Greenberg’s initial target was Eliot Spitzer, who, when he was the Attorney General of New York, launched an investigation into A.I.G.’s accounting practices—an investigation that, in 2005, prompted Greenberg to resign with his reputation in tatters. Greenberg hasn’t forgiven Spitzer; just last year, he sued him for defamation. (The case is still pending, though part of it has been dismissed. Spitzer has denied wrongdoing.) But, since 2008, Greenberg’s primary target has been the regulators and Federal Reserve officials who orchestrated a government bailout of A.I.G. that prevented the firm from collapsing, though at a substantial cost to its stockholders, including Greenberg. (After he left A.I.G.’s board, he remained one of the firm’s largest shareholders.)
After six years, during which it suffered numerous setbacks, Greenberg’s highly paid legal team, spearheaded by the famed litigator David Boies, is finally getting its day in court, where it seeks to prove that the A.I.G. bailout violated the U.S. Constitution and the laws governing the Federal Reserve. On Monday, delivering his opening statement to the U.S. Court of Federal Claims, Boies claimed that the government imposed extortionate terms on A.I.G.’s board, which was in no position to resist them. To make up for the losses suffered by Greenberg, Boies demanded at least twenty-five billion dollars in compensation.
Most news organizations are covering the trial straight, as if it were a deadly serious affair. It is, in fact, an absurdist comedy, rich in ironies, worthy of the Marx Brothers or Mel Brooks. Rather than dispatching its legal correspondents to write about it, newspapers would do better to send their comic-strip artists, or, if they can find one in this age of solemnity, an old-fashioned wiseacre in the mold of the late Art Buchwald or Mike Royko.
Let’s start with Greenberg, who, far from being extorted and victimized by the government bailout, did pretty well by it. If the Fed hadn’t rescued A.I.G., the firm would have collapsed and entered bankruptcy; Greenberg’s stock would have been worthless. As a result of the bailout, he saw his share of the company greatly diluted. In return for extending tens of billions of dollars in credit, the Fed demanded warrants that gave the government about eighty per cent of A.I.G.’s equity. (Subsequently, as the Fed extended more loans, that figure reached about ninety per cent.) But Greenberg still emerged from 2008 owning about ten per cent of A.I.G.’s outstanding shares. And, as the company recovered from its near-death moment, he was able to sell this stock for a lot of money.
How much? In March, 2010, according to press reports, he agreed to sell ten million shares to U.B.S., the big bank, for $278.2 million. And he may well have received more than that. According to a Reuters story, the deal included a clause that allowed Greenberg to reap some of the gains if A.I.G.’s stock continued to climb during the next three years, which it did. For the sake of argument, let’s assume that Greenberg ended up with three hundred million dollars. That’s three hundred million dollars he wouldn’t have had if Ben Bernanke and Tim Geithner, then the Fed chairman and the president of the New York Federal Reserve Bank, and Hank Paulson, the Secretary of the Treasury, had allowed A.I.G. to go belly up.
Rather than hauling those three musketeers into Judge Thomas Wheeler’s court, which his lawyers will do next week, Greenberg should be taking them out to dinner. The only mystery about the lawsuit is why Wheeler allowed it to proceed this far. In 2012, Judge Paul Engelmayer, a federal judge in New York, tossed out a similar case, noting that A.I.G.’s board had voluntarily agreed to the terms of the September, 2008, bailout, seeing it as the only option to avoid bankruptcy. For whatever reason, Wheeler, whom George W. Bush appointed to the bench in 2005, decided that the case raises sufficient legal issues to proceed.
Perhaps he is taking seriously Boies’s contention that the bailout violated the Fifth Amendment, which prevents the federal government from seizing private property without proper compensation. But, of course, this wasn’t a seizure—it was a bailout. Or perhaps Wheeler wants to explore whether the Fed overreached the lending authorities that Section 13.3 of the 1932 Federal Reserve Act grants it. There’s no doubt that this statute was drawn up vaguely, but that was deliberate. During the Great Depression, as in September, 2008, the Fed faced a potential cataclysm, and it needed some freedom to maneuver, which Congress granted it.
In the acres of coverage this case has already received, I haven’t seen a single independent legal expert predict that Greenberg will win. But maybe we should ignore all that fun stuff. According to one school of thought, this case isn’t really about whether an angry rich man can prevail against the government. It’s about getting to the bottom of one of the enduring mysteries of the 2008 crisis: Why did the New York Fed, led by Geithner, insist that A.I.G., once it had been rescued at taxpayers’ expense, settle up, at full face value, tens of billions of dollars’ worth of mortgage-insurance contracts that it had outstanding with big Wall Street firms, such as Goldman Sachs and JP Morgan Chase?
Before the financial crisis, the banks had taken out these contracts, known as credit-default swaps, to insure against the possibility of their large holdings of junky mortgage securities falling in value. As the housing market collapsed, the market value of these swaps fell sharply, reflecting skepticism among investors about the mortgage insurers’ capacity to honor them. But, rather than forcing the big banks to settle up the swaps at a discounted price, A.I.G., which was then under the effective control of the Fed, paid them off at par: a hundred cents on the dollar.
Did Geithner and his colleagues do a favor to their pals at Goldman, JP Morgan, and the other big banks? That’s the argument Greenberg’s legal team is set to make. If the insurer had forced its Wall Street counterparties to take a “haircut” on the swaps, it wouldn’t have needed to borrow so much money from the government, and it wouldn’t have had to give up so much stock, Boies will claim. To buttress his case, he will question some of those involved, including Geithner—a prospect that has some members of the commentariat salivating. Forcing an “honest admission out of Mr. Geithner” about his motives “would be a helpful, even cathartic, development,” The New Republic’s estimable Noam Scheiber wrote in a Times Op-Ed. “Traumatic historical episodes often require a high-profile public reckoning before the country can move on.”
That may well be true, and the debate about the A.I.G. bailout is an important one. But what we’ll see in the courtroom will almost certainly be shadow boxing rather than catharsis. Geithner and his former colleagues will insist, as they have since the beginning, that their only goal was to restore confidence in the markets and to prevent contagion. If the Fed had sought to impose haircuts on A.I.G.’s counterparties, they will argue, it would have raised more doubts about the trillions of dollars’ worth of credit-default swaps that were outstanding elsewhere. And in an environment where financial firms were already reluctant to extend credit to each other, this could have prompted a general panic that would have sent more firms to the wall. “I thought our no-haircuts strategy was a no-brainer,” Geithner wrote in his book, “Stress Test: Reflections on Financial Crises,” which came out earlier this year. “The whole goal of our interventions was to calm the system. As we had seen with WaMu”—Washington Mutual—“which was less than a third of the size of AIG and much less vital to the broader financial system, haircuts send a destabilizing signal that more haircuts are coming, encouraging runs on financial firms.”
It’s a serious argument, but one that begs a counterfactual. Unfortunately, history doesn’t allow them—we can’t rerun the events of 2008. Instead, we have the ultimate irony: a lion of the financial sector, a proud member of the 0.1 per cent, going to court to make an argument popularized by progressive journalists and anti-Wall Street demonstrators. The system is rigged, the government is in the hands of the big banks, and the little guy—even the little guy with, say, three hundred million dollars in his back pocket—is getting screwed. Mr. Greenberg, welcome to what is left of the Occupy movement. It could do with a lift.
Original Article
Source: newyorker.com/
Author: BY JOHN CASSIDY
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