“Judge Thomas C. Wheeler of the United States Court of Federal Claims only stated what we all understood at the time: Officials were loath to let AIG fail for the effect it would have on banks and Wall Street firms, but equally loath to receive the brickbats they would receive if they just flat-out guaranteed AIG liabilities (as they would do for just about every institution shortly)…

…Messrs. Geithner and Bernanke…extorted from AIG directors a bailout surrender that deprived shareholders of their legal rights and expectations. Judge Wheeler, in finding fault with this outcome, dealt neatly with the Catch-22, essentially ruling that a court couldn’t assume anything would have been left for shareholders in the event the government’s larger rescue campaign had failed. He awarded no damages but at least established clearly that in using AIG to save the financial system, the government had broken the law with respect to its treatment of AIG shareholders.”, Holman W. Jenkins, Jr., “The Long Way Back From 2008”, The Wall Street Journal

Opinion

The Long Way Back From 2008

A symbolic court victory for AIG shareholders perhaps is the beginning of government’s retreat to more normal boundaries.

Henry Paulson, Ben Bernanke and Timothy Geithner in October 2008.

Henry Paulson, Ben Bernanke and Timothy Geithner in October 2008. Photo: MATTHEW CAVANAUGH/European Pressphoto Agency

By Holman W. Jenkins, Jr.

Anybody who bothered to be alive and paying attention knows what happened with AIG in 2008. Trying to guess what the political system both demanded and would tolerate from them, Henry Paulson, Ben Bernanke and Tim Geithner had made the decision to let Lehman go belly up—only to discover the markets panicking and the global economy quaking.

No sooner had this miscalculation gone awry than they were confronted with AIG, still torn between putting a finger in the dike and satisfying the moral-hazard scolds who said bailing out Wall Street was rewarding recklessness. Messrs. Paulson, Bernanke and Geithner have prevaricated since then, understandably, but they obviously at the time feared political blowback tying their hands if more rescues were needed. In the event, it fell to President Bush to scare hell out of the country, and to pull the entire political firmament into complicity with a general bailout whose unwritten imperative was “no more Lehmans.”

“Americans are not for nationalization,” Chuck Schumer went on TV to aver. Nancy Pelosi yielded to Mr. Paulson on bended knee. And with these two potential grandstanders brought into compliance with the agenda of saving the financial system, one good legacy of the Great Depression was borne out: Washington does not stand around while the banking system collapses.

AIG-Lehman was the pivotal moment, marking the transition from the politicians-as-headless-chickens phase of the crisis, to the “we’re all in this together” phase—meaning Democrats and Republicans, liberals and conservatives, who uniformly concluded they wouldn’t have political careers if they failed to act.

The bailout was foremostly the act of a political class saving itself, and incidentally, the rest of us if you believe the narrative that says we were a few days from a massive destruction of jobs and wealth.

But neither did we get off scot-free. It’s been a long way back. There was a political price to be paid, and we’ve paid it—with Obama priorities that put expanding entitlements and regulation above restoring dynamism and growth to the economy. The same was experienced in the Great Depression. The “bold, persistent experimentation” of FDR was less concerned with reviving growth than with left-wing social planners taking advantage of a capitalist class flat on its back to impose their own agenda.

One act of long-delayed healing was this week’s AIG decision. Symbolic maybe, but the ruling serves to underline once more the primacy of the rule of law in American life, however much it may have been mussed up and dirtied in the exigencies of the moment in 2008, and then in the opportunism of the Obama forces in its aftermath.

Judge Thomas C. Wheeler of the United States Court of Federal Claims only stated what we all understood at the time: Officials were loath to let AIG fail for the effect it would have on banks and Wall Street firms, but equally loath to receive the brickbats they would receive if they just flat-out guaranteed AIG liabilities (as they would do for just about every institution shortly).

Messrs. Bernanke and Geithner needed to be seen taking a pound of flesh, and they did so by imposing harsh loan terms and confiscating 79.9% of AIG’s stock ownership. But they faced a problem. AIG is governed by bylaws. Its shareholders have rights. If allowed to vote, they might have rejected the deal, preferring to try their luck in bankruptcy. Bankruptcy’s job, after all, is to preserve value for claimants, and, in retrospect, the government having stopped the free fall of the financial system, plenty of value likely would have been left even for AIG’s shareholders.

But this was also a Catch-22, since the government had settled on AIG as its instrument to begin the rescue of the financial system. In fact, AIG shareholders might have had Washington over a barrel. Recall that Bear Stearns’s Fed-midwifed sale to J.P. Morgan a few months earlier had to be rejiggered at the last minute to make it acceptable to Bear’s shareholders.

Messrs. Geithner and Bernanke were not keen to repeat this embarrassment, and so extorted from AIG directors a bailout surrender that deprived shareholders of their legal rights and expectations. Judge Wheeler, in finding fault with this outcome, dealt neatly with the Catch-22, essentially ruling that a court couldn’t assume anything would have been left for shareholders in the event the government’s larger rescue campaign had failed. He awarded no damages but at least established clearly that in using AIG to save the financial system, the government had broken the law with respect to its treatment of AIG shareholders.

By the way, don’t believe the guff you’ve been reading about how future rescues now will be imperiled. Dodd-Frank may remain problematic, but Judge Wheeler’s ruling only means the Fed will find it harder to force bailout recipients to accept terms inferior to terms they believe are available elsewhere simply for the purpose of scoring political points off shareholders.

Posted on June 17, 2015, in Postings. Bookmark the permalink. Leave a comment.

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