Have you ever wanted to hold a mock trial of Hank Greenberg's lawsuit over the AIG bailout from the comfort of your own home? If so, you're in luck, because yesterday AIG filed with a federal court the complete AIG Mock Trial Deluxe Kit. It's all here:
- A written protocol for conducting the mock trial
- Briefs, reply briefs, and sur-reply briefs from Hank Greenberg's investment vehicle Starr International, the Treasury, and the New York Fed
- A polite letter from the Department of Justice declining the invitation to attend1
- PowerPoint presentations of bothsides2
- A transcript of highly respected lawyers arguing both sides
The mock trial was, of course, conducted by AIG's board a few weeks ago as part of the board's consideration of whether to join Greenberg's lawsuit against the government claiming that AIG's bailout was an unconstitutional taking of shareholder property. The board, unsurprisingly, went with no, and yesterday it filed the full mock trial kit with the court hearing Greenberg's claims.
The transcript is a very good read; I will mostly pick out a few amusing points but that shouldn't detract from the facts that (1) there is a legitimate serious interesting issue here, beyond the "ooh look at the ingrates" surface, and (2) both sides did a good job of arguing it. David Boies, Greenberg's lawyer, has the harder case - that the government unconstitutionally took 80% of AIG's equity by entering into a voluntary credit agreement approved by AIG's board that included a grant of equity - but he does a good job with it, resting his argument largely on Section 13(3) of the Federal Reserve Act (which permits the Fed to lend to non-banks but which does not on its face allow the Fed to, for instance, punitively demand lots of equity in excess of what it needs to compensate it for that lending) and on public statements by government officials to the effect of "AIG's bailout was harsh because we wanted to make an example of them."
The government's lawyers - Francis Bivens of Davis Polk for Treasury and John Kiernan of Debevoise for the New York Fed - also do a good job on the substantive points, laying out exactly how voluntary AIG's decision to enter into a deal with the government was - the board approved (with one dissenter), bankruptcy was an option, private sector solutions were considered but were clearly inadequate, the government's rescue was a risky proposition and so it demanded equity as compensation, etc. And they note that if AIG disliked the terms of its bailout, the time to raise those concerns was ... well, sometime before the end of that bailout.3
So, good job everyone, though there is a blooper reel. Boies occasionally veers into crazytimes:
The idea that AIG was so weak that the government could do anything it wanted to with AIG at that point is inconsistent with what the law requires. It is I think also inconsistent and sort of common sense in fairness, if the time of Hurricane Sandy, if somebody was driving by the place on the Jersey Shore or Staten Island, certain places in Long Island, and there was a shop owner whose shop was about to be destroyed by the water, had a lot of valuable paintings in it and the shop owner said give me some help, get these paintings out of here to safety, and the van driver said, I will take it out but you have to pay me for doing that. Okay, I'll pay you, and he says in addition you have to give me 80 percent of the value of those paintings. ... What was happening was AIG, like hundreds of companies, was swamped with the hurricane not named Sandy, but the financial liquidity crisis, global financial liquidity crisis of 2008. They were victims as much of that disaster as the people of Hurricane Sandy.
And the government's lawyers ... I guess if I were representing the government here, in a case where a federal judge has already compared the government's role to that of a loan shark, I might be tempted to bring a baseball bat and smack it against my hand menacingly as I spoke. Francis Bivens, Treasury's lawyer at Davis Polk, cannot resist:
I can tell you on behalf of the Department of the Treasury, the Treasury would not offer a settlement on any terms. ... If the case goes forward in the company's name there will be AIG employees who have to testify, there will be briefs submitted on behalf of the company supporting the claims, and in all likelihood if there is a derivative case brought here it will likely be determined in a public trial. So the testimony of the AIG employees will not take place in some deposition in a closed conference room. The AIG employees will be testifying in a public proceeding in open court in a proceeding that will be followed very intently by the media.
Nice conference room you got here, boys. Shame if an angry mob were to descend on it. Or a congressional investigation:
First, the government will be your adversary by signing onto the litigation, AIG will be terminated,4 the cooperative relationship that it had with the Department of Treasury and the New York Fed and will instead be positioning itself in direct opposition to those institutions. A decision could also lead to another wave of congressional investigations, and AIG employees and AIG Board members could be called to testify before Congress and justify the decision to pursue a lawsuit asking the U.S. taxpayers to return billions of dollars to AIG. The public backlash and reputational risk of this lawsuit is also real.
