Never underestimate the greed of a billionaire. But I have to say separately that I will thoroughly enjoy the pigfight between former AIG chief Hank Greenberg’s C.V. Starr (now the biggest shareholder in AIG) versus the Federal government over the rescue of AIG. Any cost and embarrassment that the Administration suffers will be the direct result of the Bush-Obama policies of being concerned only about saving financial players rather than meting out any punishments, and for being incompetent negotiators.
The media and even some Congressmen exploded over the notion that AIG might join Greenberg in a suit against its rescuer, the US government, meaning ultimately the American taxpayer. For instance, Elijah Cummings, ranking member of the House Committee on Oversight and Government Reform, wrote:
The idea that AIG might sue the government is an unbelievable insult to our nation’s taxpayers, who cleaned up the mess this firm created. I understand that AIG’s board has a fiduciary duty to consider this action, but the simple fact is that AIG did not have to accept these terms — it could have entered bankruptcy. This is like suing the paramedic who just gave you CPR because he didn’t give you a pillow. The American taxpayers were a lifeline to this firm, and for certain shareholders to now criticize the terms of the rescue is utterly ridiculous.
The fact that AIG has launched a PR salvo thanking America for its rescue no doubt heightened the negative response; AIG has tried to feign gratitude to reverse the stigma of the bailout. Its board would have to be smoking something strong to join Greenberg in this lawsuit. It would suffer considerable reputational damage to chase a low-odds payoff. MarketWatch, hardly a bastion of radicalism, suggested, “How about charging AIG with treason?” As for the possible upsides, a Federal judge in the Southern District of New York already dismissed the parallel case against the New York Fed with prejudice and issued a blistering ruling; Starr is appealing.
Neil Barofsky explained on Bloomberg why AIG’s board will probably choose to dodge this bullet:
The flip side is the AIG directors and its CEO Benmosche have been consistently intransigent in their dealings with the government (see here and here, for instance); this is one of the few boards that might be loopy enough to sign up for Greenberg’s scheme.
But all this uproar misses what I consider more interesting, and had gone under the radar until now: that the judge in the case against the government is letting the case proceed (procedurally, the cases needed to be filed in different courts). Discovery has already begun; the New York Times reports that Starr has demanded 16 million pages of documents and the DoJ has not only tasked a dozen attorneys to this case but has also been forced to hire experts.
While a few observers argue Greenberg’s suit has merit, it’s really hard to see that, at least if the detailed account of the AIG rescue in Andrew Ross Sorkin’s Too Big to Fail is remotely accurate. The Starr lawsuit tries to claim that the government discouraged sovereign wealth funds and other investors from taking a stake in AIG, meaning effectively that the government somehow preferred that AIG get in trouble and then took advantage of it. Huh? The Bush Administration wanted no part of bailouts; they clearly hoped to leave the whole credit mess in Obama’s lap but events conspired against them. In fact, as with Lehman, the Administration was trying to get a private sector rescue in place up to the last possible minute. But as the mortgage backed securities market kept collapsing, the losses in AIG’s securities lending portfolio ballooned to $20 billion (on top of a then-estimated $50 billion hole in the credit default swaps portfolio). They couldn’t raise enough money in the post Lehman panic (quelle surprise!).
The suit apparently makes the related claim that the terms imposed on AIG were punitive. First, that is what they are supposed to be, the Bagehot rule is “lend freely, at a penalty rate.” Second, punitive does not mean exploitative. Sorkin has said the terms on which the government lent were the same that the insurer was offering to private investors. Now get that: management and/or the board had to have approved those terms. If they were soliciting funding on those terms, voluntarily, from private parties, how can Starr claim the deal was extortionate? And even if the Sorkin account somehow missed key points that would complicate the picture, the board accepted the government deal because the alternative was bankruptcy, which would have wiped out the shareholders, including Starr.
The other part the fulminating misses is how many times the deal was redone, each time to make the terms more generous to AIG.
he original financing was $85 billion, secured by all of AIG’s assets, with a interest rate of 8.5% over Libor, which translated into 11.5%, From the Fed’s press release:
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers…
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
Now as readers of Andrew Ross Sorkin’s Too Big Too Fail may have noticed, there was a stunner in how this came about. Wall Street (namely, the god of syndicated lending, Jimmy Lee) has determined he could raise $50 billion on the terms outlined above, which fell short of what AIG needed. (There is another amazing vignette, when AIG needs a $14 billion overnight loan from the Fed, and Geithner demands collateral. CEO Wilmustad wonders how they will come up with that “in the next few minutes” and someone remembers “the unofficial vaults.” In the same office, AIG had “tens of billions” of physical bonds, apparently not recorded on the balance sheet. WTF? What kind of organization is about to run completely out of money, and then remembers it has “tens of billions” sitting around? Obviously someone DID know, and chose to keep that little fact secret.)
So why did the NY Fed suddenly decide to fund all on its own? Why didn’t the Fed just lend along side the other firms on the same terms? I’d much rather have a bunch of Wall Street SOBs overseeing AIG than the half-hearted minders at the Fed.
