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Hank Greenberg Wants To Know Why His Bailout Was So Much Crappier Than Everyone Else's

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The complaint in Hank Greenberg's lawsuit against America is now online, and strange and entertaining in equal measures. I'm pretty sure Occupy Wall Street will be interested to hear his theory that the Constitution allows Fed bailouts of struggling financial institutions, but requires those bailouts to be much gentler than the one handed to AIG.

There is some sensible stuff here. Greenberg's suit makes good use of the SIGTARP report finding that the government didn't exactly conduct hard-nosed negotiations with AIG's CDS counterparties. Instead, it bought off the assets covered by CDS at par (even though some of the counterparties might have accepted a haircut), tore up the CDS contracts, and waived any claims AIG might have against those counterparties. And the description of how the government avoided and ignored legal requirements to get a shareholder vote to authorize new shares for the government, and kind of maybe lied about it a bit in disclosure documents, is kind of interesting for shareholder-voting nerds, of whom there are about five and I am one.

But that's all just a political smoke screen: lots of people are good and mad that the government funneled too much money through AIG to Goldman Sachs or Deutsche Bank or whatever, but pretty much zero of them think that money should have gone to Hank Greenberg instead. And lying in disclosure documents, like insider trading, isn't a crime if the government does it.

Greenberg's case really boils down to two claims. First is the constitutional argument that the bailout-in-exchange-for-equity was unconstitutional because "everyone else got a no strings attached bailout, so we should have gotten one too." And "everyone" included "Libya":

Throughout the global financial crisis, the Government allowed many domestic and foreign institutions access to the discount window. ... [D]iscount window loans peaked at about $110 billion at the end of October 2008. Foreign banks borrowed approximately 70% of that amount; for example Dexia SA of Belgium borrowed about $33 billion; Dublin-based Depfa Bank, Plc, subsequently taken over by the German government, received approximately $25 billion; Bank of Scotland borrowed $11 billion; and Arab Banking Corp., 29% owned by the Libyan Central Bank at the time, received 73 different loans. Wachovia also borrowed $15 billion, and numerous investment banks were also granted access. At no time did the Federal Reserve Board require that it be given control of, or an equity stake in, these institutions. ... If AIG had been given similar access to the Federal Reserve's discount window or other sources of liquidity like these other institutions, AIG would easily have met its liquidity needs.

Well, okay. Maybe! The legal theory of "the constitution requires that anything you give to Libyans you have to give to me" is a bit untested - if true, I am planning to assert my Constitutional right to call down air strikes on my enemies (who are legion).

The second key part of the complaint is the damages: the Constitution is important and all, but why do Hank and Snowflake deserve "no less than $25 billion, which includes an amount equal to the market value of the 562,868,096 shares of Common Stock the Government received pursuant to the conversion of the Series C Preferred Shares based on the market value of such shares as of January 14, 2011* (closing price of $45.24 per share)"? The gist is that the government loaned AIG $85 billion and in exchange got back not only a secured, above-market loan but also an 80% equity stake in AIG worth a cool 25 yards (or 23, depending on when you count):

According to AIG's 2008 third quarter and 2009 first quarter Form 10-Q filings made while the FRBNY was in control of AIG, an ownership interest in 79.9% of AIG's Common Stock was then valued at $23 billion. Yet, the Trust was required to pay nothing more than $500,000 for the Series C Preferred Shares with the purported "understanding that additional and independently sufficient consideration was also furnished by FRBNY in the form of its lending commitment under the Credit Agreement." Contrary to that self-serving statement, however, no "additional and independently sufficient consideration" was provided for the taking of approximately 80% of the Common Stock of AIG. To the contrary, the loan provided under the Credit Agreement was fully and adequately secured by AIG assets, and the Government was compensated for any risk associated with that loan by imposing an annual cost of 14.5% to AIG, which was significantly higher than market rates and significantly higher than the discount rates the Government extended to other institutions.