Anyway the board ultimately decided to do nothing, and sent a long reasoned letter from its lawyers - C.J. Seitz of Seitz Ross and Paul Curnin of Simpson Thacher - to Greenberg saying no dice. The letter is good too! They consulted constitutional experts and everything, and Curnin ultimately concluded that "he would quantify Starr's likelihood of success at no more than 20%, and that given the difficulties of predicting litigation outcomes he would add or subtract 5% on either side of his estimate." I say unto you that a 10% band actually suggests he's pretty confident of his ability to predict litigation outcomes.5
And now the next step is, I guess, Greenberg and the government hashing out with the court in D.C. which of Greenberg's claims can go forward even without AIG.
This whole thing strikes me as an amazing triumph of, like, The American Lawyer as a species. Remember that what was happening here is that AIG was deciding whether there should be a lawsuit against the government. A lawsuit would take time, cost both sides in legal fees, rehash old worries about AIG's crisis behavior, generate bad publicity, and generally be a headache. So they did this mock trial to decide whether they wanted all that bother.
And the mock trial generated all that bother itself. Very, very few trials in any actual court in America make use of as much expensive lawyering as this mock trial in an AIG conference room. Outside of cannibalism cases, even fewer generate as much bad publicity.
This isn't particularly the fault of AIG or its lawyers or even Greenberg and his; it's just a sort of natural backward induction from an expensive legal system: as trials get more expensive and horrible, avoiding them becomes more valuable, making the trial-avoidance motion practice more expensive, which makes avoiding it more valuable ... until mock trials in boardrooms become multimillion-dollar propositions. Still. One takeaway here is that this case is a bonanza for lawyers.6
One other thing, which is maybe a triumph of laywerism, or maybe something else. Remember that Curnin, the board's lawyer, told the board that he quantified Greenberg's odd of success at at least 15%, as I read it, though it's a little unclear. A 15% probability of winning on Greenberg's $25-billion-plus7 lawsuit is worth call it $3.75bn of expected value to AIG's shareholders; there's a time value element but still: that lottery ticket is worth a lot of money, no? But nothing in the board materials attempts to quantify that value, beyond Curnin's off-the-cuff probability estimate. Of course there are countervailing economic considerations - bad publicity, lost business, congressional investigations, broken kneecaps - but you might imagine someone in AIG's, like, marketing department coming to the board and trying to quantify the expected costs of those considerations. And then the board could sit down and say "$3bn lottery ticket vs. $Xbn losses from suing, which one adds more value to shareholders?"
And that didn't happen. Weird, right? It's almost as though a dispassionate weighing of costs and benefits to shareholders was not the only thing on the board's mind.
1. No, I'm kidding, it's a total "fuck off / see you in court" kind of letter.
2. Umm, lawyers? If your PowerPoint presentations are all dense text, maybe ... skip them? Boies's presentation is actually portrait-oriented, which, man, lawyers.
3. As Kiernan put it:
AIG not only made no protest at the time, but it made no protest for years thereafter, while enjoying the benefits of the Fed's performance, and of the Fed's further rescue loans, restructuring the rescue loans and such gestures that the Fed unilaterally reducing the interest rate by 550 basis points one month after initially issuing its loan, when there was no reason that they needed to do that. ... There is nothing reasonable about the proposition that AIG would just sit silently why the government performed its side of the deal and waited until it no longer needed the government and then and only then say now we decided we don't have to perform our side of the deal because the terms are illegal.
4. Sic.; should clearly be "... AIG will be terminating the cooperative relationship ...," but I left it as is because "AIG will be terminated" is funnier. Elsewhere I've cleaned up one or two obvious minor typos in the transcripts.
5. Or not very numerate. Lawyers, amirite?
6. Or not? I don't know the fee arrangements here but it would not be unreasonable to guess that (1) Greenberg's lawyers are on some sort of contingency-ish basis where they only/mostly get paid if they win and/or (2) the government's lawyers are charging significantly discounted rates.
7. I thought it was $25bn, though numbers like $50bn are thrown around in the transcripts.