
Rescued by a Bailout, A.I.G. May Sue Its Savior - ejstronge
http://dealbook.nytimes.com/2013/01/07/rescued-by-a-bailout-a-i-g-may-sue-its-savior/
======
sharkweek
This really makes my blood boil, but I'm trying to remain impartial while
reading.

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;

~~~
ChuckMcM
I agree with the emotion but I can also see the argument that the agreement
was made under duress.

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.

~~~
earbitscom
Actually, it's more like a guy who just conned your family out of their life
savings is hanging by a rope, which is breaking. You don't feel inclined to
save them, but unfortunately, they're hanging over a crowd of innocent
bystanders. You agree to save them, mostly so that the others are not injured.
While you do, you make them agree to give back all of the money they stole
under shitty terms. They do so by screwing over the guys who helped them pull
the con job, who are now coming to you asking for their share of the money
they stole from your family.

~~~
makomk
Not exactly. The key thing you're missing is that AIG weren't actually the
main beneficiaries of the AIG bailout, the people who bought CDSs from them
were. Effectively, a bunch of other companies convinced AIG to to sell them
insurance for way less than it should cost, in many cases on property they
didn't actually own, by conning them as to how risky it would be.

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...](http://www.huffingtonpost.com/david-fiderer/the-cdos-that-
destroyed-a_b_499875.html)

~~~
jfager
AIG isn't a company run by widows and orphans. The department that issued that
insurance was full of the most stereotypical Wall Street shark assholes
around, who thought they were smarter than everyone else and getting a big
free payday. They got scammed in the way a casino scams the idiot wearing
sunglasses at the craps table.

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.

~~~
sswaner
By that standard you must also reject legislation that limits interest rates
charged by payday loan shops? It is very much the same situation: What is a
reasonable interest rate for a loan made to someone or some corporation under
duress?

~~~
shiven
_legislation that limits interest rates charged by payday loan shops_

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.

------
sudonim
From the article:

"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...](http://www.huffingtonpost.com/2011/01/26/goldman-sachs-aig-backdoor-
bailout_n_814589.html)

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.

~~~
adrr
If AIG would have went bankrupt, shareholders would have got nothing. After
all the liabilities paid out(to the wall street clients who had credit default
swap contracts), there would have been nothing left. US put 170 billion into a
company worth $2 billion(market cap at the time) for 92% stake. There is no
legitimacy to the claim.

~~~
fleitz
That's not true, the shareholders would only have gotten nothing if the
creditors insisted on immediate payment / and/or liquidation.

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.

~~~
OGinparadise
" _That's not true, the shareholders would only have gotten nothing if the
creditors insisted on immediate payment / and/or liquidation._ "

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...](http://en.wikipedia.org/wiki/American_International_Group#Federal_Reserve_bailout)

~~~
fleitz
I happen to have had a Bloomberg terminal on my desk the day AIG was bailed
out. Lets just say I have a pretty good idea of what AIG meant to the economy.

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.

~~~
paganel
> 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...](http://www.guardian.co.uk/business/2008/sep/27/wallstreet.useconomy1))
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.

------
smsm42
It's kind of funny that the government apparently (if AIG claims are true) did
the same to them as what politicians long criticized the bankers for doing as
"predatory lending". I.e. if you consider that using one's bad situation to
trick him into a loan which terms are unduly onerous is despicable thing to do
for a bank - shouldn't be the same thing despicable for the government? On the
other hand, if it's OK for the government to do, they shouldn't really use
this "predatory lending" term anymore - at least not in a legal context. In a
generic rhetoric, you can say "charging this much for a loan really sucks,
you're a giant douche if you do that" but legally if it's OK for the
government shouldn't it be OK for others?

~~~
jforman
The biggest problem with predatory lending is the salesmanship and opacity of
terms that make the financial impact unclear to the person buying the loan.

