Monthly Archives: October 2014

AIG Trial Continues. Anticlimactically.

Former fed Chief Ben S. Bernanke, finally took the stand in the ongoing controversial AIG  trial (see our earlier posts), but this long-anticipated event turned out to be anticlimactic. Bernanke said he couldn’t remember whether “specific details, such as various fees to AIG, were discussed before central bank officials voted.” Associated Press, Bernanke Defends AIG Bailout in Court, L.A. Times, Oct. 10, 2014, at p. B3. Of course, the amount of those  “fees” — whether they were excessive or not; whether the government had the power to impose them — is a factor that lies at the heart of this controversy. And given that Bernanke was “one of the key decision makers on the bailout,” his lack of recollection of these matters does not speak well of his attention to details where, as we know, the devil dwells. Given the controversial nature of this monumental bailout, one finds it hard not to conclude that Bernanke did not make much of a perceptive, or credible, witness.

Then there was the matter of necessity, and here Bernanke, reflecting the feds’ general legal strategy, stressed the great need for federal action to prevent “basically the end” of the financial system. But what he and the feds don’t seem to understand is that great necessity may justify the use of eminent domain, but it does not justify an uncompensated seizure of AIG’s stock and the imposition of excessive interest on AIG.

Necessity goes to justification for a taking. It does not justify omitting payment of just compensation when the taking does occur. In other words, great necessity may have justified the feds’ seizure of that 80% of AIG’s stock, and their subsequent exercise of AIG corporate powers to give the big banks whose junk bonds had been insured against default by AIG, an unwarranted break. In other words, Uncle Sam was free to give away his own money, not AIG’s. The deal struck by the feds after they seized that stock allowed the insured banks to get off scot-free with their alleged misrepresentation of the quality of those bonds, at AIG’s expense. To say it again, it did not justify a seizure of AIG’s voting stock without compensation. As the US Supreme Court explained in 1906 in the Strickley case, dire necessity justifies the use of eminent domain in cases “where the very foundations of public welfare could not be laid” without it; 200 U.S. at 531. In other words, dire necessity may justify a taking, but it does not dispense with constitutional imperative of the government having to pay just compensation for what it takes. As President Harry S Truman found out the hard way in the Youngstown Sheet & Tube case, seizure of private property — even under prod of dire wartime necessity — is not allowed without the exercise of eminent domain and the payment of just compensation because neither the Constitution nor statutes allow it. Here, to make matters worse, there was no statute purporting to authorize the seizure of AIG’s stock.

Moreover, as the Supreme Court explained in the Pewee Coal case, when the government uses its power of eminent domain to seize and operate a private enterprise,  it becomes liable for any losses that the seized company incurs while being operated by Uncle Sam. Of course, here there were no losses in the long run, but that goes to the issue of compensation, not to the issue of whether a taking occurred — i.e., whether Uncle Sam had the right to do what it did. There are eminent domain cases in which due to unique facts, the property owner receives no compensation. But that does not make them any less eminent domain cases.

AIG Trial (Cont’d.)

Two noteworthy items for today.

First, the NY Times continues to report progress at the trial. Former Treasury Secretary Timothy Geithner continues on the stand, being examined and cross-examined. Not much new there — these folks are concentrating on the “fairness vs. unfairness” of AIG’s treatment by the feds. At least as far as the press coverage goes, nobody is focusing in on the eminent domain law aspects of this controversy. Which is to say that if the AIG bailout produced benefits, that only justifies the taking, if the court agrees with Starr’s contention that there was one. No one seems to mention that eminent domain takings are supposed to produce benefits, so for the government to say that its bailout of AIG saved the financial world is to say no more than What SCOTUS said at the turn of the 20th century. Also, it’s black letter law that the government may use its taking power without due process ( that’s what SCOTUS said in the Dow case). So for the feds to defend on those grounds is not a defense, but only a justification for the taking of 80% of AIG’s stock. See Aaron M. Kessler, Geithner Testifies That Government Had Right to Act to Avert A.I.G. Bankruptcy, NY Times, Oct 9, 2014, at p. B4.

