Federal Reserve and the US Treasury swooped in as the 'Saviors of the Universe' to save the day with some 'Bold Action,' including loans, stock purchases, Special Purpose Vehicles and investments amounting to just over $182 billion of bailout aid. So far, so wonderful, right? Just another example of the governmental heroes of the world saving us from disaster yet again (by, as Bush so memorably put it, "abandon[ing] free market principles to save the free market"). And who could argue with the fact that the financial world is still functioning tickety-boo, AIG is back on its feet, the bailout has since been repaid, and everyone is happier?
Well, except for Greenberg, that is. With a 12 percent stake in AIG, Greenberg's Starr International was the largest single shareholder in the company at the time. When the government bailout mandated that the government now owned 80 percent of the company's stock, Greenberg complained that the government had essentially confiscated the private property of Starr (and the other shareholders). Hence the lawsuit.
But wait just one second. Who is AIG, anyway? Should we be glad they're back on their feet after all? Should we care about Greenberg and this property seizure? What was the ruling on the court case and how it will change the Fed or Treasury's operations in the future? To answer those questions, we're going to have to get up to speed on AIG itself and the man behind the lawsuit, Maurice "Hammerin' Hank" Greenberg.
You might think that AIG is just an ordinary insurance company. A boring, humdrum, faceless corporation full of pencil-pushing number-crunchers. But you'd be wrong. As I outlined in a Corbett Report Podcast episode on AIG, the real history of the American International Group is much more bizarre than you'd imagine and starts in China, where Cornelius Vander Starr founded an insurance company in 1919. His prime placement as a businessman with connections all over the world and access to sensitive insurance information came in handy during World War II, where he was forced back to New York after the Japanese invasion of China. Once Stateside he teamed up with "Wild Bill" Donovan, head of the Office of Strategic Services (OSS), to create an elite cadre of insurance agent spies that used their access to sensitive insurance information across enemy lines to feed info back to the Allies. If the OSS rings a bell, that's because it was the forerunner of the CIA. Starr used his Chinese networks to operate a covert network of informants in pre-Communist China for the OSS.
Greenberg entered the picture in the 1960s. A lawyer by training who served in WWII and Korea, Greenberg became a rising star in the insurance industry as the youngest ever vice-president of Continental Casualty, a firm in Manhattan. Starr poached him in the 1960s and Greenberg succeeded Starr as CEO of C.V. Starr in 1968. Focusing on the companies faltering American operations, Greenberg built AIG into the behemoth that it is today through all the types of wheelings, dealings, drug running, money laundering, bribery and treachery you would expect.
While Greenberg's exploits and the empire he created could fill a book in itself (and they do), a bullet point summary would have to include:
So, now that we're ready to go back to the beginning, what was the verdict? Can you guess? Well, in his ruling Justice Thomas C. Wheeler writes:
"Upon a full consideration of the record and the arguments of counsel, the Court finds that FRBNY’s taking of 79.9 percent equity ownership and voting control of AIG constituted an illegal exaction under the Fifth Amendment. The Board of Governors and the Federal Reserve Banks possessed the authority in a time of crisis to make emergency loans to distressed entities such as AIG, but they did not have the legal right to become the owner of AIG. In the Federal Reserve’s history of making hundreds of emergency loans to commercial entities, the loan to AIG represents the only instance in which the Federal Reserve has demanded equity owners hip and voting control. There is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan."
Pretty straightforward, right? Whatever else may be said about Greenberg and AIG, at least the court recognizes that the Fed clearly overstepped its bounds in actually taking over and running a business in return for "emergency loans." At last, some sanity!
So what is the penalty for this crime? Bupkis. Nada. Zilch. Zero. Nothing. Or, in court speak: "Based upon the foregoing, the Court concludes that the Credit Agreement Shareholder Class shall prevail on liability due to the Government’s illegal exaction, but shall recover zero damages."
That's it. The Fed came in and gave AIG an emergency loan it (literally) couldn't refuse, took it over and began running the company completely illegally and in violation of the constitution. And the court decided that for that sin, the Fed will pay absolutely nothing and suffer absolutely no consequences. In other words, the ultimate precedent from this ruling is that in a time of emergency, the Fed can do absolutely anything it likes, including violating the constitution, and absolutely nothing will be done about it.
And there it is, folks: Justice! What, you're going to suggest that Greenberg was playing his role in setting a very very very atrociously bad legal precedent that will likely (definitely) be used in the future to ensure government takeover of essential industries during economic crisis? Shut up, conspiracy theorist!