Sorkin apparently corrected the second edition of his book; the claim is that what he called bonds in the first version of his book were the stock certificates of all the AIG subs. Even if true, that’s astonishingly irregular. But the point here is that Starr’s claims are barmy. The suit apparently asserts the interest rate was 14% (I’d like to see how they come up with that) and that AIG was disadvantaged by the loss of private investors. But they were going to come in on exactly the same terms that the government funded the deal at. So no financial harm was done. The only reason I can fathom for the NY Fed taking up the entire loan is that it thought it would take too long to close the deal. But the flip side is this was an $85 billion lending facility; AIG was still free to close a deal with private investors if it wanted to and use it to partially pay down the Fed loan.
Moreover, as indicated above, the original loan was only for two years. The whole idea was to have a high interest rate to force AIG to sell assets and pay the loan back. The belief was that AIG was a hugely valuable company that was suffering a holding company insolvency. If it sold its subsidiaries, surely it would have more than enough to repay the loan.
That’s not how it played out. AIG was shortly back to the well, for another $37.8 billion. It needed to have the maturity of the loan extended, since it couldn’t sell enough units (in part due to the fact that some were garbage barges; I’m told by a former state insurance examiner that Treasury was having monthly conference calls with the state insurance regulators in the 19 states in which AIG has insurance subs pressuring them not to pull the plug on them).
And remember, AIG was coddled during this process. As we wrote earlier:
Look at the list of terms above. The government has the right to seize absolutely everything of value AIG has until it pays off the loans, hold virtually all of the equity, and can veto many key actions (the senior position with respect to the assets gives it more rights than those listed above). Think of AIG as a felon: until it pays its debts to society, it has virtually no rights….
Now given AIG’s liquidity needs, and the object of this exercise (not to have AIG go under) the second loan was presumably necessary, but the efforts to dress it up as as a loan against collateral is an amusing fiction (all this second loan does is degrade the collateral against the original loan. There are no free lunches here, except, of course, for AIG). Again, if we go back to the felon metaphor, the state had budgeted X for his care, but it turns out he has a really nasty disease that really has to be treated or it will infect the entire prison population and the guards too, so the cost of his incarceration has gone from X to X + Y.
But now we get to the heinous part. AIG should have no rights at this point. Zero. Zip. Nada. The government already on the hook for an open-ended liability. Yet the Fed is treating AIG as a party that has rights and is negotiating with them, as opposed to dictating terms. This is staggering.
But what did the Feds do? They kept making the terms easier, and got nothing back, not even symbolic items like formally putting the company through bankruptcy to allow management contracts to be voided, firing the board, or at least demanding their resignation letters, along with those of C level managers, so the Feds could throw them out with no hassle if deemed necessary, or even indemnification, a no-brainer whose omission is what is allowing AIG to contemplate suing Uncle Sam. A basic rule is you never give a free concession in negotiations. You get something back, and the fact that AIG kept coming back to the well (three additional times) gave the Feds plenty of time to ponder if there was anything they had missed in their earlier dealmaking. But their priority was not to protect the interest of the public, it was just to salvage AIG with as little effort on their behalf as possible.
How Starr can claim to have been victimized by a sugar daddy that kept shoveling more and more money at it? It got stealth bailouts too, such as Treasury going through hoops to preserve the value of $26.2 billion in net operating losses plus $9 billion of “unrealized loss on investments” that Sorkin called “a tax benefit, er, gift, from the United States government”
These aren’t the only claims that Starr makes, but they all flow from the idea that AIG was somehow snookered and abused in doing the initial bailout or that the government exercised undue control when it did one of its later restructurings in a manner that disadvantaged shareholders. Given that all these retrades amounted to corporate welfare, this is remarkably strained.
So why am I nevertheless looking forward to seeing this ridiculous lawsuit play out? Greenberg may be deluded enough to think he has a case, but he’s seasoned and legally sophisticated, so he may be operating on a different theory. I’ve mentioned before that there are two ways to prevail in litigation: by having a winnable case or by having one that can get past summary judgment in which you can inflict a ton of pain on the other side in discovery and the trial process. And remember also, Starr’s counsel David Boies cut his teeth on the IBM antitrust suit, which lasted the better part of a decade. He’s been through extremely protracted, complex litigation before.
So what might Greenberg and Boies be planning? Well if I were in their shoes, I’d try to make this case o embarrassing to the government that they are willing to pay to make it go away. Merely making it costly (like 16 million page document requests) probably is not sufficient in and of itself. If Starr can persuade the judge to keep the records unsealed, and gets embarrassing material about how the government handled the rescues into the public domain, this could be great theater, and would also let us see how much of what has been fed to folks like Sorkin was accurate. That means keeping it in the spotlight during Obama’s term, since his successor wouldn’t suffer from any revelations.
