And one bonus reason.
Shameless lawsuits don’t get much more shameless than celebrity lawyer David Boies’s action against the U.S. government over the 2008 financial bailout. On behalf of a major shareholder in AIG, the insurance giant that received $85 billion in taxpayer money in 2008, Boies is seeking $40 billion in damages, on the argument that the government wasn’t nice enough when rescuing the possibly insolvent company. The plaintiff claims that the government did not consider all options prior to seizing AIG, and that it extracted unduly harsh terms from the company in exchange for its help.
The 2008 financial bailouts were very unpopular at the time and have remained so over six solid years of post-bailout economic stagnation and financial-market frenzy. With the anniversary of the Henry Paulson Treasury Department’s $700 billion Troubled Asset Relief Program (TARP) falling this month, the spectacle of a billionaire (Maurice “Hank” Greenberg, whose Starr International Company, Inc. was a major AIG shareholder) demanding better treatment in a bailout brings out the torches.
“The ultimate legal morass,” “a bear” that is “considered a long shot by many legal experts” and “is already costing U.S. taxpayers a considerable sum,” fumes Alex MacGillis in The New Republic.
The suit’s real purpose of “aiding the forces of concentrated wealth and privilege” is the rational kernel of dialectic Salon’s Luke Brinker finds within the mystical shell.
“As ridiculous as it is entertaining,” concludes Zachary Karabell of Slate.
But here’s the funny thing (not funny ha ha, funny strange). Boies is not doing badly with the case. The AIG shareholders could pull out a win, for at least five reasons — with a sixth reason thrown in because these days you never know who’s going to sue for more.
1. Boies is the way-better lawyer
The lineup of witnesses includes some of the oiliest technocrats in the history of this country: then–secretary of the Treasury Paulson; then–New York Federal Reserve president Tim Geithner; then–chairman of the Federal Reserve Ben Bernanke; and both current and former general counsels for the Fed. Yet with all of them, Boies has been able either to extract statements that weaken the government’s defense or to lead the witness through long and ultimately credibility-shrinking gauntlets. Paulson admitted Monday that the harsh terms imposed on AIG were done with an eye toward slaking what he imagined to be a popular thirst for punishment of rich people. Geithner conceded the same Wednesday and acknowledged that the government ignored other, better offers for AIG prior to acquiring an 80 percent stake in the company. Bernanke’s performance Thursday was lifeless and foggy, with the former Fed chief being described by USA Today’s Paul Davidson as “nervous” and giving “terse responses.” Last week, Federal Reserve Bank of New York general counsel Thomas Baxter noted that in 2008 he considered the interest rate the government offered to AIG “loan sharky.”
Boies moves slowly, but he has a strong sense for the witnesses’ character flaws: Paulson’s vanity and fearfulness, Geithner’s irritability, Bernanke’s wonkish inarticulateness. It is especially effective with people whose entire careers are built on the illusion that they have deep mastery of technical detail. Leading Geithner through a long Q&A Thursday about the hiring of former Allstate chief operating officer Ed Liddy to take over AIG, Boies fairly conclusively demonstrated Geithner’s ignorance of what Allstate’s business — and to some extent AIG’s — even was. The usually fluent Geithner was also unable to shoot down a comment he reportedly made to Greenberg that strongly suggests the government knew the insurance giant wasn’t dying but was invested in making it look weaker than it actually was: “You were the only one who was right about the value of AIG.” Geithner joked about the comment and apparently aimed to communicate to the court that he was being sarcastic when he said it. But there are no emoticons in a court of law. The idea that Geithner told Greenberg this in earnest is still live.
2. It is not the business of a republic to ’scapegoat’ companies
“It certainly was a scapegoat for Wall Street and all the bad practices people were angry about,” Paulson testified Monday. “There was a clash between markets and politics.”
Paulson is the last person on this planet who should be judging what the American people were angry about. The 2008 bailouts were extremely unpopular with voters of both parties. Asked in a September 2008 Fox News poll whether the financial crisis was “a good time for higher taxes and a larger government or . . . a good time for lower taxes and a smaller government,” two-thirds of Democrats chose lower/smaller. Nearly equal numbers of Democrats and Republicans thought the bailout would have either little or negative effect. In an October Fox News/Opinion Dynamics poll, 53 percent of respondents said government involvement was “not part of the solution at all.” Around the same time, 55 percent opposed any government-funded bailout in a Los Angeles Times/Bloomberg survey. A full 77 percent of respondents told CNN/Opinion Research that the bailout would primarily reward those responsible for the downturn. The “people” did not even support the kind of liberal-seeming rescue of mortgage borrowers Paulson appears to think was less controversial. The Federal Housing Finance Regulatory Reform Act of 2008 was purportedly aimed at assisting homeowners rather than greedy Wall Street tycoons. But even that one the voters didn’t want. Polls early in 2008 that specifically tried to measure support for bailing out homeowners found the public opposed by nearly a 2-to-1 margin. Representative Kevin McCarthy (R., Calif.), whose district at the time had one of the highest foreclosure rates in the country, nonetheless noted in 2008 that his constituent mail was running “50 to 1: ‘Don’t bail these people out.’”
Paulson might counter that this was a case where a leader needs to ignore popular will in order to rescue the economy. That is not being decided in the court, of course — though the apparently permanent hobbling of the American economy argues for the conclusion (supported recently by Nobel-winning economist Vernon Smith) that the unwashed masses were right, that the rescue of big financial players merely traded a market-clearing crash and recovery for permanent stagnation.
