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.

The AIG Trial: Act One

The New York Times (M. Kessler, A.I.G. Trial Witnesses Will Be Central Cast from 2006 Crisis, Sep. 30, 2014, at p. B9) gives us a sort of a blow-by-blow description of the opening day of the Starr International v. United States trial. If you are a takings junkie we do recommend it for your perusal for the contents of the respective opening statements.

What we find fascinating is that nowhere in the Times writeup is there any mention of the plaintiffs pursuing a taking theory, which is odd. Maybe they are, but you can’t tell from the way the NY Times describes the first day in court. The depiction of the core of the complaint is that by the use of draconian terms and usurious interest rates in the bailout contract that Uncle Sam imposed on AIG to save it from bankruptcy, AIG was unfairly treated as compared to all other bailed out banks et al. Uncle Sam, on the other hand, argues that this is rank ingratitude, if not outright chutzpa, because, whatever its terms, Uncle Sam rescued AIG from bankruptcy, and when the bailout was over, both AIG and Uncle made a bundle — AIG got a $182 billion bailout, and  Uncle Sam made $22 billion.

But money aside (for the moment at least) wasn’t there a taking of property when Uncle seized some 80 % of AIG’s voting stock, which enabled him to impose those draconian terms on AIG? Seems that way to us, even though there is a fly in AIG’s ointment — AIG consented to the deal. But that consent, argues AIG was coerced. Which brings to mind the implications of SCOTUS taking/exaction cases, like Nollan, Dollan and Koontz which spoke disapprovingly of overreaching government demands as “out and out extortion.”

But be that as it may, the way the Times describes it, from the defense point of view, it’s a case of ingratitude carried to the point of chutzpa on the part of the plaintiffs (who, according to the defense are trying to bite the hand that fed AIG when it was starving). From the plaintiffs’ point of view, it’s a case of an extortionate government overreaching both morally and legally since no law authorized its overreaching conduct — i.e., rescue is one thing, but extortion and grossly unequal treatment by the government is another.

But last time we looked, ingratitude is not a cause of action. Taking is.

Maybe, plaintiffs are staying away from a taking argument because they may win on it and then — believe it or not — they may not get paid. How can that be? When a taking occurs, just compensation is due and its measure is fair market value of what was taken. Here it would be the FMV of the stock that Uncle seized, but under black-letter eminent domain law, from that just compensation there would have to be deducted any special benefits that accrued to the taking claimant. And did that happen here? It would so appear since, as we noted, after the dust settled and AIG got bailed out by Uncle, eventually both of them made a bundle in profits. So the benefit and profit to AIG would have to be deducted from any losses claimed by it because of the stock seizure. Would that net amount be positive or negative? We don’t know and so far we haven’t noticed that the parties who have been quoted at length in the newspapers, are even aware of the offset-of-benefits rule. Come to think of it, we haven’t seen anybody talking about the measure of damages in this case. Maybe we are not as attentive as we think we are.

So stay tuned, folks, and see how it turns out. This case is bound to receive additional coverage because the list of witnesses who are about to testify includes such luminaries as former Treasury Secretary Henry M. Paulson, former president of the New York Fed, and Treasury Secretary Timothy F. Geithner, and — ta, da! — former Fed Chairman Ben S. Bernanke. What a cast! Describing the testimony of these guys while on the stand, under oath, should be journalistic catnip for the newspaper business sections.*

As far as we are concerned, and however this case turns out and on what theory, watching ueberlawyer Boies examine and cross-examine these worthies, should prove to be a show for which tickets would, or at least should, sell like hot cakes. The courtroom has been overflowing and remote TV coverage has been set up in other rooms — you take it from here.

 

A Los Angeles Mystery

Those of us who live in la-la land and read what passes for the local newspaper, known as the Los Angeles Times, may recall that a while ago, in 2011, to be exact, the city’s movers and shakers were all agog over the imminent construction of a new downtown NFL football stadium that was going to transform downtown LA into an urban heaven on earth, and also transform the money-losing downtown LA Convention Center into a new, new facility that would make money hand over fist. Well, folks, it didn’t happen. That much is non-news. But there is something that is news — of sorts.