And just imagine, if this goes to court, Boies will almost certainly seek to put Paulson, Geithner and Bernanke on the stand. I don’t see how Geithner, as a private citizen, could refuse; if Bernanke is reappointed, he might escape (judges tend to show some deference in calling top executives and officials to testify if less senior people have enough knowledge to appear in their place).
Put it another way: if you thought Geithner squirmed when Elizabeth Warren grilled him, you haven’t seen anything till Boies has a go at him. That alone is reason to look on this suit with more sympathy than it otherwise deserves: it will lead any successor bailouter in chief to be a lot more careful and demanding when he shovels out cash to wards of the state.
An unintended consequence might be that the DoJ might have to divert resources from enforcement of the law in other cases to defend against this suit.
Enforcement? Surely you jest.
Any “diversion” is a feature, not a bug.
Only part jest. The alternative that it might be part of a plan/conspiracy is very unsettling.
That being said, it does look a bit similar to the patent wars in the tech industry. The ones with the most resources win, justice be damned.
That”s for sure
Financial Fraud Conviction Scorecard:
Obama Received a $101,332 Bonus from AIG
Obama’s AIG Outrage: All Talk, No Action
LOL! That was brilliant Yves! Maybe repost it in Spanish for any concerned Mexican readers?
“So why am I nevertheless looking forward to seeing this ridiculous lawsuit play out?”
Good thinking, Yves. Me too. The sheer entertainment value of this whole “economic crisis” thing makes it all almost worthwhile, as far as I’m concerned. How do you put a price on good, wholesome fun?
we should all imagine with FEAR what will be obtained and fleeced while these firework shows play on
You’re right! While we are all curled up with popcorn, watching the show – they’ll be crawling in through the window, stealing the plastic (they got away with the silver a long time ago …)
Many years ago, I had the misfortune to accept a job offer from these sc*mbags. I took a transfer to city I’d never been, and within 3 weeks, they were already lying about the terms. I quit after less than a year, but not before regular incentives like “Do this NOW, or you’re fired!” and various variations thereof. Lesson learned: Always get it in writing when dealing w/AIG or any of their many subsidiaries.
Weiner – one of those lesson’s right up there with “tie your shoelaces”, suitable for all occasions –
I learned that awhile ago – document, document, document ….
When folks won’t give it to you in writing – a clue that they may not intend to give it to you at all …
Ha ha… No kidding. But I was a 20 something guy in my 2nd job during the 80s. “They couldn’t have possibly lied to ME, could they!?!” It’s pretty funny now, but at the time, I was just astonished. Ethics?!?! Bhwa, ha, ha….
We all exist in a Washington Mutual employment universe (WaMu, now part of JPMorgan Chase, was major mortgage lender in the USA).
During the 2009 congressional investigation into WaMu’s practises, it came to light that WaMu kept a blacklist of HONEST real estate estimators and assessor, which were offlimits, but instead preferred to use a list of the DISHONEST ones. Ergo, the zero integrity types profited during the late 90s and first decade of the 21st century.
Washington Mutual was supposed to have been the major contractual employer of real estate estimators and assessors in the Northwest during that period.
To paraphrase a description I’ve seen of why AIG necessitated a bailout: AIG FP sold $460 billion of CDSes without the required capital reserves for the insurance payouts of from $20 trillion to over $40 trillion.
We call that an insurance swindle, the largest in human history!
Re.Schadenfreude Alert. Can you give a direct link to the Barofsky Bloomberg screen please, i’m only getting a black box, with flash player, yet no connection via on the blog. thank You
I understand that AIG’s board has a fiduciary duty to consider this action, but the simple fact is that AIG did not have to accept these terms — it could have entered bankruptcy.”
Sorry Mr. Cummings, but isn’t that a lot like saying pirates have a fiduciary duty to rape and pilage?
Only if they’re incorporated pirates.
This lawsuit is absolutely hilarious and the government deserves nothing more than to be bit, and bit hard, by the bailouts, even if it’s by the beneficiaries of the bailouts, which were overwhelmingly opposed by the citizens, but crammed down our throats nonetheless. Getting the spotlight back on the bailout debacle for any reason can only yield more scrutiny and hopefully some positive results. This case would really get fun if the DoJ would make counterclaims, but with Obama’s, DOJ, you know that’s not going to happen.
I take it you are suggesting that Lanny Freuer isn’t right now at his secret Bat Cave planning the takedown of Maurice Greenberg and AIG?
The precious rule of law, it brings order to the random whims of what otherwise would be an overbearing tyranny of capriciousness and cruel, cold plated revenge. It’s all perfectly legal, like the guns bought to murder people by the wholesale bakers dozen, times 2. It’s all perfectly within their rights, no, even more so, a compelling duty, a sacred responsibility to protect the right to property less the jack boot oppression of the state crush our noble, enterprising spirits!! The rule of law, and not people asleep at the wheel, working hand in hand with the invisible hand of the market, making sure that no one makes a decision, but simply a clockwork symphony of inexorable laws grinding us all finely. The wheels of law, like the wheels of commerce, working in a joint operation to create the best of all possible worlds. I feel nearly to God Almighty already.
