AIG Contemplates Joining Stockholder Suit Against US Gov't 354
inode_buddha writes "After completing its bailout rescue and paying back the money with interest, AIG is considering suing the US Government for doing so. The reasons why? Among other things, the 14% interest rate paid to the government. 'The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal's high interest rates and the funneling of billions to the insurer's Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for "public use, without just compensation." The former CEO and current major shareholder said: "The government has been saying, 'We're your friend, we owned and controlled you and we let you go.' But A.I.G. doesn't owe loyalty to the government," a person close to Mr. Greenberg said. "It owes loyalty to its shareholders."' The lawyer representing him is none other than David Boies of SCO fame."
The US Governement can respond (Score:4, Interesting)
AIG was a risky investment. Anyone who would have invested in AIG at that time would expect a return that balanced that risk - that includes the taxpayers.
Well... (Score:5, Interesting)
In rough numbers, it looks like brass scrap is going for about $2.33/lb. Given the big brass balls that AIG apparently possesses, they should never have needed any sort of bailout in the first place...
(And, incidentally, if that 14% interest rate was so crushingly unfair, where exactly were the private lenders willing to offer better rates and cut big, bad, Uncle Sam out of the picture?)
Good for them.... (Score:2, Interesting)
I hope they win their lawsuit. If only the shareholders and bond holders of GM would do the same. What a massive money laundering scheme.
UAW supports Obama
Obama takes over most of GM shares screwing the bond holders (mostly retirement funds) in the process
Obama gives most shares to the UAW
UAW waits six months and sells the shares
Each of these steps were covered in the regular media but, for some reason I have yet to see an article putting all the steps together. If you think this is an anti-Obama thing it isn't as it would be equally as terrible if a Republican did it.
Can the citizens file a class action? (Score:4, Interesting)
I have an even better idea: Let's get the entire population of US citizens to file a suit against the government, and all the politicians individually, for wasting our money bailing out failing companies.
Funny business (Score:5, Interesting)
Now, I wasn't in favor of the bailouts to begin with. I'm generally in favor of deregulation, and the only way that deregulated businesses learn their lesson is to be allowed to crash and burn on their own. These guys should have paid the price for their failure to understand how to do business so that the stockholders and the boards would understand in the future that they cannot allow bozos to run their businesses.
However, AIG stockholders are still in the wrong here, despite the forced bailout. How can you say you might have made more money when your other option was collapse? It's clear that the interest rate was very high, but it was well within AIG's ability to pay it (obviously). And now, those stockholders are trying to double down. No way.
Of course, this case seems so absurd on the face of it, that I must be missing something. I'm probably going to see what the details are, but at this point, it is looking like funny business.
Devil is in the details (Score:4, Interesting)
The AIG (and other) bailouts were not typical bankruptcy cases. These are initiated by creditors when the debtor can't meet obligations. The government's role (the courts) is only to oversee the terms of the reorganization/liquidation. With AIG, the court case will probably depend on who and how AIG was found to be illiquid (or under capitalized), and how the exchange of equity for a capital injection was requested. If AIG's board of directors came looking for help, the government may not be guilty of taking private property. If the BoD negotiated that deal, it was their prerogative to do so, or they are the ones shareholders should be suing (good luck with that).
One could claim that AIG management was pressured into taking the deal. But much of that pressure came from other private investment banks to keep the AIG paper they held from becoming worthless. The Lehman Brothers bankruptcy may stand as evidence of the government offering the option of allowing investment banking to solve its own problems without intervention.
"Too Big To Fail" (Score:4, Interesting)
Banks are key infrastructure, almost like electricity and water. Our economy depends on them running smoothly. Thus, we have to treat them as a protected resource, not just some random widget maker.
One could also argue the same for the auto industry in the north east because the economy in that region was heavily dependent on a few companies. Part of the problem is that we allowed oligopolies to form such that failure is almost all or nothing: too big a granularity of change.