Basically Hank Greenberg wants you to believe:
(1) The government forced AIG
(2) to take a market-rate loan
(3) and give up 80% of its equity for nothing.

The government would presumably put it more like this:
(1') The government offered AIG the chance to
(2') get a below-market loan
(3') and pay for it by giving up 80% of its equity.

Now, Hank's theory is not necessarily crazy on its face. Certainly the banks who got TARP money whined pretty incessantly about being forced to take it, and the TARP terms were much nicer than what AIG got.

At the same time, AIG was actually, y'know, insolvent, and a bankruptcy filing would probably not have been great for shareholders either. The complaint doesn't really deny that; it says that AIG would have been fine with a massive liquidity infusion from the government, but doesn't pretend that anyone else was hanging around to bail it out if the government hadn't come through. It just says the government could have been nicer about it. Similarly, there's no actual claim that anyone at AIG was threatened or forced into taking government money: just that AIG was told that what it got was "the only proposal that you're going to get." AIG had the choice of that proposal or nothing, with nothing meaning bankruptcy and pretty shitty shareholder recovery.

But what about Greenberg's claim that the $23-25 billion worth of stock that the Fed got was free money, and that the Fed had a fully market or above-market loan and overreached with the additional equity stake? Well, I don't know. Certainly the complaint makes a compelling case that the Fed actually got all its money back on the initial credit facility, with agreed interest, and that prospects are decent for it to get back the rest of the bits of money that it pumped into AIG in the form of Maiden Lane III etc. So ex post, if you squint, it does kind of look like the Fed got $25 billion "too much" in value.

Ex ante, in September 2008, this looked like a really really risky loan, and you can understand why the Fed wanted not only a double-digit interest rate (later reduced) but also a big equity stake to compensate it for putting $85 billion of taxpayer money at risk. But, as the complaint details, the actual interest rate and equity stake that the Fed got was kind of plucked from thin air: there's no obvious analysis on why the Fed wanted 80% as opposed to 75% of AIG. And no competitor could have gotten the same deal - even if Warren Buffett had had $85 billion lying around to give to AIG, he probably couldn't have run over the shareholder voting mechanism quite as easily as the government did - so there was no way to get a price check.

Still. If you put yourself in a position where you need $85 billion to tide you over until payday, it seems a little churlish to complain that you only got one offer. There's a great moment in The Big Short where Deutsche Bank tries to call collateral from an AIG-type counterparty on a CDS trade, and the counterparty objects because they have the position marked much higher than Deutsche had it. The counterparty makes various arguments about the underlying soundness of the assets and the eventual recovery. Deutsche says something to the effect of "okay, I'll make you a market: I'll buy those bonds back from you at my mark, or sell you more at yours." The counterparty posts the collateral.

AIG seems to have had similar uncomfortable conversations in its pre-state-owned-zombie days, and its massive CDS writing program seems to have operated on a "what could possibly go wrong?" model. Hank Greenberg may, as his complaint claims, have kept AIG out of the diciest CDS writing business when he was running it. But when he sues the people who bailed out AIG, claiming that their offer - the only offer AIG got - wasn't good enough because of his fundamental analysis of the underlying assets and the ultimate recovery that the Fed got - that sounds a lot like the thinking that got AIG into trouble in the first place.

Starr International v. USA [pdf]
Starr International v. Federal Reserve Bank of New York [pdf]
Related: Hank Greenberg Estimates If The Government Had Minded Its Own Damn Business Back In ’08, AIG Would’ve Been At Least $25 Billion Ahead Right Now

* Convenient! AIG is in the low $20s now and never saw $45.24 again, but the January 14 date is the date on which AIG paid off and terminated the Fed's credit facility, leaving the government with a "free" 79% stake in AIG, which no longer owed the government anything.. Except for all the money that it still owed the government.


Hank Greenberg: Humanitarian

He sued the government for the little people.