… you and Lloyd ….
This morning’s San Jose mercury-News buried the story on pg. D3 of the 4 page Business section; while on the front page is a 5″x7″ pic of barry Bonds in a story about sports stars cheating and the Hall of Fame. An indicative example of the corporatemedia..or as my 82yo commented, “well, since the internet, newspapers are having a hard time..”..So what?..they’re gonna sell more if they put a 5×7 pic of Barry Bonds or a big headline about AIG sueing the govt.?
Barry Bonds will beat every time!!!!
One strategy might be to find somewhere, someplace that someone else got a better deal on bailout interest rates and claim unequal treatment. Given the helter skelter mishmash of bailout deals flying around, it shouldn’t be too hard to find such examples.
I hope they go for a jury trial.
Good luck find any jurors sympathetic to AIG and Greenburg.
What I like about this, Yves, is the high payout to Goldman and other banks at AIG’s expense. the lawsuit relies directly on the language of Neil Barofsky.Barofsky is especially scathing when it comes to Tim Geithner’s claim that it was not possible to oblige AIG’s counterparties to “take a haircut” on its loans because French law did not permit banks to lose money! This deception was put forth in a panic atmosphere to bamboozle Congress into letting Geithner (then head of the New York Federal Reserve) and Treasury Secretary Hank Paulson from Goldman Sachs pay Goldman and other Wall Street’s heavy winners at their own arbitrary and self-serving valuations of how much AIG owed them.
In reality there was no truth to the claim that French law prevented banks from taking a loss, or that the U.S. Government had to apply the same giveaway offer to Wall Street.
Geithner’s team undercut any chance of getting relief for the taxpayer by deciding that no one concession would be accepted unless all of the banks agreed to the exact same percentage reduction. The New York Fed officials told us that for this reason, after the regulator overseeing AIG’s French bank counterparties told them that it would be against French law to accept less than full value for the bonds, the negotiations effectively ended.
However, Barofsky points out, Geithner stonewalled requests for details. When he called the French regulator,
she emphasized that she had not ‘slammed the door’ on negotiations and had been more than ready to engage in them with the Fed as long as they were at a high level and universal. But she told us that the Fed officials had never seriously pursued that option, commenting that she had been surprised when the Fed officials had never called back. When I asked her about the Fed’s assertion that it would be illegal under French law to agree to a discount, she said that the French government could have waived that restriction.
The effect was “that tens of billions of dollars of government money had been funneled directly to the banks. We therefore labeled the deal what it was, a ‘backdoor bailout of the banks.’” This finding inspired AIG, its head Morris Greenberg and the company’s largest stockholder, Starr International, to sue the U.S. Government, claiming that it “used billions of dollars from A.I.G. to settle credit-default swaps the insurer had with banks like Goldman Sachs, which received over $14 billion in winning bets against AIG on CDOs (collateralized debt obligations). The deal, according to the lawsuit, empowered the government to carry out a “backdoor bailout” of Wall Street.” But inasmuch as the Treasury had become indistinguishable from Goldman, its policy was to support the allegedly fraudulent financial deal and bail it out with “taxpayer” funds (creation of new federal debt).
It didn’t have to be this way, Barofsky explains. “The deal was a gross distortion of the normal functions of the market. In a bailout-free world, instead of being saved by the government, AIG would have been unable to make its cash collateral payments to the banks and gone into bankruptcy. As a result, the banks would have been left with the CDOs and stuck with their continued declines in value. Those losses would have punished the banks for what had been bad and risky bets – i.e., assuming that AIG would be able to meet all of its obligations. In market parlance, each of the banks would have borne the ‘counterparty risk’ of doing business with AIG and suffered the consequences of betting on the wrong counterparty. Instead they were paid out in full. In that respect, Geithner’s opening of the spigot of taxpayer cash for AIG was more of a bailout of the banks than it was for AIG itself.” (pp. 180f.)
My Question is, then why didnt Hank or anyone at AIG at the time, scream out BEFORE TARP Fraud was voted on , that the baackdoor was going to Goldman …..
It’s called, “judicial opportunism” (after the fact)
FWIW, the French government later said there was no French law obstacle to a haircut.
M. Hudson wrote: “…inasmuch as the Treasury had become indistinguishable from Goldman…”
This is the crux of it and so obviously and appallingly true that I think you’re right: the more Greenberg’s suit casts light in this direction the better.
Not a very sympathetic plaintiff but a suit against Government Sachs nonetheless.
Somebody has to do something about it. Every other organized group has already rolled.
@Mark P. Fine comment. If only Eliot Spitzer could get in on this:
Sincerely sorry to foist Maria on everyone but I still wish to see some serious egg on her face one day…
Will David Boies be hired by AIG this time as well ??
Au contraire, thanks for mentioning Maria. I saw her on TV the other day and her nose and philtrum (Word of the Day: the vertical groove on the upper lip under the nose) looked kind of strange. Has she had nasal surgery recently, or did she just have a bad cold?
