What’s good about the dismissal of Hank Greenberg’s AIG lawsuit today is that there’s all this roiling weirdness under the basic story of:
- The government seized AIG because it was garbage,
- AIG shareholder, ex-CEO, and general fanboy Hank Greenberg sued the government for destroying the valuable valuable value of his AIG stock, and
- he lost.
Duh he lost! It’s AIG, it’s become a byword for financial failure. “Don’t pull an AIG,” bankers say to each other, in my lazy imagination. You don’t need to be a lawyer to know that a lawsuit claiming that the government’s bailout stole massive value from AIG shareholders was not going to work. It didn’t! The end.
But there actually was all sorts of crazy nefarious stuff going on; your sympathies may vary but I was ever-so-slightly moved by two of Greenberg’s claims:
- That the Fed paid off AIG’s CDS counterparties at 100 cents on the dollar, rather than trying to negotiate them down to less, which AIG would have been able to do,1 and
- That the Fed couldn’t get shareholders to authorize issuing more shares to give to the Fed, so AIG cleverly and nastily did a reverse stock split to avoid that difficulty and thwart the vote of the shareholders.
That first one should get anyone a little mad – backdoor bailout of Goldman Sachs! etc. – while the second one is, just, if you enjoy people being dicks in takeover battles,2 this is a good one to keep in mind. The Fed were kind of dicks! The shareholders were kind of screwed! In a procedural way. In a substantive way, I mean, I dunno, my vote is that AIG’s funding was cheap even at 80% of equity, but reasonable minds could differ.3
But here we are in court so procedures are kind of what matters, and the Fed maybe did some things that, if Carl Icahn had done them, would’ve looked bad. So Hank had a case, or a sort of a case, that something was unkosher, Delaware-fiduciary-duties-wise, at AIG. So what can a court do about it?
Two sort of oblique things. First, the court found that the Fed didn’t actually do all those mean things that Greenberg said it did, because AIG did them, and the Fed never controlled AIG. The Fed was never a shareholder of AIG: even after AIG gave it 79.9% of the shares, those were in a trust for the benefit of the Treasury, with Fed-appointed trustees and a mandate including nonbinding guidance from the Fed, but not actually under the Fed’s control. And before it was a shareholder it was just, y’know, the Fed. Meaning both (1) a regulator (though mostly not AIG’s regulator) and also (2) a limitless pile of money that happened to be negotiating across the table from a company that was basically a giant pit where money was supposed to go:
Far from describing actual control of AIG by an outside party, these allegations describe a moment of corporate desperation, in which AIG’s Board grabbed the sole lifeline extended to the company. Merely because the AIG Board felt it had “no choice” but to accept bitter terms from its sole available rescuer does not mean that that rescuer actually controlled the company. By Starr’s logic, a loan shark whose usurious interest rate is agreed to by a small business so that it may stay afloat could equally be said to have had actual control over that business so as to compel its agreement to a loan.
I feel like some people actually might say just that? Nontechnically speaking?4
Second, the court found that even if the Fed had controlled AIG it was doing so in its business of being a, um, Fed, which is a higher calling than being a good Delaware fiduciary, so Delaware fiduciary law did not apply to it:
[O]ne need only imagine the predicament confronting the hypothetical FRBNY officials ostensibly “controlling” AIG in late November 2008 were their actions in connection with AIG’s rescue potentially subject to state fiduciary law: “To act or not to act? Is it better to act decisively, and pay par value, and thereby end the grave threat to the economy posed by AIG’s continuing CDS exposure? Or is it better, at the risk of not helping the economy, to negotiate over price with these counterparties, and thereby avoid being found liable by a jury, years from now, for breach of Delaware fiduciary duty law?” It is to avoid distracting and detaining such federal officials — including the FRBNY personnel who in fall 2008 were the paradigmatic men and women “in the arena” — from carrying out their vital official duties that the preemption doctrine covers federal instrumentalities.
There’s not much to argue with here, at least in the second line of reasoning: Delaware fiduciary duties are for regular people, not for the men and women of action who administer securitization programs for the New York Fed. The first part is a little strange, though: the Fed is off the hook for making AIG do things to save the financial system, not only because it was doing those things to save the financial system, but also because the law finds that it never had any power to make AIG do those things in the first place. All in all I’d prefer if it was otherwise.
1. From the opinion dismissing the case:
Starr alleges that, had AIG been left to negotiate with its CDS counterparties, rather than being forced to pay par value, AIG would have been able to negotiate more favorable settlements to the CDS contracts than those achieved by [Maiden Lane] III. Starr alleges that, on one occasion, AIG was forced by FRBNY to turn down a concession that a CDS counterparty had offered.
2. As who doesn’t?
3. They could! It’s not like AIG was Citi.
4. Also I feel like the judge meant “loan shark” in really the nicest possible way but the Fed maybe isn’t thrilled with it?