Oligopolies are a problem because they create "too big to fail". If there were a dozen or so car companies, then a couple of them failing wouldn't cause the same devastation.
Oligopolies often argue that they need "economy of scale" to be efficient, but that's usually just an excuse. Sub-system specialists could provide economy of scale for specific portions of cars, and perhaps facilitate more standardization.
What they REALLY expected... (Score:5, Interesting)
When AIG took on the deal, their stock price was crap. They expected that once they took the deal, which was the USG buying preferred stock, which pays dividends, that the stock price would fall and stay LOWER than the buy price until the USG's stocks were bought off from payment via dividends and cash buyback. This turned out NOT to be the case and the stock price went ABOVE what the USG bought it for. What AIG is crying about, is the fact that they had to buy back their OWN STOCK from the USG, which they had an option NOT TO TAKE, at the current market rate which was, surprise surprise, HIGHER than when it sold it to the USG. There's nothing to sue over here. It was a standard loan backed by the only asset that AIG had at the time: its own stock. No "property" was bought by the government, and the government's voting rights were limited by the wording of the purchase, even though it should have had a ridiculous amount of power with that large of a percentage of *PREFERRED STOCKS*.
Re:For fucks sake (Score:5, Interesting)
We may have laws, but we have no rule of law. The 2008 financial crisis is proof of that. We already have the laws we need to put these people away, Reagan imprisoned nearly 1000 bankers for much less egregious crimes during the S&L crisis. Fraud is illegal, perjury is illegal, and running a business that profits from such activity is illegal.
No, this is not a problem with our laws. It's a problem with our government being incapable of enforcing the law against the powerful. Vigilante justice is the only solution. Put a few bullets through a few CEOs and they'll be begging to see federal court instead.
Re:Shareholders (Score:2, Interesting)
It wasn't that simple. AIG was on the edge of collapse and the government was the *only* entity around big enough to bail them out. "Let them die," you say in a James T. Kirk-ish way. But AIG was also considered by the government to be one of those "too big to fail" institutions. The Treasury Department had allowed Lehman Brothers to implode the week before, but AIG was even larger and Treasury wasn't willing to let AIG go under the same way--there's an excellent chance that an AIG bankruptcy would have turned the recession into an outright depression. So AIG was basically negotiating with a gun to its head because, had they not accepted, Geithner had made it clear that he would force it on them. The Board of Directors vote was essentially to ratify something they had no choice in at all.
I'm certainly not averse to the government making sure the taxpayers get their money back. But given the circumstances at the time and that AIG had pretty much no choice in whether to take the deal or modify the terms, making AIG accept an interest rate of LIBOR plus 8.5% seemed pretty harsh.
http://online.wsj.com/article/SB122156561931242905.html
There were 2 bailouts of AIG (Score:4, Interesting)
I think this whole thing's a bit of a red herring. Yes, AIG paid back their bailout money with interest. But if I remember correctly, the government made good on all the AIG insured mortgage backed securities as part of the bank bailouts in addition to bailing out AIG itself. I could be wrong about that, but there was so much cronyism going on in the TARP process that it's safe to assume there's some bait-and-switch going on in the repayment process.
AIG wasn't a bank, and was about to go bankrupt (Score:5, Interesting)
"They", in this case, refers specifically to AIG, not banks in general. AIG wasn't a bank, it was an insurance company. It wasn't a part of the general program where the Fed forced banks to borrow money; it was a separate bailout that occurred prior to the bank forced-capitalization program.
AIG, was in a gigantic liquidity crisis and would have gone bankrupt in a couple of days due to inability to borrow money to pay the influx of claims from the Bear Stearns collapse, along with paying out on the default protection insurance they had written on $hitty mortgages. Nobody would lend money to them except for the feds.
Re:Shareholders (Score:4, Interesting)
Lending money to a company that is already bankrupt takes a risk premium. According to Greece bonds interest rates, a 8% premium for high risk bankrupt assets is not a large premium.