“What I like about this, Yves, is the high payout to Goldman and other banks at AIG’s expense. the lawsuit relies directly on the language of Neil Barofsky.”
So, are you saying that AIG has a “legitimate” case against the gov’t?
I don’t buy that claim, although it is likely that Starr calls Barofsky if things get that far (to trial).
AIG was toast if there was no bailout, which came in the form of a loan from the NY Fed, which happens technically to be only quasi public. It does not have the power to engage in 5th Amendment-style takings, particularly for an entity it does not regulate.
As one commentator said, it’s like arguing with how the paramedic saved your life. Net the maybe $6 billion haircut they might have gotten on $30 billion of CDS (UBS offered only 4%) against the $35 billion of other gimmies that AIG got thanks to the tender ministrations of Uncle Sam (the waiver of the time limits on the NOL and other tax issues). You can cut this any way you want and it ins’t credible. But Greenberg will have his day in court and he will (or should) seek to maximize the pain factor.
OK, thanx ….
Anyone who is going to torture Geithner, cant be all bad
Treasury, Geithner and other dirt bags at Obama administration absolutely deserve to be tortured and waterboarded Guantanamo style, but not by the cockroaches at AIG.
These billionaires have bad cases of “””stripperbrain”””.
“While a few observers argue Greenberg’s suit has merit, it’s really hard to see that, at least if the detailed account of the AIG rescue in Andrew Ross Sorkin’s Too Big to Fail is remotely accurate.”
You doubt whether Sorkin, Goldman’s propaganda machine, is remotely accurate? Oh, please. No, he didn’t make the movie that we all gagged on (Too Big to Fail), but he did defend it. He sat there and defended it! I would believe nothing that came out of Sorkin’s mouth. Taibbi has raked him over the coals as well.
Hank Greenburg was foaming at the mouth when this was all playing out. I remember reading an article where he told a reporter (and I paraphrase): “There is a huge, huge story here, and it’s up to you to find out the details.”
The Village Voice and ProPublica did some excellent reporting on AIG/Goldman/Paulson. The Village Voice especially covered Joseph Cassano, head of Financial Products division at AIG, who is now hiding out in London and won’t talk to the press, and how Cassano’s employees kept asking him what the heck he was doing. Cassano would always blow up whenever his employees questioned what he was doing. From my reading, it almost appeared as if Cassano could have been in league with the Wall Street banks because he knew – he knew – what he was doing. Perhaps his stint at Drexel Burnham Lambert taught him too well.
There is I think a LOT more to this story, and not how Sorkin tells it. The more light shed on this, the better. Something went down here. Hopefully this suit will unearth the truth.
The Sorkin book is internally consistent and he did tons of reporting. It would be hard for so many players to keep a major lie straight among themselves. And there is no reason to think that AIG did not shop for money before the Fed stepped in, and no reason to think the parties involved would lie about the terms (that the terms sought were the same as the ones the Fed eventually lent at). Tons of people, and I mean tons, would have seen or been aware of the pitch materials, and would have disputed Sorkin’s account. That is true of a lot of the other material in the book.
And most of what he says about the panic and exhaustion of the officials rings as plausible. The big problem is he’s accepts the implicit TINA (There is No Alternative) view of the book, that rescuing the banks and not getting tough with them was the only option.
“AIG was sinking fast. It needed cash, and it needed it fast. In stepped the Government’s Fed team….staffed up to the gunnels with former Goldman Sachs staffers like Dan Jester and Hank Paulson. And they pushed an arm up AIG’s back with a simple deal: no immunity for Goldman, no deal.
So when AIG got the Fed’s bailout money and paid off its bank creditors, synchronised precisely with the receipt was a closure signing in which the bank forfeiting any rights to sue Goldman Sachs.
The financial enquiry report buried this information halfway through 800 pages in a small-print footnote. The text states that Goldman ‘gave a good and valuable consideration’ to AIG in order to secure the waiver: but this is untrue – AIG did not get a red cent from Goldman Sachs.
It wasn’t remotely in AIG’s interest to agree to this waiver. The waiver was forced on AIG by the government, and specifically by Treasury and the New York Fed officials….working on behalf of their dear old alma mater.”
1. That isn’t in Greenberg’s lawsuit, so he doesn’t think that’s a tenable claim
2. AIG was dead with no rescue. This was not “sinking fast” this was DEAD if nothing was done fast. Look at the terms of the deal. The government had a lock on everything. AIG had to agree to everything. The board signed off on the deal, remember?
And the idea (favored in ZHish circles) that Goldman tanked AIG is nuts. It was ratings agency downgrades that forced the crisis in September, not Goldman. These CDOs they insured were on their way to being worth very little. The only reason they didn’t do a lot worse is QE that focused on MBS and massive Treasury cheerleading.
And this is EXACTLY WHY Harvard’s Martin Feldstein was a director at AIG FP, to avoid all this murky goings on and skulduggery.
