Rescued by a Bailout, A.I.G. May Sue Its Savior
dealbook.nytimes.com
dealbook.nytimes.com
The highlight of the article:
> Judge Paul A. Engelmayer wrote that while Starr’s complaint “paints a portrait of government treachery worthy of an Oliver Stone movie,” the company “voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy.”
Sure, the terms might have seemed "unfair" but what could they possibly expect? It was "accept some harsh terms for royally screwing up or go under." It's not like they were some innocent bystander; they made some really stupid decisions and paid the price.
Side note: those "thank you" commercials feel so terribly disingenuous;
It's amazing to me how the USA is still so innovative despite that legal insecurity.
If you are about to die and the only person who could save you, offers to do so, but asks you to agree to something reprehensible in exchange for saving you, what do you do?
At the risk of creating a strawman (the goal is illustration not substitution) let us construct a scenario, you're hanging by a rope which is breaking, you have maybe 10 minutes before it breaks. And the only person who can save you says, "Ok, I'll save you on the condition that in the near future I will come to you and ask you to do something for me, and you must agree to do what ever I ask."
What if your savior asks you to blow up an airplane? Or sell your spouse into the sex trade? or any of a dozen things you would never do voluntarily and are counter to your values. This is the kind of thing that novelists use to create tension, its very effective.
So AIG claims here that the Government went too far in its ask, and has crossed some line into moral turpitude. Who is the bad guy? the good guy? Doesn't really matter though, its one of those chickens they talk about that come back to roost. Never a good thing.
Boy: Do not try and recover the money. That's impossible. Instead only try to realize the truth.
Neo: What truth?
Boy: There is no money.
Neo: There is no money?
Boy: Then you'll see that it is not the banks that are broke, it is only yourself.
Back in reality, most banks have paid back their TARP funds, as did AIG, generating a hefty return over 3 years to the Treasury. You know what bailout is still significantly in the red? The auto industry. But we hear little about that because those guys don't work on Wall Street.
In all fairness, I do not remember "the auto industry" almost bringing the whole capitalistic system (and with it our Western world) close to a grinding halt, according to what we were lead to believe, in the last 5 to 10 years. And after the gang-rape that GM did over here in Germany and continues to do now, oh yes you do hear about them here.
> a suit is a parasitcal criminal.
From what I have seen, the average folks still buy into the opposite extreme where every suit and especially every banker is some sort of god-like being, far removed from our mere mortal realm and surely a gravely respectable person, much more so than the average Joe. Quite frankly, I find the extreme prevalent on the internet to be far more beneficial because it moves things into a direction where the strange money-fetish has to make way for a more realistic view of this profession so prone to scams, frauds, "gamblings", cut-necks and other shenanigans. It will hopefully help people to view a bank not much different from some regular store, a place offering a service, regardless of dress code.
Also, I do not think the auto industry runs Stasi-like intelligence operations where they constantly collect and pool your most private and financial information and credit ratings and use all that to evaluate how they are going to deal with and sell to you - or potentially put you out on the street.
As someone unfortunate enough to be working in IT in this "parasitic" industry I cannot see this industry getting hit and dis-credited hard enough after they have repeatedly gotten away with much more than murder over decades. There is no reason other than money that anyone works in this and it cannot be a coincident that they pay much more than a lot of other industries; and I don't think there are a lot of other industries with a more backward, pre-history corporate and work culture.
I don't care about "could haves". These industries were all bailed out; some returned a profit to the taxpayers, some are still in the red without a chance of paying any of it back. Yet we continuously denigrate the industry that paid the money back as the "criminals".
>"From what I have seen, the average folks still buy into the opposite extreme"
Really? You must be living in a different world than I am. Just skim this thread, or any thread on Reddit...
>"Also, I do not think the auto industry runs Stasi-like intelligence operations where they constantly collect and pool your most private and financial information and credit ratings and use all that to evaluate how they are going to deal with and sell to you - or potentially put you out on the street."
Banks aren't planning to put you on the street. Where does this come from? Banks want to lend money and be paid back, with interest. This whole debacle worked out really well for them. They only had something like 3 trillion wiped from their collective balance sheets.
By the way, the auto-industry parents run huge financial companies.
>"it cannot be a coincident that they pay much more than a lot of other industries"
Sort of like IT? Or medicine?