Nothing is being said in the press and broadcast media about this non-event; about what happened to cause those plans to vanish from sight. And vanish they did; nobody is talking in public about them. Remember, in order to facilitate that proposed development, for which the LA Times was cheering, California environmental laws were changed to make environmental approval for special, large projects like football stadiums blessed by the Governor, to zip through the courts like a greased pig. But it didn’t happen. No downtown stadium was actually proposed, and neither were any actual plans for the expansion of the Convention Center made public. And, of course, no NFL team has been enticed to come to Los Angeles. Nothing. Nada. Zip.

Last time we looked, the city was losing some $30 mil annually on the present convention center and continues to lose money on it, though at this time we are not sure how big that loss is.

Your tax money at work.

PS – if you want a bit of background on the hoopla about that new, new, new but nonexistent NFL stadium, go to: http://gideonstrumpet.info/?p=1849

Follow up. No sooner did the ink dry on the printout of the above post that the L.A. Times has brought us the following headline that requires neither comment nor elaboration: AEG Asks For 6-Month Extension to Woo NFL Team to Los Angeles, Sep. 29, 2014.

We can’t wait. Rots of ruck, fellows.

 

More on AIG’s Claim of Taking

As a follow-on to the preceding post, we recommend that you read Noam Scheiber, Finally, the Truth About the Bailout, NY Times, Sep. 29, 2014, at p. A23. Here it is: http://www.nytimes.com/2014/09/29/opinion/finally-the-truth-about-the-bailout.html?action=click&pgtype=Homepage&version=Moth-Visible&module=inside-nyt-region&region=inside-nyt-region&WT.nav=inside-nyt-region&_r=0   As we noted earlier, the trial starts today. Keep an eye on it.

Government Bailout, or Government Fraud Amounting to a Taking? Or Both?

You may have come across some earlier stories in the press to the effect that the management of the 2008 bailout of insurance giant AIG, has been charged to be a taking of AIG’s property. Former managers and shareholders of AIG, the beneficiary of a government bailout, are suing Uncle Sam in the US Court of Federal Claims, claiming that the treatment AIG received in that bailout, amounted to a taking of property. But how is that possible, asked the cynics. After all, the government offered AIG some $182 billion (with a “b”) to enable it to survive and to meet its obligations as an insurer of flaky bonds it had insured against default, and thereby did indeed assure AIG’s survival. So whence comes the chutzpa to sue the generous Uncle?

It turns out that according to the plaintiffs there is more to this story, and the plaintiffs may have something there if they can prove their allegations. We learn all this from our favorite financial reporter, Gretchen Morgenson of the NY Times (Court Casts A New Light on Bailout, Sep. 28, 2014, at p. p 1 of the Times Business Section). Go to http://www.nytimes.com/2014/09/28/business/court-casts-a-new-light-on-a-bailout.html?ref=business

The plaintiffs are former managers and shareholders of AIG, who complain that they and AIG were subjected to disparate and draconian treatment by Uncle Sam, as opposed to others (notably banks) who were also bailed out. For example, they complain that Uncle took 79.9 % equity stake in AIG, consisting of stock with voting rights, a burden no other bailed out company had to bear. This enabled Uncle to make a deal with the holders of the failed insured junk bonds whereby they not only got paid for those bonds with funds ostensibly made available to AIG, but also AIG had to waive its right to sue those bondholders for misrepresenting their bonds’ quality.

Then there is the matter of interest. AIG had to pay 14 % in interest on Uncle’s money, whereas others who were bailed out got away with paying 5%, and some 2.25 %. We won’t go through the whole megillah here; we recommend that you read Ms. Morgenson’s article for the details of this fiasco, and take note of the charge that Uncle was concealing the fact that it was thus indirectly bailing out the big boys, like Societe Generale, Goldman Sachs , Deutsche Bank and Merrill Lynch, while making it appear that it was only bailing out AIG, their insurer who was forced to make it appear that it was  making good on the insurance policies it had issued.