Marty Feldstein did a remarkable job, of course, just as he had done at Eli Lilly as a director (at the time, largest criminal penalty levied against them in history), and at HCA before that (extraordinary sized penalty in out-of-court settlement for their Medicare/Medicaid fraud).
Yup, thanks to Prof. Feldstein and his directorship at AIG FP, the largest insurance swindle in history was avoided…..
Stunned to see speculation that Andrew Ross Sorkin might suffer from accuracy. I would have thought we were all past that kind of wild, unfounded speculation.
There is a difference between getting facts right and spinning those facts (and sometimes not considering or underplaying other relevant facts, a related phenomenon).
As indicated above, no one has disputed a major element of the Sorkin account, and too many people were involved in the AIG fundraising for that to be monstrously wrong. And I don’t see how the Fed funding AIG on the same terms as an private fundraising that fell short can be construed as some sort of plot to take advantage of AIG for the benefit of banks. Trust me, private creditors in a senior position would have been less merciful to the insurer. And they would have been incapable of ponying up another $37.8 billion on short notice.
By any chance, do you wish to purchase an Andrew “I Love Wall Street” Sorkin T-shirt?
Oopsy, forgot that I wasn’t an authorized dealer.
I’m not sure the lawsuit has no merit. I happened to be watching the Charlie Rose show the day before AIG was taken over – his guest was Hank Greenburg. Hank was a major shareholder, but not an officer in AIG at the time. The next day Charlie had him on the show again, because of what happened. There were several divisions in AIG and only one was in trouble. I thought at the time, they are stealing the profitable divisions from AIG.
Please read this summary of the ruling of the judge who threw the case out WITH PREJUDICE. Or try reading the post again.
Greenberg is a vindictive man (he is famed for his ruthlessness) and Charlie Rose pitches only softballs.
1. AIG was hugely insolvent at the holding company level. The subs were all regulated and could not send cash to the parent even if they had any. So no bailout, AIG would have gone bankrupt and Greenberg would have gotten NOTHING.
2. As indicated, some state insurance regulators also thought the subs were in trouble and wanted to shut them down. Treasury pleaded with them not to. The property & casualty subs in the US have massive cross guarantees. Shutting down one would likely have triggered cascading closures.
3. The idea that the regulators stole anything is disproven by the fact that
a. AIG tried selling these supposedly profitable divisions and got nowhere.
b. The authorities restructured the deal 3 times (including giving AIG an additional $37.8 billion in funds early on and giving it the “gift” of $35 billion in tax breaks later on). Each time the deal was restructured it was made MORE favorable to AIG.
Yves, I continue to wonder — and have asked in comments on various articles here — what WOULD have happened if AIG had been allowed to go into bankruptcy [or receivership or some sort of control by the Feds]?
Your description in the article deals with the “internal AIG” issues: firing management, firing directors, seizing property, etc.
But at the time, the public was treated to a relentless drumbeat of “external” catastrophes that would result from an AIG “failure:” every granny, cop, teacher, fireman or other person who had an insurance policy or pension would be stripped of it if AIG went down. I can’t recall the details of the other elements of the Doomsday Scenario, but I do recall there were lots of them. And endless “end of the financial world as we know it” scare statements.
Of course we were never allowed to discuss the BENEFITS of the Feds taking over AIG, as you’ve described them above; the only focus was on the COSTS. Thus I think it’s particularly important to debunk this continuing myth that aiding AIG, “whatever the cost,” somehow saved the financial world from Armageddon. This myth continues to be used to argue that “maybe there were problems, but we HAD to bail out AIG, because the risks to the country were so great.”
Can you write about this some day please?
“….Charlie Rose pitches only softballs.”
My comment is trivial. I’m not suggesting that Yves coined the term “pig fight.” What she did accomplish was elevating it into “pigfight,” a single word, as in “dogfight.” A word that shall live in infamy!
” …it will lead any successor bailouter in chief to be a lot more careful and demanding when he shovels out cash to wards of the state.”
Hmm – I was a bit confused by this – it seems to me it would lead a BiC to be less demanding when he shovels out cash, to keep the beneficiary from suing him ….
But, as fun as it may be to watch, somehow this whole thing seems like a lose-lose situation; a “win” by either side appears as a vindication for it, either a vindication for a crappy corp, or one for a crappy government, and a whole lot of money spent ….
David Boies – hmmmm, somehow i thought that, not only was he good, but he was a principled fellow – so why would he work for scumbags? Unless of course, the real point is not to defend an “aggrieved party” against a particular gov’t wrong, but to use this as a way of exposing the incestuous gov’t/bank relationship and, as bad as AIG is, it allows “standing” to pursue such a case, as JTF suggested above …. The unfortunate thing is, if Boies wins, AIG “wins”, and that could have unpleasant repercussions down the road … Even a “settlement” that gives AIG anything, ISTM, would be victory for corp ability to be able to extort gov’t., on top of it’s ability to buy it, as it makes the folks in enforcement, those who give a damn, that is, more timid about being anything less than complete doormats, or “we will get sued – and probably lose!”