Beside, many bad assets have been bought from AIG by the treasury, assets that had no real value, but were still paid for so that AIG doesn't go under mechanically. These people should just STFU.
Re:the government screwed the bank too? (Score:1, Interesting)
You forget, that it was all the Liberal's fault due to the Fair Housing Act in the 1980's and guess who wrote that? Yep Chris Dodd and Barney Frank... I wonder who actually lobbied them for that Act? And were the banks actually required to write subprime loans? Under what sort of duress?
Re:Can the citizens file a class action? (Score:2, Interesting)
No it hasn't. It's been the exact opposite. Recent years have pretty much discredited the whole idea of Keynesian monetary policy, namely government spending during recessions and government hoarding of surpluses during booms. Good in theory, completely worthless in practice because, shock, governments don't ever do it.
Let's review a few facts. The first fact is that according to Keynesian teaching, current US monetary policy should result in massive stimulation of the economy - borrowing is as cheap as the Fed can make it. According to the theory, right now the economy should be borderline overheating the juice has been turned up so high. Actually it is sputtering along apparently indifferent to the Fed.
The second fact is that there's a good explanation for this which hasn't previously been accounted for in the mainstream teaching. Namely, that Fed policy hasn't juiced the economy because people don't want to borrow, no matter how cheap it is. That isn't something they anticipated, so QE1 was largely DOA. It enriched the banks who now got a great wheeze in the form of being paid interest on reserves given to them for free, but otherwise was just pushing on string. QE3/4 have thus resorted to outright monetization of the debt, the avoidance of which was one of the primary arguments for central bank independence. Oh well.
Now you point to BLS data as if to say, look ma, no inflation! But I feel that your post is misleading for three reasons. The first is that bill_mcgonigle didn't say "inflation should be higher than it is given current policy", so you are arguing a strawman. The second reason it's misleading is you're quoting a compound rate and neglecting to mention that. 2% inflation in 2010 is a much larger increase in prices than a 2% inflation in 1985. Every year, if prices rose by the same fixed amount, the quoted inflation rate would go down because it'd be a fixed increase over an ever larger base price. That isn't happening. The third reason is that it's only very recently the USG adopted policies that would be expected to increase inflation. QE1 had little effect, QE2 was "operation twist" which wasn't creating new money, actual creation of money that will enter the economy is a relatively recent thing.
There's a third problem I have with your post about the Austrian School. You bring it up right after talking about inflation. The Austrian School teaches common sense on inflation - if you print money, inflation is the result. This isn't some radical crazy philosophy. It's both obvious and supported by many examples throughout history (Edicts of Diocletian and Germany in the first part of the 20th century spring to mind). The crazy, radical philosophy is that endless money printing (that works, so not QE1) will NOT affect inflation. Even the Fed don't believe that which is why their current policy of open ended bond buying is supposed to end if/when inflation goes over a certain level. They know that's the expected end result and they also know inflation is bad.
Re:Errr... that's not who is behind the suit. (Score:5, Interesting)
And on a related note, what is this constant equation of shareholders to stakeholders. This is so common in the coorperate world nowadays it just plain sickening.
Quothe the article:
'"But A.I.G. doesn't owe loyalty to the government," a person close to Mr. Greenberg said. "It owes loyalty to its shareholders."'
No it doesn't. A large coorperation has many parties it relies on for it's very existance. The government being one of the more important ones. Without a government to back the financial markets or even guarantee a basic rule of law, none of your coveted shareholders would even think about investing in your sorry bank.
Never mind your employees, or your customers!
IMHO this is at the very root of this whole crisis, this very narrow perspective on responsability. Many famous leaders of industry in the past considered it as important to provide as many working people with a decent living as increasing the fortunes of a select few. These days it seems as CEO's and other corperate crooks only think about their own wallets and, if bothered about accountability, start jabbering about the shareholders only.
Makes me sick to my stomach, it really does.
http://en.wikipedia.org/wiki/Stakeholder_(corporate) [wikipedia.org]