Yes, I am. And I hope you do realize that neither of those two are even remotely representative for the vast masses of average folks out there.
Their finance departments were used for much more than car loans.
The industry needed an infusion of cash, and they spread it around a bunch of the biggest players.
Ford ticked up after not taking a handout, larger well governed banks had no such opportunity.
Deposits up to $100K (or thereabouts) were insured by the FDIC, so even under a run, the savers in the bad banks were not going to be left high and dry; and perhaps wiser about where they put their money in the future. Perhaps the Federal Government didn't want to see the FDIC invoked.
Instead, a precedent was set; bad behavior was not punished (by way of market action), and good behavior is tainted by association (via political demonizing).
To continue the metaphor, it's like if a guy conned your family out of their life savings, and then the Government generously seized your home in exchange for paying the guy who scammed you the rest of the money you owed him which you couldn't afford to pay.
Edit: see, for instance, http://www.huffingtonpost.com/david-fiderer/the-cdos-that-de...
Yes, the government bailout of AIG went towards paying off their counterparties. But those were actual debts that AIG owed because of their own stupidity and greed. Had AIG gone bankrupt instead, the counterparties would not have received anywhere near full payment, and there's a compelling case to be made that that's how it should have been. But this idea that AIG somehow got screwed by having to pay off their shitty bets with our money is laughable and disgusting. If the shareholders want to sue someone, it should be their own board.
If the government were a payday loan shop and gouging thousands of independent companies everyday, your analogy would hold water. Till then, this is merely a straw-man argument.
Also, I got my analogy wrong. It would be more like if the Government seized 92% of your house in exchange for loaning you the money to pay off the scammer with interest, which they knew you could repay.
Even after the massive swindle, AIG's problem was liquidity and not insolvency - they had enough assets to repay everyone and if they'd actually gone bankrupt, the shareholders may well have come out better in the end, but their counterparties would've been screwed because they'd have had to have waited for the bankrupcy proceedings to get paid.
Conflating their position with calamitous death seems borderline disingenuous. You're soliciting emotional reactions to an unforeseeable emergency. But AIG was in a situation that years of rational business decisions put in the cards. They not only should have known it could happen, but they'd also know that their gains from having done it far outweighed the personal potential losses.
Which is almost certainly why the gambles were made in the first place and puts the lie to any analogy to human desperation in a split-second survival scenario.
In this case, a corporate liquidation is exactly like death, the assets are divided up amongst the creditors and the company ceases to exist.
It just isn't the same. Not remotely. There's no parallel.
AIG, via its decision-makers, took the bet that the bailout would work out for them for the same reason they took the bets that put them into that position and the same reason they're taking the bet that it's worth suing the federal government: a sober analysis of risk/reward suggested it was the best business move.
No-one acted out of desperation. No-one was going to be hung for their misdeeds. No-one was jumping out a window for grief or committing seppuku for shame.
But the humans making the decision to accept the deal do not feel fear that they will cease to exist and they will leave their loved ones behind. They don't have the animal fear of physical pain either. Unless they have been terribly reckless with their personal finances, they are not at any risk of actual death. At most, they have dread of embarrassment and the shame of having failed the trust of their employees.
The resemblance between this and becoming worm-food is uncanny, though.
If you actually believe this, then I believe you are a terrible person.
The very fact that the government even stepped in is a major exception to the system as a whole, so this is more like the flying spaghetti monster sending you back to earth after your suicide and you then wanting to sue His Noodly Appendage for not having been able to play the lottery on the day of your death and/or not picking up Charon's ferry bill for you.
And there is no law against offering a tough deal when the odds are stacked for you and your partner has their back against the wall - a principle the banks and insurances use and (strongly) abuse each and every day against those who have no choice. Again, had this been some even-bigger-money-giant buying AIG out and then running the place into the ground again, it would have also been the end of it.
They are twisting a rule that was obviously meant to keep capitalism and business separate from government just to get some money out of it when without that governmental divine intervention they would not even be existent in the first place.
I am all for playing devil's advocate and looking at the flip-side of things and great you made an attempt but, sorry, this is wrong on so many levels, there is no right way of looking at it.