So who are folks “routing for” ’cause somebody will claim a win ….
Its the payouts to GS and other counter parties that Hudson mentioned above that have always interested me. Too bad the NY judge finds it uninteresting.
The Fed took an 80% “equity” interest in AIG and assumed powers to direct the company in some ways. So Greenberg’s theory on the backdoor bailout is that the fed had a fiduciary obligation to shareholders. And breached that duty when it forced the AIG board to pay 100 cents on the dollar to (and failed to even attempt to negotiate with) GS and the other counterparties at a time when AIG was insolvent.
The NY judge dismissed this out of hand saying there is no fiduciary obligation from creditor to debtor. But the complaint alleges an equity stake by the fed so the fed was more than a creditor. Alas, the NY judge wants the case gone and so it is.
But hope floats. The Washington suit against the US Gov continues for now. There are always some unrelated skeletons out there and billionaires like Greenberg unavoidably have large stacks under their beds precipitating insomnia. Maybe one of these skeletons can be used to persuade Greenberg to fold on his Washington suit.
No, the original deal was a LOAN secured by all the assets of AIG and all the equity in the subs. The first restructuring kept it as a loan but eased up on some of the terms. So when the NY Fed negotiated with the CDS counterparties, it had no fiduciary duty. Really, if Greenberg is unhappy over that, he should sue AIG and its board as of 2008 for neglecting their duty of care to the shareholders and allowing the NY Fed to operate on their behalf.
I went through at length at the time how unwarranted it was to make deal more favorable to AIG during these various restructurings.
Therefore the NY Fed was not acting as an shareholder. The deal was converted eventually to an equity deal to lower interest payments. And given that the gov’t already had everything of value and AIG demonstrated it was unable to repay the loans (ie, the idea that the outstanding parent equity had any value was bollocks), it was also silly to convert it to equity and to convert it only to 79.9% (that was done apparently to eliminate interest payments and to keep from consolidating AIG debt on the USG balance sheet, I am not making that up).
Plus I don’t see how one set of shareholders has a fiduciary duty to others (someone can explain that to me). If that were the case, why aren’t pension funds and even major index fund investors obligated to join suits when activist shareholders go after crappy managements? The argument is effectively one of self-dealing, but these shares were public, the government’s restructurings, each and every one, made its position WORSE (favoring equity holders), it was extremely arm’s length in its dealings with AIG (tolerating its refusal to cut the pay of employees who had contracts and Benmosche’s intransigence) and its planned exit became a stock sale, aligning its interests with Greenberg’.
One more thing about the NY Judge. He dismissed Greenberg/Starr’s complaint against the Fed with prejudice. Somewhat unusual – plaintiffs are almost always given a chance to refile to fix the deficiencies in the original complaint. Twas a good day indeed for the Fed.
1. This wasn’t a “”NY judge”. This was a Federal judge and the case was filed in Southern District of NY. Federal judges are much higher caliber than state judges.
2. If you read the summaries of the ruling, he said even if you buy the factual allegations, they don’t have a case. That is why he dismissed it with prejudice. AIG hires the most famous litigator in the US and they come up with a nutty case seeking $25 billion in damages?
The NY Federal Judge is irrelevant. The real action is at the US Court for Federal Claims in DC(a “subject” matter court that probably less than 10 people have ever heard of). The government tried getting Greenberg’s case dismissed twice unsucessfully which means I suspect we are heading for trial. This is a major screwup on Treasury and the Fed. The problems is doubt Geithner and Bernanke themselves ever heard of the US Court for Federal Claims until recently. It is though right across Lafayette Park from the White House.
Public radio’s Marketplace did a story and an AIG ad parody yesterday. The parody’s at the end, at 2:07: http://www.marketplace.org/topics/business/aig-thanks-bailout-see-you-court
Yves, from what you describe, I hope this doesn’t go farther. It sounds like rich people being greedy. And then they will cry to the courts about how the big bad evil govt took their “small business” from them and almost bankrupted it. And that will carry over into the media and then the general public will think that ‘the bailouts were bad and they were forced on the good guys so the govt could take over’. So next time wall street blows up, they will be so arrogant that they don’t need bailing out, and the public will agree. And so the govt will step back. And of course, kaboom, the whole thing crashes and burns. And ppl like Dimon and godman Sachs will light their cigars off the ashes of the burning American economy.
“Too Big to Fail is revelatory, though not in the way Andrew Ross Sorkin intended. The book offers startling evidence that Hank Paulson and his deputies colluded with Goldman to create a liquidity crisis at AIG, and to manipulate the government funding a backdoor bailout of AIG’s CDO counterparties, most notably Goldman. It’s not that Sorkin’s sources recounted the truth. Quite the opposite. Rather, they told him stories that were so transparently dishonest that the truth emerges by way of negative implication. […]
Was AIG really too big to fail? Maybe if you worked for Goldman.”