But even if we take seriously Paulson’s belief that the rescue had to happen, it is not the business of government to single entities out for vituperation. Bills of attainder are forbidden by the Constitution, and sacrificing a company to what a cabinet official believes is the public’s bloodlust is not acceptable behavior. Lost amid the hubbub about excessive bonuses is the fact that AIG has been eviscerated since 2008, forced to sell many profitable lines just to buy itself back from the government. The good news is supposed to be that the taxpayers were reportedly made whole on the government’s $85 billion investment. (Always take claims like that with a grain of salt. If I got a rebate on my taxes, I seem to have missed it.) Had the company willingly entered into this contract with the government, it would have no cause for complaint. But the trial has gone some way toward demonstrating that AIG’s shareholders were forced to accept government help.
3. The government itself erased any bright lines among Too-Big-To-Fail institutions
The AIG suit seems at first blush not to pass the BS test, for an obvious reason: AIG is not a bank, and therefore it was quite reasonable to treat it differently when including the insurance company in a large bank bailout.
Unfortunately, in 2008, Bernanke, Paulson and Geithner spent an enormous amount of time and energy (and money — did I mention that they spent a lot of money?) arguing that this kind of distinction did not matter, and they have, in bits and pieces, made this view clear again during the trial. All the apocalyptic rhetoric with which these male hysterics tried to scare people focused on the interconnectedness of the financial markets, the idea that there were so many externalities and contingencies and third-party dependencies that every American had an intimate stake in the preservation of the financial system in its existing form. “On September 16, [2008],” Bernanke said in characteristic published statements he claimed Thursday not to remember making, “AIG, the largest multidimensional insurance company in the world, which had been selling credit insurance, came under attack from people demanding cash either through margin requirements or short-term funding.”
So which is it? If AIG was as central as Citigroup to the functioning of the economic system, and if the Fed and Treasury were within their legal authority in bailing it out (neither of these points is settled, by the way), then there is no clear case for setting up AIG for much harsher terms. Bernanke Thursday described Bagehot’s rule as “lend freely at a penalty rate,” yet he was happy to forget the second part of that formulation when lending to Citi and Bank of America, whose books at the time strongly suggested they were less than ideal credit risks. But the scapegoat was treated differently. The Fed actually tried to pressure AIG to accept its terms by charging it a whopping 8.5 percent rate while holding out the prospect of a much lower rate once the deal was signed. What’s amazing is that all the government witnesses acknowledge this, often proudly, with no apparent understanding of how it makes the plaintiff’s case.
4. The court is not laughing
The media have had quite a bit of fun with the “ridiculous” and “absurdist” trial, but Judge Thomas C. Wheeler doesn’t seem to think the case is laughable on its face. While he narrowed the scope of the suit somewhat prior to trial, Wheeler allowed it to go through, and with a witness list that includes a Who’s Who of the central planners who killed the American free market. I have not been able to draw any strong patterns from Wheeler’s previous opinions or from decisions by the U.S. Court of Federal Claims (an offshoot of the court created by President Franklin Pierce as the venue where private suits against the government are heard). But he has been quite broad in the trial’s action. It’s scheduled to go six weeks, and Wheeler has allowed extensive discovery, including evidence drawn from the Fed’s double-secret “Doomsday Book.” The trial is moving at a very leisurely pace, which seems to be just the way Boies wants it.
5. It’s 2014: Everybody gets both a handout and the right to demand more
Back in the innocent days of late 2008, I argued in another publication that the TARP, whether it “succeeded” or not, represented a conceptual change in the relationship of the private market to the government, a no-return gallop down the everybody-on-welfare path America has been traveling, sometimes at a trot, sometimes at a canter, since at least the Progressive era. Wells Fargo president Richard Kovacevich had just attempted to take an honorable stand against the government’s forced largesse, but in the end, he too went along, and he’d have been a fool not to. “And maybe I’d be a fool not to default on my mortgage now, just to see what portion of my lost property value Wells Fargo will be willing to eat,” I wrote. “Maybe the owner of a poorly run automaker ought to apply for protection . . . There will be other [demands for bailouts in the name of fairness], newly credible calls for nationalized health care, Washington-led energy ‘investments . . . ’” Of course, within 24 months that wild-eyed science-fiction dystopia had become reality in all its particulars (except that, like 90 percent of Americans even in the worst of times, I never defaulted on my mortgage).
So why shouldn’t AIG’s shareholders try to wet their beaks one more time? It’s now the American way.
6. You still have the right to challenge a government taking (special bonus reason)
In an excellent piece in Thursday’s New York Post, Seth Lipsky points out that even billionaire Hank Greenberg has rights under the Fifth Amendment:
The Fifth, which contains our bedrock protection of private-property rights, is at the heart of this case.
It says that no person shall be deprived of property without due process of law and, if the property is taken for public use, just compensation. Greenberg reckons he was denied both.
The Fed seized AIG in September 2008. The job started to go down on the 16th, when Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and other officials met with key members of Congress.
According to Paulson’s own memoir, Sen. Chris Dodd twice asked “how the Fed had the authority to lend to an insurance company and seize control of it.” Bernanke insisted the law allowed it in “unusual and exigent circumstances.”
To a degree that was not obvious in the beginning, the AIG trial is turning on just how much force the government used in involving itself in the affairs of this private company. This is a non-trivial point, and it’s worth having a public argument about. Both Geithner and Paulson in their respective memoirs congratulate themselves for their forceful response to a crisis that they all but claim would have wiped out all life in the solar system within days. Those self-estimates have never really been challenged, until now. Whether or not the case goes Boies’s way, he’s done America a service by reopening an argument that the American people lost.
— Tim Cavanaugh is news editor of National Review Online. Follow him on Twitter and Facebook.