Second, if you don’t feel like wading through this controversy on a piecemeal basis, and want a concise summary of it, see Dean Starkman, Trial Revisits Financial Crisis, LA Times, Oct. 9, 2014, at p. B1. Go to http://www.latimes.com/business/la-fi-aig-trial-20141009-story.html

CAVEAT: Other than occasional mention of the subject of takings, none of the press coverage that we have seen analyzes the plaintiffs’ legal taking theory, or the measure of compensation that would be payable if the plaintiffs prevail on liability.  See http://gideonstrumpet.info/?p=7020

AIG Trial (Cont’d.)

For the next installment of this saga, this time involving testimony by former Secretary of the Treasury, Timothy Geithner, go to http://dealbook.nytimes.com/2014/10/07/geithner-says-an-a-i-g-bankruptcy-could-have-been-more-damaging-than-lehmans/?_php=true&_type=blogs&ref=business&_r=0

Not much there that is legally new but it’s amusing to read about Geithner’s effort to steer a course between his testimony and what he said in his book. All of which reminds us of a line of some famous Frenchman who said “Oh Lord, make my enemy write a book.”

On the funny side, this time the dramatis personae were sparring over the meaning of the term “insolvent.” The government contends that AIG was insolvent, while the plaintiffs deny this, and contend that it was only experiencing a “liquidity crisis.”

More Coverage of the AIG Taking Lawsuit Against the Government

If you have an interest in this subject that we have dealt with in recent posts, here are some links to NY Times articles that deal with this subject in some detail. They are worth a read. They make it clear that the feds’ terms for the bailout of AIG were indeed “punitive” and harsher than those of other bailouts. Thus, one of the plaintiffs’ points (invidious disparity of treatment) is conceded. In his testimony, former Treasury Secretary Paulson conceded, and offered justifications for it. But, they do not really justify the difference in treatment of AIG as opposed to other bailed-out financial institutions. Lord knows there were lots of shady and reckless folks, who to put it mildly, were bad actors in the 2008 financial disaster, so why not be “punitive” with them, or at least some of them, too?

Besides, we are not aware of any legal doctrine that strips “bad” actors (who as yet haven’t been charged with or convicted of any criminal misconduct) of their constitutional rights. We expect that Mr. Boies will make much of that concession.

Here are the links:

http://dealbook.nytimes.com/2014/10/06/paulson-takes-the-stand-in-a-i-g-trial/?_php=true&_type=blogs&ref=business&_r=0

http://dealbook.nytimes.com/2014/10/06/a-i-g-bailout-revisionists-version/

Note that the above article, though not labeled as being in the nature of an editorial, argues that the plaintiffs’ position is a “ludicrous tale.”

Also this one, on how that lawsuit is being funded:

http://dealbook.nytimes.com/2014/09/23/as-ex-chief-of-a-i-g-sues-u-s-wall-st-is-happy-to-pay-the-tab/

Edited Oct. 7, 2014, at 12:17 PM Pacific time.

The AIG Trial (Cont’d.)

Oct. 6, 2014. Today’s New York Times reports that Former Treasury Secretary Henry Paulson testified that the terms imposed on AIG by the feds as part of its bailout were indeed punitive in order to discourage opposition.

Mr. Paulson testified on Monday that he believed the terms of A.I.G.’s bailout in September 2008 were “punitive” and “harsher” compared with the assistance that other financial institutions received at the time. He said that political considerations played into the decision to apply “punitive” terms to A.I.G.: It had become a lightning rod for public outrage that needed to be dealt with.

When asked by Mr. Boies if it was important for the government bailout of A.I.G. to be seen as harsh to quell political opposition, Mr. Paulson said it was.

Go to http://dealbook.nytimes.com/2014/10/06/paulson-takes-the-stand-in-a-i-g-trial/?ref=business

And so, it would appear that AIG’s contention that it had been singled out for more harsh treatment than the other beneficiaries of government bailouts, is justified. Whether that justification will be deemed by the court to be sufficient as a defense for  the feds’ punitive behavior, is another question.

Stay tuned.