It’s déjà vu all over again.
I’m only starting to dig into the AIG bailout trial by reading the transcripts and related exhibits. That means I am behind where the trial is now. However, that gives me the advantage of contrasting what is in the documents with the media reporting to date. And what is really striking is the near silence on the core argument in this case.
The Starr International v. the United States of America suit is, at its core, about whether an insolvent borrower still has the right to the protection of law. It’s thus a high-end, big-ticket replay of the same form of arguments that homeowners fighting foreclosure often tried in court to obtain a mortgage modification: we don’t dispute that we aren’t able to meet our obligations, but the party foreclosing on us needs to go through the proper steps to take possession of our house. In the mortgage borrower’s case, that meant establishing standing, as in proving that they really were the proper party to initiate the foreclosure. In the case of Starr, the AIG executive enrichment vehicle controlled by former CEO Hank Greenberg, the argument is that even though AIG was insolvent, the bailout, which included through a series of maneuvers getting control of 79.9% of AIG stock, was impermissible.
Let me stress I’m no fan of Greenberg. But you can’t ask for the rule of law to operate in one place and not another. We’ve seen the administration repeatedly bend over backwards to give banks all sorts of free or super cheap waivers for bad conduct and not enforce regulations against them, yet borrowers are held in court to strict terms of their agreements and face unreasonably high hurdles when they try to fight abusive conduct.
Despite his considerable warts, Greenberg is unearthing information that shows how one-sided and high-handed the Fed’s conduct during the crisis was. Yet people who claim to be on the side of curbing bank power are instead rallying to support the bank-cronyistic Administration:
We’ve embedded the transcript from the first day of the trial at the end of the post, which included both sides’ opening arguments, along with the testimony of the first witness, Fed Board of Governors general counsel Scott Alvarez, along with the sides each side presented.
The specific legal arguments from the Greenberg camp, represented by uber lawyer David Boies, are that the manner in which the government took control of AIG’s common stock involved a taking (a violation of the 5th Amendment requirement of offering adequate consideration for government seizure of property) and an illegal exactment (more on that shortly). Note that Greenberg can prevail on either contention.
A key issue is whether the Fed exceeded its legal powers in how it structured the bailout and coerced AIG’s board into taking it. The rescue was done as a Section 13(3) loan, which is often referred to as the Fed’s “unusual and exigent circumstances” authority. While that allows the central bank to take pretty much anything it wants to as collateral for a loan and make that loan to pretty much any party it chooses to, Greenberg’s attorneys argue there are still limits on how the Fed can conduct itself. Consider this slide from the Boies’ presentation (click to enlarge):