Hank Greenberg was right all along. And he’s forced the federal government to eat a huge helping of crow.
Greenberg won a stunning repudiation of the government’s tactics in the 2008 bailout of American International Group Inc. when U.S. Claims Judge Thomas Wheeler wrote that “the weight of the evidence demonstrates that the government treated AIG much more harshly than other institutions in need of financial assistance.”
Though the Monday ruling was mixed for Greenberg because Wheeler awarded neither him nor shareholders damages, the decision caps a tenacious four-year battle that many of Greenberg’s critics had dismissed from the start as the pleadings of a bitter old man. Greenberg, now 90, had insisted all along he would prevail on the merits.
Wheeler’s language is unequivocal: “While the government publicly singled out AIG as the poster child for causing the September 2008 economic crisis, the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions.”
And even if Greenberg and shareholders don’t get a penny -- Wheeler decided AIG would have gone bust without intervention, flawed as it was -- the lawsuit may change forever how the Fed responds to future bailouts, severely curbing the terms it can impose.
Greenberg, representing 275,000 shareholders, also complained that the Federal Reserve Bank of New York, the lead actor in the bailout, imposed an extortionate interest rate on an initial $85 billion bailout loan and illegally demanded an 80 percent stake in the company as collateral.
“The Government’s justification for taking control of AIG’s ownership and running its business operations appears to have been entirely misplaced,” Wheeler said in his 75-page opinion. “The Government did not demand shareholder equity, high interest rates, or voting control of any entity except AIG.”
In fact, Wheeler found, the Fed had never demanded such equity ownership in the 75 years since its charter was enacted.
Wheeler agreed that the government maneuvered things so that there would be no vote on its rescue measures by shareholders such as Greenberg and that AIG managers who had succeeded Greenberg, the insurer’s onetime chief executive officer, had agreed to the bailout under duress.
Summing up, Wheeler said: “The Government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose,”
On the other hand, with heroic history of the bailout rewritten more to Greenberg’s liking, the judge concluded that without it New York-based AIG shares would have been worth a big fat zero.
At the same time, while the government doesn’t have to dig into its treasury to pay out billions, Wheeler did handcuff the Fed and other officials from trying to pull the same trick the next time there is a financial crisis.
On interest rates, for example, it must do what its charter says and establish a loan interest rate “fixed with a view of accommodating commerce and business.” Not one that punishes the poster child of financial excess, which was how AIG was characterized at the time.
He also rejected a government argument that it has the authority to act as it did based on what its charter calls its “incidental powers,” a murky provision that the Fed had fought for decades to keep murky. Now we have a bright line.
Wheeler lamented that he can’t do much to punish the government for acting illegally -- and making a $22.7 billion profit in the process. But that was not part of Greenberg’s lawsuit demands, which didn’t call for giving that money back -- what lawyers call disgorgement.
Wheeler also left the government with a little threat for the future.
“A troubling feature of this outcome is that the government is able to avoid any damages notwithstanding its plain violations of the Federal Reserve Act,” he said. “Any time the government saves a private enterprise from bankruptcy through an emergency loan, as here, it can essentially impose whatever terms it wishes without fear of reprisal.”
“With some reluctance, the court must leave that question for another day,” he said.
Appeals on either side could change the assessment of this historic case. But for now it’s fair to say both sides won, and both sides lost.