You've decided to push a rather nice antique couch off the back of a high-flying plane for reasons all your own. While it falls, someone radios you and says, "look, I'll snatch this couch out of the air with this really expensive-to-fly jet with grappling hooks I have, but afterwards you'll owe me 80% of what you make selling it or renting it to those weird antique museums". Turns out the guy calling you really just wants to prevent the couch from crashing into a residential area, but he figures that in order to afford this crazy couch-saving stunt, he needs a big chunk of equity in the couch, which will be splinters if he doesn't save it anyway. And you, having decided that dropping a valuable piece of furniture from 30,000 feet was a bad idea after all, take the deal.
It turns out that you made a good move, because later you sell the couch and make lots of money, a lot of which goes to the crazy couch-saver guy. And you still think the deal sucks, so much so that, apparently, it was illegal for some reason, and you should get to keep a higher percentage of the couch's proceeds.
Now, what part of that seems like duress?
Man, if I were a timetravel agency, I'd be selling front-row tickets to the 21st century as "comedy night".
I see it differently: if you are walking down the street and see that a shop is closing its doors, do you help the owner to stay open knowing that he can sue you later?
The comments around this question have been really interesting to watch. But the underlying subtext of corporations 'good' vs 'bad' and the level of seriousness it entails when they are dissolved is even more amazing.
First off, on a discussion group that is pretty much focused on creating innovation through technology, the concept of corporations is pretty much fundamental. If you hate corporations and everything they stand for then starting one should be the last thing on your mind. Further helping other people create theirs should also be pretty low on your list. Without the existence of these collectives there is no framework for seed rounds, 'happy exits', or IPOs. There is no 'acqui-hire' and no structure in which to build a vision that is greater than yourself.
But the second bit that must be understood is that "corporations" are composed of people, just as a marriage is composed of people. These companies are things that people invest time, emotion, and money into to further their goals. When they fail, people feel badly, sometimes really badly about that.
If you decide to live in the community of people who build companies from the ground up, or work to make them great, then someone you know personally will commit suicide when they come to the realization that their company has failed and they could have prevented it. I know it is hard to imagine this as a young person who has yet to face their own mortality in any serious way, but please try to understand this scenario.
You have been working with folks for 3, 4, 5, or maybe 10 years on building something together. Imagine someone you knew in 6th grade is is now graduating with you in college. There are challenges that you don't think you can overcome, personal hardships that you weather together, shared victories you've achieved. You've shared in people making progress toward their life goals, perhaps they have saved up enough to buy their first house, maybe their kids have made it into an Ivy League college, maybe their kids have married your kids. And now, all of this and more is going to be destroyed. These people, these friends and colleagues, are going to have their lives turned upside down, and some more than others. Some will lose their houses, their kids will be told they have to come home because there is no money for school, reputations will be smeared, and good people who did nothing but great work will be villified by a public which has been fed information in a way that creates the most rage and the least understanding.
If you, latinohere, or anyone else reading this, ever get the "opportunity" to be standing at that abyss and look into it, you may feel that your own death is actually preferable than having to live with that. Sadly I know friends who decided it wasn't worth it and they ended their own lives rather than live with the knowledge they had led people into a place that turned out not as they had hoped. And in that moment, that moment of decision, do you take this "deal" which converts a bad outcome to a slightly less bad outcome. it really comes down to people living and dying. Corporation or not, real people who have to live with themselves the day after and the day after that.
Not to mention misdirected. The implication is that the American people are the ones being thanked, as if they had any choice in the matter.
"It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.”
From a different HuffPo article for context:
"When news first broke in 2009 that Goldman had been an indirect beneficiary of the AIG bailout, collecting the full value of some $14 billion in outstanding insurance polices it held with the firm, the officials who brokered the deal justified these terms as a necessary stabilizer for the broader financial system."
http://www.huffingtonpost.com/2011/01/26/goldman-sachs-aig-b...
Say what you will about A.I.G being a douche joining a lawsuit against the Gov. Some ex-Goldman Sachs people brokered a deal that made Goldman whole at the cost we-the-people and with bad terms to A.I.G.
There is some legitimacy to that claim -- whether or not in the public perception it looks like AIG biting the hand.
Given the fiscal situation I'm sure they would have seen the error of their ways. AIG being liquidated would have been possibly the worst thing for AIG's creditors and the best outcome possible for the people of the United States.