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.

~~~
smsm42
As I said in other comment, would you be willing to support this notion for
any deal? E.g., if the offer is very clear and not opaque at all - say, you
are in desperate need of a job, and some employer offers you a salary that is
10% lower than legal minimal wage and 20% lower that is common in your
profession, and openly says this is because of your gender and race and he
knows you gender and race are lazy and unproductive, but since he's low on
money he's willing to hire you for low price - would you say such clear and
open offer be fine? Current law considers it illegal and unfair, do you reject
this concept and would you vote for a politician that would support repealing
such laws and declare any voluntary contract which is clear to both sides to
be legal? If you would, you would find yourself in very tiny minority in
contemporary America. Most people think that some deals are unfair even if
both sides agreed on it - and unfairness may stem from many things, difference
in power one of them. Powers of AIG management and US government at that
moment were obviously very different - so why it is inconceivable to consider
that it may be that US government used his advantage to deal unfairly? We know
lots of other cases where people in power used their powers to deal unfairly,
why it couldn't happen in this particular case? It may or not may happened
indeed - that's why you need a court to figure it out - but I don't see, in
current legal system, how you can reject the notion that it can be possible in
principle.

~~~
icambron
> 10% lower than legal minimal wage and 20% lower that is common in your
> profession, and openly says this is because of your gender and race

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.

~~~
smsm42
The question whether the government actions in this case were legal or not is
up to the court for decide. But if you accept the premise that some voluntary
contracts can be not OK despite their being voluntary, you can not object to
AIG's claim that they were wronged by saying "but it was voluntary!". You know
already being voluntary is not enough - either you have to abandon this notion
or you have to abandon your objections to AIG.

>>>> 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.

------
infinityetc
From the article:

> _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.

------
DigitalSea
It's not like the government forced them to take the bailout. They could have
declined and sunk into bankruptcy, they had a choice and they should live by
that choice. If the company were run honestly and competently they wouldn't
have ever been put into that situation in the first place. I'd like to call
this whole scenario karma, ain't it a bitch?

------
charonn0
I cannot express how disgusted I will be should AIG join the suit. The notion
that AIG was somehow wronged by the government in this case is beneath
contempt.

------
msellout
However annoying this is, there is some truth to the claim that the takeover
of AIG was a "backdoor bailout" of other firms. Somewhat like the IMF loaning
money to countries like Thailand and South Korea during the Asian financial
crisis. The bailout money went straight through the immediate recipients and
on to their creditors.

------
newman314
Just posted a related article from Rolling Stone.

<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.

~~~
retube
Rolling Stone has a huge anti-bank bias. The material they present is usually
misleading, out of context and often plain wrong or mis-informed. This is
absolutely not a credible source on the financial crisis. Indeed Matt Taibbi
is basically just a troll.

~~~
Uchikoma
It would help your argument if you cite misleading, plain wrong, out of
context or misinformed parts of the article to make your point.

~~~
retube
Sure. But I have a day job and no time to put together critical analyses of
random stuff on the internet. Plus I don't really care what other people chose
to believe.

------
mtgx
They really don't care about that. When they were very close to bankruptcy,
they would've done whatever the government would've asked them to do. Soon
after the bailouts, they weren't even going to meet with Obama to talk about
further banking regulations. I'm talking about the top banks in general.

------
anigbrowl
So going by the number being sought (I haven't bothered to read the
complaint), the government should only have taken an 85% stake instead of a
92% stake? This seems like an instance of chronic denial by Greenberg and his
remaining admirers - anything to put the blame on someone else.

------
jheriko
Maybe I am missing something, but all I see here is 'rich people want to have
their cake and eat it - and btw at the expense of joe public'.

Maybe I just find it hard to think its anything other than greed when the
company involved is an organised scam... er insurance company. ;)

------
Zenst
So X company screw up, needs bailout as without would cease to be and all
shareholders would lose there money at the very least if they did not get a
bailout.

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.

------
debacle
I worked with AIG in the weeks after the bailout. This does not surprise me.
I've never felt less good about the work I was doing.

