I know it's almost time to forget about former AIG CEO Hank Greenberg's lawsuit against the government, since AIG yesterday decided not to join it, but I find myself unable to let go. Over the past couple of days of swirling outrage I've spent a lot of time with Greenberg's complaint, and the Court of Federal Claims opinion refusing to dismiss it, and: the whole thing is so kooky and weird! And not crazy, either; probably wrong, but not nuts. How can we consign it to oblivion just because AIG refused to enrage everyone by backing the lawsuit? Fortunately Greenberg's lawyer David Boies is running around keeping everyone enraged so I guess we have an excuse:
David Boies, the attorney suing the U.S. over American International Group Inc.’s bailout, said the firm’s takeover was an abuse of authority similar to firefighters seizing possessions they rescued from a flood.
“The fire and rescue people say we’re going to cart them out, we’re going to protect them, but we’re going to take 80 percent of them for the firehouse,” Boies said in an interview today on CNBC. “Everybody would know that was wrong. It’s also illegal.”
Hahaha enraging. But basically harmless enough. It's the next thing he says that's really weird:
“There are limits to what the government can demand in return for” rescue loans, said Boies, who represents Greenberg’s Starr International Co. “What it cannot demand, as a court in Washington, D.C. has already ruled, is that the company give up its equity.”
So! The rule that "the government cannot demand equity in exchange for a loan" would be a pretty weird rule, wouldn't it? It would rule out the government's AIG bailout, in which AIG got a loan in exchange for (1) a security interest in all of AIG's assets, (2) L + 8.5% interest, and (3) an 80% equity stake. It would also rule out ... I dunno, I mean, all of the TARP investments were sort of "loan plus equity," though the loans were called preferred stock and the equity was in the form of warrants so whatever.
Why couldn't the government demand a share of the upside in exchange for a loan in distressed circumstances? In the private sector, that happens all the time; in fact Greenberg's own complaint notes that the government's terms were based on terms that had been negotiated in a failed private-sector AIG financing. Here's the complaint:
The terms of the deal were based not on an individualized determination of what was necessary to protect the Government’s interests, but rather on a private-sector term sheet that a banker hired to represent FRBNY’s interests acknowledged to be unfair. Specifically, the Government’s non-negotiable offer was based on a term sheet formulated by a private-sector consortium that the Government had assembled. ...
After the attempt to find a private-sector solution failed, the Government did not conduct any independent analysis to determine what terms were reasonably necessary to protect the Government’s legitimate interests. Nor did the Government provide assistance on the more favorable terms that it had provided and would continue to provide similarly situated entities with inferior collateral. Instead, it simply adopted the key terms of the private-sector term sheet, modified such that the Government Accountability Office found the Government loan to be “considerably more onerous than the contemplated private deal.” As a result, the terms demanded by the Government were grossly disproportionate to the Government’s interest in protecting the interests of taxpayers in what, without any equity interest, was a fully secured loan with an exorbitant interest rate.
There's some argument that that's true, since the government soon scaled back the bailout terms to something less onerous. But so what? No private creditor in the history of private creditors has ever been blamed for "not conduct[ing] any independent analysis to determine what terms were reasonably necessary to protect [its] legitimate interests" before offering a loan. Pretty much, you offer the terms you think you can get away with, and the borrower either accepts them or doesn't. Here, the borrower accepted. That's normally that.
But here it's not, I guess, because after all it is the government. Everything in this case turns on whether the government can do what private investors do can't, or whether the government can't do what private investors can, or both or neither or vice versa. So: private investors can just ask for whatever terms they want, but Greenberg seems to think that the government can only ask for "reasonably necessary" terms.1
Why? Well the answer seems essentially to be that Fed and Treasury, in September 2008, were more than normally persuasive. As the complaint puts it, “By ... falsely and irresponsibly representing that it was willing to risk destroying the global economy if the AIG Board did not accept its extortionate demands, the Government coerced the Board into accepting the Government’s demands.”2Destroying the global economy is quite a threat, I suppose.
Forbes reporter Nathan Vardi pondered last night whether Boies or Greenberg might themselves have alerted DealBook to AIG's consideration of this lawsuit yesterday, in order to inspire public outrage against AIG. With Boies taking to the media today to, um, inspire further outrage, I'm starting to like this theory.
Why would making everyone hate AIG and Greenberg be a good strategy? Well, we talked yesterday about how the government rage and threats directed against AIG this week actually helps part of Greenberg's case. His claims are mostly "derivative" claims, and so if AIG doesn't join in on them he can't actually pursue them - unless he can show that AIG's directors were motivated by other-than-fiduciary reasons in declining to join the suit. "Personalized death threats from Congressmen" might - might - qualify as such other-than-fiduciary reasons. If Boies and Greenberg suspected that AIG was not going to join their suit anyway, drumming up some death threats might be good tactics.
