“In August, Houston issued more single-family housing permits than all of California.”

David Brooks, The Sorting Election, N Y Times, Oct. 11, 2014, at p. B7                      

As we have tried to make clear, the press coverage of the lawsuit against Uncle Sam for the seizure of AIG stock during the 2008 financial meltdown has not been journalism’s finest hour in terms of displaying an understanding of legal theories underlying this mega-kerfuffle. But it turns out that someone, it turns out, is at least thinking about it. See Tim Cavanaugh, 5 Reasons the Government Might Lose the AIG Lawsuit, National Review on line, Oct 10, 2014. http://www.nationalreview.com/article/389994/5-reasons-govt-might-lose-aig-lawsuit-tim-cavanaugh

Actually, we have trouble understanding how Mr. Cavanaugh’s “5 Reasons” add up to a clear cut victory for the plaintiffs, but we sure dig his Reason No. 6 — evidently thrown in as a bonus-afterthought to the other five reasons. It contains an inverse condemnation claim (taking of property without compensation), although Mr. Cavanaugh does not use that term.

After all the pros and cons of the government’s asserted graciousness or its punitiveness in bailing out AIG, and of the current plaintiffs’ (former shareholders of AIG) asserted ingratitude in trying to bite the hand that bailed them out back in 2008, the stark fact remains that Uncle Sam did seize some 80% of AIG’s voting stock, and with it control of AIG, which he used it to force AIG to grant a sweetheart deal to the big-boy banks that had taken out insurance policies from AIG against default of mortgage-secured bonds, and now wanted full 100% payment of their value as if nothing had happened, rather than a reduced payment that AIG was trying to negotiate with them, until Uncle Sam stepped in, flashed all that AIG stock it had seized, and forced AIG into that sweetheart deal with the insured banks. And by the way, the plaintiffs also complain that Uncle Sam forced AIG to give up their claims against those insureds who, according to AIG, misrepresented the quality of the bonds being insured.

For a summary of last week’s Bernanke testimony, see Bernanke Testifies That He Was Reluctant to Lend Money to A.I.G., NY Times, Oct. 11, 2014, at p. B7.

Anyway, if you wish to keep up with this controversy (which in our opinion at least is the biggest and most unique inverse condemnation claim in history) we recommend you read Mr. Cavanaugh’s article.

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.

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 https://gideonstrumpet.info/?p=7020

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.”

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.

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 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.

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: https://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.

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.