------
lostlogin
With government contract work here in New Zealand I have noticed a willingness
to call in the lawyers very early. If the contract were with a private
enterprise there is no way a contract would get renewed, however the
government is happy to deal with people even after after they have been sued
recently. This may not we a world wide phenomenon.

~~~
btilly
I have seen it noted that common law countries in general tend to resort to
lawyers early and often. Indeed when comparing major construction in different
countries, having a common law legal system is a risk factor for having much
higher costs.

~~~
anigbrowl
You've probably read it already, but I really enjoyed Robert Kagan's book
_Adversarial Legalism_ on this subject.
[http://www.bsos.umd.edu/gvpt/lpbr/subpages/reviews/kaganal.h...](http://www.bsos.umd.edu/gvpt/lpbr/subpages/reviews/kaganal.htm)

------
damian2000
Surely the problem with their argument is that when they were bailed out they
did have a choice; it was either accept the terms or go under. So if they
accepted the govts terms, why should they now be allowed to argue they got
ripped off.

~~~
smsm42
Would you accept this reasoning for any deal? Because there are many folks now
that claim banks tricked them into accepting unfair deals - even though they
were perfectly free to deny these terms and reject the deal. There are many
other situations where you can be offered an unfair deal and still be able to
sue even if it's voluntary transaction - e.g., if you are offered to be hired
and because of your race, your employer says you'd be getting 10% less salary.
If you don't like it, you can reject the job, nobody's forcing you. But the
law still says offers like that are not legal. So the notion that there's a
choice does not always mean the deal is OK. Obviously, the concept that if
they had a choice, they cannot argue they were wronged does not work in
current law. Why deals with the government should be an exception? The AIG may
be indeed wronged or may be they are full of it, but unless you reject the
whole legal tradition that there can be unfair deals, that needs to be figured
out looking at the facts and can not be rejected just because they agreed to
it.

~~~
viscanti
There's a bit of a difference between offering a higher interest rate to
someone who just ran their business into the ground (and needs a bailout to
survive) and racism. Lenders take creditworthiness into account all the time.
I'd have to image destroying your company, with your only other alternative
being bankruptcy, as being a valid reason for having a higher than normal
interest rate. There's certainly some risk there, and there isn't anyone who
was going to come along and bail out the government if their bailout money was
lost by AIG.

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.

~~~
smsm42
There is a difference, of course. However, if you accept the voluntary deal
can be unfair, then only consistent way to treat it would be that any
voluntary deal could be unfair. Otherwise you are basically saying "it's
unfair only if I don't like the guy who's benefitting, but if I don't like the
guy who's getting the short end of it, that's fine". You can not bring
voluntarity as objection and at the same time accept that some voluntary deals
can be unfair.

>>>> 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.

~~~
viscanti
The examples you've given for voluntary deals not being OK were for protected
classes. There's no such protections for companies who have run their company
into the ground and need a bailout. Agreeing to a deal, no matter how onerous
the contractual requirements is perfectly legal if you're not a protected
class, and AIG was not a protected class.

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.

~~~
smsm42
So what you are saying some people are better than others and have preference
before the law because they are "protected class" and since AIG shareholders
do not belong to this class the law and fairness works differently for them. I
see.

------
martinced
AIG should STFU and be glad to be living in a socialist economy.

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.

------
OGinparadise
Any corporation too big to fall should be too big to exist. No company should
be allowed to hold hostage our entire financial system.

~~~
techsupporter
That makes for a nice sound bite but how do you decide it? I'm not even
opposed to the idea (I'm overwhelmingly in favor, actually) but what mechanism
is used to establish "too big to fail?" I realize that we can't legislate on
the basis of "unforeseen consequences," but legislation by bumper sticker
slogan is just as bad.

~~~
olefoo
Here's a metaphor to consider; think of financial crises as forest fires, easy
to start and hard to fight when conditions are right for them. Bailouts act to
increase the fuel load in areas where they apply, so while they solve the
immediate problem (you put out todays fire) you are creating conditions to
make future fires worse ( more fuel, faster spreading fires, greater damage ).
In a very real way, bailouts have allowed vulnerable institutions to survive
to make the rest of the economy more vulnerable than it would have been had
the banks been allowed to die.