This article sets out a different take on the crisis. I don’t know if you’d agree, Yves.
Sorkin makes out that “mistakes” were made, nothing more than mistakes. He paints a picture of Paulson and Geithner as tireless workers on behalf of the American people. Taking into account everything else we read and learn on a daily basis (fraud, corruption, collusion, etc.), I find that hard to believe.
Please. Goldman had the most accurate marks on the CDOs, all the other banks were holding them at fictively high marks to avoid exposing their own insolvency. And as pointed out by a reader above, it was the ratings agency downgrades that forced the collateral posting. Goldman wanted more than the other counterparties due to its more negative, and more accurate, marks. But they didn’t even get that. It was revealed that Goldman and AIG fought over the marks and Goldman only got a % of what it wanted.
This is sour grapes/conspiracy theory. The monolines had BETTER insurance contracts on CDOs (no requirement to post collateral) AND no securities lending portfolio with a $20 billion hole in it, and they failed too. Fiderer is well meaning but has spread a lot of disinformation on CDOs (this is a topic I have dug into in nauseating depth). I haven’t bothered debunking him because that would have served to treat a lot of his stuff more seriously that it warranted.
This is really bad halo effect (as in people/institutions are all bad or all good). Goldman is the source of many evils, but it is not the source of all evil. Everyone who wrote CDS on CDOs in any scale and kept them on their balance sheet died. AIG did that all on its own. And it was dumb enough to treat it as free money, they held NO capital, no reserves for losses against them, and got the dumbest regulator they could find (the OTS) to snooker while they did this.
“Any cost and embarrassment that the Administration suffers….”
This Administration is such an embarrassment it is incapable of embarrassment.
I hope this suit goes forward for all the same reasons but furthermore, I hope AIG wins. Not because I support these thieves in the slightest, but because nothing would so enrage the population of this country more than having one of these larcenous felons not only getting bailed out but then getting paid to be bailed out. Makes it all but impossible for politicians to come on TV with “aw shucks” looks on their faces and explain how they just had to cut Social Security for “our” debt problems.
In years prior to 2006 – to appease analysts and maintain leverage – AIG entered into “sham” transactions to affect the appearance on its balance sheet of $500 million of loan-loss reserves. SEC enforcement action ended with a $1.6 billion settlement and the removal of Greenberg and Chief Financial Officer Howard Smith. Both were charged by Spizter and, later, Cuomo, pursued the civil case and now Schneiderman is finishing it off.
In 2006-2007 Cumo appended additional charges to the 2006 lawsuit as the legacy of AIG “creative accounting” manifest itself again (when the housing market began to collapse), the mortgage pools AIG insured began to fall in value; it saw mounting losses on the loan pools it had insured – as did losses on AIG’s books and credit default swaps. In the first quarter of 2008 alone AIG losses were in excess of $20 billion.
Then, in FYE 2008, additional charges were added to the 2006 lawsuit – for damages over an auto warranty insurance transaction with Capco Reinsurance Co, which Schneiderman called a sham – as AIG posted cumulative losses of $18 billion, posted $5.3 billion in collateral against credit default swap contracts it had written in 2005-2007; posted an additional $4.4 billion in collateral, and when rating agencies lowered AIG’s ratings, it triggered an additional $14 billion collateral call as margin against AIG’s credit default swaps.
And, that’s when AIG didn’t have “the cash”.
Ever since charges were filed in 2006 (and subsequent chargs added), Greenberg has maintained reinsurer General Re Corp (Warren Buffett’s Berkshire Hathaway Inc.’s little entity) structured and executed the $500 million sham reinsurance agreement that allowed AIG to ‘improperly’ improve its reported reserves and that charges against him should be dismissed over this more egregious transaction committed by General Re Corp – the precursor and root cause of all AIG’s ills.
And, in the general of panic of 2008 (and the then perceive notion that someone/thing had to be a fall guy for the whole debacle), General Re Corp might have agreed with Greenberg’s point of view. So, it’s not a stretch to imagine that the suddenly ….‘discovered tens of billions of physical bonds that AIG had apparently not recorded on the balance sheet’ ….came from General Re Corp – – given that the fallout from a collapse would almost certainly have widened the breadth and depth of any post-apocalypse investigation and subsequent charges. And, in all likelihood, the transfer would have been facilitated by the Treasury – to keep it of the radar.
Fast forward to May 2012 – New York State Supreme Court Justice rejected Greenberg’s bid to dismiss claims over a “better-known transaction” with reinsurer General Re Corp. Greenberg and Smith have asked the Court of Appeals, to dismiss the entire case, but it’s not going to happen. Greenberg‘s now really pissed – believing he’s suffering all kinds of pain and humiliation for post 2005/6 shit, that didn’t even happen on his watch. So, Greenberg is left with only one option: to widen the case up as much as possible; give the prosecution and the defence any and every reason to trawl through treasury records, General Re Corp records and, if Schneiderman continues, bring the whole edifice down on them.