Long story short, the plaintiffs now claim that Uncle subjected AIG to discriminatory, draconian mistreatment and used their [AIG] funds to benefit banks that had foolishly invested in junk, mortgage-backed bonds so they had only themselves to blame for their plight, and then, with Uncle’s help, concealed that fact from the public.

The bottom line charge of this controversy is that Uncle (as its de facto largest shareholder after he seized a majority of AIG’s stock) used AIG to conceal the fact that Uncle was not really bailing out AIG, but merely secretly using AIG as a conduit to bail out the largest banks for the consequences of their own improvidence. So if proven, would all this amount to a [temporary] taking of AIG’s property? Though in an unconventional factual setting, it sure looks that way, and if the court agrees, Uncle will be on the hook for some serious “just compensation.”

So stay tuned — the trial begins tomorrow.

Can Any “Science News” Be Relied on, Or, Should Trees Be Saved or Chopped Down?

It’s getting to be so that you can’t rely on any purportedly scientific news in the newspapers. Take fats, for instance. First we were told that butter and animal fat (like lard) were bad for us, so we switched to margarine. Then we were told that margarine was hydrogenated oil and as such full of icky transfats. So off we went to consuming olive oil, with fancy Italian restaurants duly providing little dipping dishes the better to enjoy that wonderful, crusty Italian bread without clogging our hearts. Now, we are told that bread and pasta (heretofore deemed to be the cat’s meow nutritionwise) are out and traditional animal fats are in because it turns out they are actually good for us. So what do we put butter on? That, they don’t tell us so we don’t know, unless you are a disciple of our Grandma who averred that to be a good cook you have to start with at least a half-pound of butter, and the rest then doesn’t much matter. By her lights, you could put butter on everything (except meat, of course). So we are now back to marbled steaks and such. But no buttered potatoes to go with them because those are full of carbohydrates that, as you may recall, are bad for us too. See http://online.wsj.com/news/articles/SB10001424052702303678404579533760760481486

To say nothing of gluten which we have been serenely consuming as part of bread, particularly whole grain bread which — here it comes again — was said to be good for us, but turns out to be bad because whole grain or not, it is a carbohydrate-laden food and carbohydrates are, as you will recall, bad for us. Our all-time favorite meshuggas in the bread-eating department is a big sign on a local bagel shop that advertises “Gluten Free Bagels.” In case you are not into Hebraic gastronomics, be advised that what makes bagels bagels (rather than rolls with a hole in the middle), is that they are made of high-gluten flour and are boiled before being baked. So gluten-free bagels would not be bagels; they would be more like alcohol-free single malt Scotch. But don’ worry too much about that: gluten is bad only for people suffering from iliac disease which most of us are spared. So if you are going to commit suicide by eating bread, you may as well eat it gluten and all. And by all means, if you are going to eat bread, do try some real rye bread (almost unobtainable in our part of the country) — you may as well die happy.

But according to its title, wasn’t this post supposed to be about trees? Yes it was. But we had to digress into that other stuff to make our point that this is part of a larger problem — scientific conventional wisdom keeps changing so we can’t tell what is good and what is bad for us.

OK. Let’s talk about trees. For lo, these many years we have been taught as an article of faith, that trees are our friends because, apart from being pretty and producing great-tasting fruit, they draw carbon dioxide from the atmosphere, thus aiding human pollution fighters. They also emit oxygen that we can breathe and prosper. Right? Wrong.

Along comes a Yale assistant professor of atmospheric chemistry named Nadine Unger who, in an op-ed in the New York Times informs us that trees are actually bad for us, and that preventing the chopping down of forests may actually be a bad idea environmentwise. To Save the Planet, Don’t Plant Trees, NY Times, Sep. 20, 2014, at p. A19. Yikes! What’s next? Is nothing sacred? Evidently not. At least not at Yale.

