The story the other day that AIG was considering suing the taxpayers because the taxpayers did not give them a nice enough bailout was so vomit-inducing that I did not even look much further into it.
A couple of readers whom I trust both wrote me to say that the issues here are a bit more complex than I made them out to be. The Wall Street Journal sounds a similar note today:
Every taxpayer and shareholder should be rooting for this case to go to trial. It addresses an important Constitutional question: When does the federal government have the authority to take over a private business? The question looms larger since the 2010 passage of the Dodd-Frank law, which gave the feds new powers to seize companies they believe pose risks to the financial system.
That vague concept of "systemic risk" was the justification for the AIG intervention in September 2008. In the midst of the financial crisis, the federal government seized the faltering insurance giant and poured taxpayer money into it. The government then used AIG as a vehicle to bail out other financial institutions.
But the government never received the approval of AIG's owners. The government first delayed a shareholder vote, then held one and lost it in 2009, and then ignored the results and allowed itself to vote as if the common shareholders had approved the deal.
In 2011 Mr. Greenberg's Starr International, a major AIG shareholder, filed a class-action suit in the U.S. Court of Federal Claims in Washington alleging a violation of its Constitutional rights. Specifically, Starr cites the Fifth Amendment, which holds that private property shall not "be taken for public use, without just compensation." The original rescue loans from the government required AIG to pay a 14.5% interest rate and were fully secured by AIG assets. So when the government also demanded control of 79.9% of AIG's equity, where was the compensation?
Greenberg is apparently arguing that he would have preferred chapter 11 and that the company and its original shareholders likely would have gotten a better deal. Perhaps. So I will tone down my outrage against Greenberg, I suppose. But nothing about this makes me any happier about bailouts and corporate cronyism that are endemic in this administration.