The government used the assets of AIG for it's own purposes and did not compensate the shareholders, the government was perfectly at liberty to let the institution collapse, but instead chose to prop it up.
Do you really think that the banks (already in the brink of bankruptcy) would have ponied up tens of billions so AIG would continue to operate?
I don't think you know how much of the world's finance AIG controlled via their insurance. http://en.wikipedia.org/wiki/American_International_Group#Fe...
For the same reason the government gave AIG $187 billion, the banks would have figured out how to craft a deal such that to the public it appeared that AIG was a viable financial entity.
Around the same time US Treasury Secretary Hank Paulson was begging people on his knees for the rescue of Wall Street (http://www.guardian.co.uk/business/2008/sep/27/wallstreet.us...) and no-one generally had any idea if the Western financial system as it was right then had much to live. I say that AIG depending on (private) third parties for its rescue would have meant certain bankruptcy.
So why didn't they? Maybe because they were BROKE and people were wondering which bank would collapse the next morning. AIG gobbled over $100 billion in a month or so, otherwise they would have defaulted and everything would've been toast.
That same week even the mighty Goldman Sachs kissed Buffet's ring and got $5 billion from him, yet you expect dozens of top banks, with different exposures and interests, getting together to put up $150+ billion in a few hours. This is recent and I remember it really well.
That misses the point, I think. It's perfectly fair for you as a taxpayer to complain that it's a sweetheart deal for Goldman and shouldn't be where your money goes. That's all fine, but it doesn't help AIG's claim that it's been mistreated.
The whole purpose of bailing out an insurance company is to make sure it can pay out its policies. The public has no interest in helping AIG's shareholders per se, so of course the government going to drive a deal that screws them as much as possible in the process of getting what it wants. And it should -- like the company, if it's going to make a deal, it should make one that best serves its stakeholders. And if AIG thought the deal sucked, it should have said no and entered bankruptcy (a perfectly reasonable thing for a company to do). But it took the deal because the board, who represents the shareholders, thought that was the better of its two options. So now their stuck with a deal that they wish were better, but I don't see why anyone owes them that.
In other words, maybe the public's best option was to let AIG fail, and maybe AIG's best option was to let AIG fail, but I don't see the scenario in which the government is being unfair to AIG.
Maybe there was something about the bailout being really a Goldman bailout, and if someone can prove actual corruption there, maybe there could be grounds for the Government to sue Goldman.
But there is no reason here the Government would owe AIG anything out of this.
Just because AIG ended up being some half-lucky and double-dumb middleman does not give them any legitimacy for such claims what-so-ever. They are nothing but lucky to still be there and the whole governmental stepping-in is not even a natural part of the system, while bankruptcy very, very much is.
In this case we're talking about extremely savvy investors who were given an offer that they accepted eyes wide open. If this was a bum deal, any anger should be directed at the directors/board rather than the government.
That completely breaks the comparison you're trying to draw. Paying someone less than minimum wage and paying them something different because of their gender or race are all explicitly illegal. A tough deal offered to AIG is none of those things, and it does not follow from "these specific things are illegal" that "any generalization of those things is therefore illegal". If the comparison weren't so speciously constructed, I'd also complain that comparing the behavior of the government towards a multi-billion dollar corporation to the behavior of lenders towards a poor person is pretty lame.
Legality aside, the actual advantage the US government had was that no one else wanted to loan AIG money. That's a pretty good reason to give them tough terms. The US would just be making a sweetheart deal with AIG otherwise. One way to think about it is that the most obvious alternative is for the US not to have bailed them out at all.
>>>> Legality aside, the actual advantage the US government had was that no one else wanted to loan AIG money. That's a pretty good reason to give them tough terms.
Do you always accept this premise? Say, nobody would be willing to lend you money - because of recent bankruptcy. Would it be OK for some shady outfit to offer you a 30% a day loan, and have you agree that if you don't return it all they get to beat you up at their heart's content? If you're hungry enough you may voluntarily agree, would it make you OK? Would it make it OK if you were sick and nobody would agree to treat you without upfront payment, but one establishment would agree if you promise to give them 95% of all your future income - would it be fine then? Or is it fine only when done to other people, especially ones investing in an evil corporation?
>>>> The US would just be making a sweetheart deal with AIG otherwise.
