Washington isn’t typically known as a theater town. But there’s a pretty good farce being staged at the Court of Claims, where Maurice “Hank” Greenberg, the 89-year-old former CEO of AIG, is suing the government for not being sufficiently generous in its epic $182 billion bailout of the insurance company. His chief lawyer, the high-profile, high-fee constitutional attorney David Boies, has called to the stand such luminaries of the bailout era as former treasury secretaries Henry Paulson and Tim Geithner, and former Federal Reserve chairman Ben Bernanke.
Fireworks have been few, though it was revealed that Bernanke used a Victorian pseudonym, “Edward Quince,” while writing late-night emails to colleagues about the debacles unfolding around him. It is likewise interesting to see how Boies, the hero of the gay marriage fight, can so clearly be on the right side of history one day and so clearly on the wrong side the next. And you have to give credit to Greenberg. Pushing 90, he has outlived so many of his contemporaries and adversaries, and is still cheesed at having been kicked out of the company he built by Eliot Spitzer in 2005. Rich beyond any measure, he’s suing the government for $40 billion because YOLO.
While Greenberg is a singular figure in American business, he’s sadly not alone in trying to argue that the taxpayers should stand ready to provide guarantees that let Wall Street hondlers profit in good times but then spare them from losses in bad times—and then transfer the profits to them later on. Several shameless wheedlers have been trying the same strategy—trying to wrest public assistance and assets into their own hands through a court action—with the two other largest single recipients of bailout aid, housing finance giants Fannie Mae and Freddie Mac.
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A quick recap. During the credit boom, AIG sold “insurance” on all sorts of financial instruments to other firms but never bothered to put money aside to pay the claims. In 2008, it was looking at a death spiral: cut credit ratings, claims on the policies, and collateral calls. By the late summer, AIG was functionally bankrupt—unable to meet financial obligations or raise new cash. And its management had no clue. “We think they are days from failure,” Bernanke (writing as Edward Quince) told colleagues, it was revealed in court last week. “They think it is a temporary problem. This disconnect is dangerous.”
When companies go bankrupt, stockholders are wiped out, and the creditors (people to whom the company owes money) take a haircut on their claims. But the Federal Reserve and the government decided AIG couldn’t be allowed formally to file for bankruptcy, as that would force virtually all the world’s financial institutions to take big financial write-downs at a time of already high stress. The solution was a bailout—of AIG, and of the financial system as a whole. The Fed and Treasury made virtually unlimited funds, $182 billion in all, available to AIG so that it could make payments to counterparties like Goldman Sachs and Deutsche Bank, and thus spare them from losses.
In exchange for offering such a huge sum, the government demanded that the taxpayers should receive interest payments and an 80 percent ownership stake in AIG. At the time, that was a little like receiving polluted land as compensation for spending a ton of money to clean up a toxic waste site.
Now, AIG was a huge, sprawling company, with lots of assets and decent insurance businesses, especially in Asia. And over time, as the panic stopped and the global economy reflated—in part due to the rescue of AIG—the company began to map out a strategy to pay back the taxpayers. Succeeding beyond expectations, AIG actually managed to pay them back in full and provide them with a $23 billion profit by 2012. Once that happened, Greenberg, who wanted little to do with the company when it was short $180 billion, filed suit, arguing that the terms were too tough and that the government should have given AIG unlimited cash on easier terms. It’s a little like a man dying of thirst in the desert suing the guy who rescued him because he gave him tap water to drink instead of Evian.
The trial is ongoing. But we can only hope the judge treats Greenberg the way several other similarly minded hondlers were treated by a D.C. Court last week.
In 2008, Fannie Mae and Freddie Mac, the two government-sponsored enterprises that extended hundreds of billions of mortgage debt with little thought, were staring bankruptcy in the face. But the consequences of a filing would have been disastrous. Banks and financial institutions owned hundreds of billions of dollars of Fannie Mae and Freddie Mac bonds, and would have been forced to take huge write-downs on those assets at exactly the wrong time.
As with AIG, the government essentially bailed out the financial system by bailing out Fannie Mae and Freddie Mac. Instead of declaring bankruptcy, the two behemoths were put into conservatorship by the Federal Housing Finance Agency and given blank checks to keep running. Combined, they drew down an astonishing $188 billion. In exchange for the cash, Fannie and Freddie issued preferred stock to Treasury that was supposed to pay 10 percent dividend. When it became apparent the companies couldn’t make those payments regularly, the deal was changed in 2012. The two companies, which were essentially owned and entirely backstopped by the taxpayers, would turn over all their profits to the government.
As the housing market and the economy recovered, Fannie and Freddie did what few people thought possible: they lent money more carefully, and started making profits. Thus far, the two firms have kicked back $218 billion to the Treasury.
Once the profits started to flow, fund managers, led by Bill Ackman and Bruce Berkowitz—who were nowhere to be found when these firms really needed cash—started snapping up shares of Fannie and Freddie stock and then sued. Their contention: The government, having saved the housing giants, should turn over a greater chunk of ownership to shareholders while continuing to guarantee the companies’ debt.
On October 1, just as the AIG trial was getting under way, Judge Royce Lamberth, a Reagan appointee, issued a decision telling them to stuff it.
Asking federal courts to turn over public assets to private investors for no good reason seems like a very strange investment strategy. But it makes sense to a degree. We’re more than 60 months into an aging bull market, and the major indices are now wobbling. Building a business is hard work. Most 50-something fund managers, let alone 89-year-old former executives, don’t know much about apps and tech, where the real money is these days. The system has been exceedingly friendly and receptive to financial engineers who exploit wrinkles in the tax code, regulations, and government subsidies to turn big profits—without contributing much to the economy at large. And the costs of litigation amount to chump change for guys who count their net worth in nine and 10 figures.
But every trend peters out. And these lawsuits may prove to be one step too far. We may be witnessing the Twilight of the Hondlers.