Since we only claim some expertise in an unmentionable area of the law, but not in earth science, we have no intention in getting into this controversy (which, if it isn’t one already, is certain to become one) let us relay to you the essence of Professor Unger’s grim message:

The understanding of photosynthesis imparted to us in school, says she, is a gross oversimplification. In the Amazon jungle, “almost all of the oxygen [produced during the day] remains there and is reabsorbed by the forest at night. In other words, the Amazon rain forest” – whom some global warming mavens have dubbed “the lungs of the planet’ – ”is a closed system that uses all its own oxygen and carbon dioxide,” leaving none for us. Bummer. Can it get worse? Yes, it can, and here it comes:

“Trees emit reactive volatile gases that contribute to air pollution and are hazardous to human health. These emissions are crucial to trees — to protect themselves from environmental stresses like sweltering heat and bug infestations.”

* * *

As these compounds mix with fossilized pollution from cars and industry, an even more harmful cocktail of airborne toxic chemicals is created.

So Professor Unger notes that maybe the ridicule heaped on President Ronald Reagan in 1991, when he said that ’Trees cause more pollution than automobiles do’ may not have been fully justified.

Since, as we said, our background is not earth science we conclude by suggesting to the earth science mavens who instruct us, (a) that they should engage in an open and honest discussion of Prof. Unger’s position, so we can learn about it and have some basis for evaluating it, and (b) they should ponder the wisdom of the jocular version of the laws of thermodynamics, that make clear the intractability of nature. Though a put-on in their present formulation, they contain a large element of scientific truth, and reduce themselves to the following:

First law of thermodynamics: you can’t win

Second law: you can’t break even,

Third law: things are going to get worse before they get better, and

Fourth law: who says they’re going to get better?

So maybe the planet does its thing (possibly even according to God’s design — we’re not getting into that one either) and there isn’t much that can be done about it, particularly as long as China and her third-world cohorts pollute the air on such a scale  that in Beijing, for example, it’s hard to see in broad daylight.

Follow up. Guess what? No sooner did the ink dry on the printout of the above post about climate and trees, that the New York Times has fired the other barrel of the global warming shotgun. We learn from that august source that a new study has found that ocean warming that has made so much news lately, is actually caused not by human activity, but by changing winds. “[T]he new analysis, which relies on wind, barometric pressure and temperature data recorded from 1900 to 2012, concludes that human activity has little impact.” Michael Wines, Human Role in Warming of Northwest Played Down, N.Y. Times, Sept. 22, 2014 (emphasis added). http://www.nytimes.com/2014/09/23/us/study-discounts-human-impact-on-rising-temperatures-in-northwest.html?ref=science

Ditto the Los Angeles Times: “This latest research shows that . . . changes in in atmospheric and ocean circulation can drive trends that can last a century or longer, overshadowing the effects of human-generated increase in greenhouse gases, the study authors said.” Tony Barboza, West Coast Warming Linked to Naturally Occurring Changes, L.A. Times, Sep. 22, 2014 (emphasis added). http://www.latimes.com/science/la-sci-pacific-warming-20140923-story.html

Second Follow-up. And speaking of other, developing countries, don’t miss today’s NY Times, Coral Davenport, Emissions From India Will Increase, Sep. 25, 2014, at p. A5, which reports that the environment minister of India has explained that his country has no intention of cutting its greenhouse gas emissions, because its first priority is to alleviate poverty and improve India’s economy. The not-so-hidden message to Uncle Sam was: if you want to save the world from those greenhouse gases, you can do so on your own nickel, being as the condition of the world’s environment is due to western societies’ historical disregard of such matters — or, if you want to reduce India’s message to Uncle Sam to it’s essence, it would be “You crapped it up  –  you fix it.”