There's a lot of way between unfair deal and sweetheart deal. Most deals fall into the spectrum between them.
They also have the same mandate as the board of any other publicly traded company: maximize value for the shareholders.
http://blogs.law.harvard.edu/corpgov/2012/06/26/the-sharehol...
And, the AIG CEO has publicly said his goal is to make his company as profitable as possible, and that may mean going to court.
That doesn't bear on whether they could (jokingly obv.) claim to be an unsophisticated victim of predatory lending, only the board at the time matters for that.
The board can run the company the way they want, barring gross misconduct or fraud, the shareholders had their say at the AGM.
I feel like these conversations are so one-sided: Why is it always this?
Yes, predatory lending happened. But you know what else happened? People fraudulently reported personal information (with little verification required, which was a government mandate) to get mortgages. People who knew they had no chance in hell to repay the mortgage, but thought they could "flip" the house in time, or that prices would never fall. I can't tell you how many stories I've read or listened to where people tell their tale of going into the bank, reporting their income way too high (yes, sometimes thanks to a pushy mortgage broker) and getting a massive mortgage. All with no job. This is fraud, but the banks don't worry too much, because worst case scenario they take back the property.
The papers you sign are your responsibility. That goes for both parties.
> The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain.
Which is reiterated by the expert they interviewed:
> “On the one hand, from a corporate governance perspective, it appears they’re being extra cautious and careful,” said Frank Partnoy, a former banker who is now a professor of law and finance at the University of San Diego School of Law. “On the other hand, it’s a slap in the face to the taxpayer and the government.”
It may seem reprehensible, but they are obligated by law as a public company with obligations to its shareholders to at least consider it. Whether they join or not, and under what merits, should be how we judge them.
http://news.ycombinator.com/item?id=5025234
It's both mindblowing and disgusting the extent which banks have manipulated things to the point where they have their cake and eat it too.
Maybe I just find it hard to think its anything other than greed when the company involved is an organised scam... er insurance company. ;)
This impacts non-shareholders who inderiectly impacted by less money in goverment to finance other area's.
Company pays back the bailout and now the shareholders are crying they want more money as they think it was unfair in the first place.
Can we just label them financial terroists and put them all in orange oneseys and then see who is laughing about it.
Bottom line what a bunch of utter cnuts. I hope the goverment and the people educate them fully and don't use any lube whilst doing it.
There was a greater than 0% chance that the government would end up with 0$ (losing everything they "invested"). In order for them to agree to take on that risk, they needed a suitable interest rate in return. At the time the deal was made, comparable "junk" bonds were at or above that interest rate. It's just the return that investors want for such a risky investment. It's not at all like racism.
>>>> In order for them to agree to take on that risk, they needed a suitable interest rate in return.
Of course. Nobody doubts that and nobody claims the money should have been provided for free. What is argued is the conditions were unfairly onerous. This may be pure bullshit and conditions might have been just fine, but voluntarity does not prove or disprove it, it is irrelevant once you accept, as US law does, that voluntary deals can be not OK. You can not have one without the other.
Even given that, a 14% interest rate and being asked to pay back contractually obligated debt don't seem to be onerous. Companies (and individuals) with poor creditworthiness are asked to do that all the time. It's certainly not a historically onerous agreement, and it's in-line with the returns investors were seeking for similarly risky investments at that time.
In a real free capitalist economy they'd be dead. It sure would have brought turmoil but... The sooner this fake economy goes down, the earlier real recovery can start.
We're only pushing the can down the road and, meanwhile, creating all the necessary condition for a much harder landing.
Nicolas Nassim Taleb said that companies like GS and AIG should STFU and that their employees should be getting minimum wages (and certainly not more bonuses).
You have to realize that AIG is effectively on "life support" as Taleb puts it.
When you're on life support because you screwed and when an entire country is bleed by taxes to keep you alive (all the money that went to AIG is taxpayers money), you better STFU.
I can't even begin to understand the various people explaining here that the terms were not reasonable.
Next time let GS / AIG and all the ones benefitting from the "crumbs of capitalism" as Buffet puts it (i.e. finance) to die a horrible death.
Obviously SOME sort of mechanism was used when the decision was made FOR the bail-outs. How about you very simply start there? You can always improve later.