And not just for the technical issue of derivative lawsuit demand requirements. Greenberg's whole case is that the government coerced AIG into doing things that were bad for AIG. This case sounds really dumb when you point out, as many people do, that AIG had total freedom of choice: it could have taken government aid, or it could have filed for bankruptcy and left shareholders with nothing.
But there's a real argument - a tough argument to make, but maybe not impossible - that that's not true. That neither part of it is true, really: that a bankruptcy filing might have left AIG solvent with some value to shareholders, and that AIG wasn't free to go under because the government told it (as Greenberg alleges) to stop working on a bankruptcy filing because a bailout was forthcoming. And that argument is helped by evidence that AIG's board, who accepted the government's bailout, were personally cowed and coerced by threats from government officials.
And how better to support that argument than by drumming up explicit public threats from government officials telling AIG directors not to perform their fiduciary duties?
Anyway, it's a theory. Here's what Treasury had to say today about AIG's decision not to join Greenberg's lawsuit:
"AIG ran a careful process and the board's decision not to join Starr International's lawsuit is the right result," Assistant Treasury Secretary Timothy Massad said. "We continue to believe that Starr's case is without merit and will continue to defend our actions vigorously."
The "AIG ran a careful process" is perfect. Unlike some congressmen I could name, Treasury emphasized not public outrage at AIG, but the board's oh-so-serious deliberations on behalf of its shareholders. Treasury has good lawyers too.
Boies Likens AIG Takeover to Firefighters Seizing Goods [Bloomberg]
As public fumes, AIG says will not sue U.S. over bailout [Reuters]
Opinion in Starr v. United States [Court of Federal Claims]
First Amended Complaint in Starr v. United States [Court of Federal Claims]
1.The other bad thing that the Greenberg thinks the government did really is kind of bad, though Greenberg's case suffers from the fact that AIG really did it. The gist is:
- AIG did not have enough authorized shares to give the government an 80% stake.
- So it gave the government convertible preferred stock, and asked shareholders to vote to (1) authorize more shares and (2) approve the conversion of hte preferred into common stock.
- Shareholders, God love 'em, voted no.
- So AIG did a 20-to-1 reverse stock split of its outstanding shares, which under Delaware law it could do without the approval of a majority of independent (non-goverment) shareholders.
- Which left it with lots of free authorized-but-unissued shares to give to the government.
- Which it did - though since shareholders had rejected conversion of the government's preferred shares, it had to give them the common stock in an "exchange" for those preferreds.
This appears to have just barely followed the letter of Delaware law, while still being pretty crappy to the notion of shareholder consent. If a Carl-Icahn-controlled company did that, people would be hopping mad. But as a New York court considering basically the same lawsuit found, the government isn't Carl Icahn, and isn't bound by petty Delaware fiduciary duties.
2.From the court's opinion on the motion to dismiss:
Starr has alleged repeatedly that AIG’s board involuntarily accepted the Government’s term sheet on September 16, 2008, and that the circumstances surrounding its acceptance led to no other alternative. Importantly, Starr also has alleged that the circumstances leading the board to accept the Government’s unfair terms were the result of the Government’s wrongful conduct. As noted above, Starr alleges that the Government’s actions and inaction in the weeks leading up to the loan agreement contributed to AIG’s dire financial situation. Specifically, Starr claims that prior to September 16, 2008, “[t]he Government discouraged sovereign wealth funds and other non-United States investors from participating in a private-sector solution to AIG’s liquidity needs.” Starr also asserts that “the Government interfered with AIG’s ability to raise capital and contributed to the decision to downgrade AIG’s credit rating, which itself triggered collateral calls that imposed pressure on AIG to declare bankruptcy within 24 hours.”
Moreover, Starr indicates that the Government induced AIG’s assent to the “grossly” unfair terms by an improper threat, whereby the Government misled AIG’s board into believing that the September 16, 2008 offer was the only one it would get and pressured the board to decide within hours. Starr attempts to portray the
Government as having engaged in unfair practices leading up to the loan agreement, thereby enabling the Government to exploit the situation in which AIG found itself on September 16, 2008. ... On a motion to dismiss ... the Court must assume the truth of the plaintiffs’ allegations and leave the determination as to their merit for a later stage. At this point, Starr has alleged sufficiently that the Government coerced AIG’s board into accepting the terms of the September 16, 2008 loan agreement.
If you or I tried to discourage a sovereign wealth fund from making an investment, we might not get very far, but I guess a court could believe it about the Treasury and the Fed. On the other hand, that "discouragement" probably consisted of saying things like "we won't provide you tons of cheap funding," so not sure how coercive it is.