Of all the crazy things people have said about former AIG chief Maurice "Hank" Greenberg's lawsuit against the government, the craziest was that he just might win.
It's sounding less crazy all the time.
The possibility of a Greenberg victory at trial, which began six weeks ago is no longer unthinkable. According to a Bloomberg report, Greenberg has a real shot of winning his argument that the U.S. government bailed out the insurance firm he founded on "unfair" terms. Greenberg and his star lawyer, David Boies, may walk away with a $25 billion judgment in the case.
As Buzzfeed’s Matthew Zeitlin pointed out, $25 billion is twice the value of all housing aid given through TARP, the highly-criticized relief program that was supposed to help out troubled mortgage holders. It’s also equal to the total value of TARP money set aside for housing that remains unspent. The talking points write themselves.
If Greenberg wins, “the howling will start,” says Susan Webber told Bloomberg, who blogs under the pseudonym Yves Smith at Naked Capitalism.
A legal ruling that AIG shareholders were victims of the government bailout that saved those same shareholders' stake in the company from being worth zero would be galling. If Greenberg walks away with billions, the public outrage will hit 11. No one argues that his firm could have survived without government intervention.
Worse still, if Greenberg wins, it seems that he will do so, in part, for a completely pointless reason.
Bloomberg reports that the judge in the case, Thomas Wheeler, “appears intent on writing an opinion that will guide what regulators are permitted to do in the next financial crisis.” Elliott Stein, a legal analyst at Bloomberg, says Wheeler “sees a real absence of established precedent about what the government can do.”
This is a weird thing for a federal judge to think, because the law is now established on this topic. It wasn't at the time of the AIG bailout, which is why Greenberg raises the issue of fairness and Wheeler seems sympathetic to it.
The government's response is, essentially, it was 2008 and we did what we had to.
Whatever you think of these arguments, precedent, in the form of a judicial opinion, is no longer needed.
As The Huffington Post wrote when the trial started, the Dodd-Frank financial reform act is very clear about the structure of future bailouts. It alters the Federal Reserve’s emergency lending powers to prohibit an individual firm from being bailed out. Instead, any extraordinary lending must to made to a broad class of firms. The rate of that lending must be the Fed's discount rate (the rate at which the Fed routinely lends to banks). Under these rules, AIG could not be bailed out in the way it was. Mike Konczal of the Roosevelt Institute wrote in 2012, “Dodd-Frank goes out of its way to pre-commit against further bailouts” aimed at individual companies. If in the next crisis, Dodd-Frank doesn't provide enough authority, Congress can simply pass a bill that provides it.
If Wheeler sides with Greenberg, he will unnecessarily clarify what Congress has already codified, and could supersede if necessary, while recklessly cause public outrage.