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TARPDavid Boies, the attorney who represented Al Gore and the Democratic Party in Bush v. Gore in 2000, is representing the legendary Maurice “Hank” Greenberg, former CEO of insurance giant AIG in a lawsuit against the United States – for bailing them out. That’s right, Boies told a federal judge last month that AIG stockholders were cheated by the federal government’s usurious terms, including an interest rate of 14% and a demand for 80% of the company. The terms cost shareholders as much as $40 billion dollars, Boies said, arguing that AIG investors deserve their money back. Former Treasury Secretary Hank Paulson, former New York Fed Bank President Timothy Geithner and former Fed Chairman Ben Bernanke were called to testify. Closing arguments are scheduled before Judge Thomas Wheeler at the US Court of Federal Claims in Washington, DC. [1]
American International Group is an American multinational insurance corporation with more than 88 million customers in 130 countries. AIG companies employ over 64,000 people in 90 countries and was founded in China in 1919 by Cornelius Vander Starr. See if you can find the anomaly with the above when compared to below:
AIG faced the most difficult financial crisis in its history when a series of events unfolded in late 2008. The insurer had sold credit protection through its London unit in the form of credit default swaps on collateralized debt obligations, but they had declined in value. The AIG Financial Products division in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans. As a result, AIG’s credit rating was downgraded and it was required to post additional collateral with its trading counter-parties, leading to a liquidity crisis that began on September 16, 2008 and essentially bankrupted all of AIG. [2]
The company known as American International Group (AIG) is an American multinational insurance corporation is the anomaly. The TARP package offered to AIG in 2008 saved it’s ass as a going concern. Perhaps they might have cleared the biggest bankruptcy in U.S. history (unlike Bear Stearns and Lehman Brothers) and made it back on the board at the NYSE. It’s highly unlikely that would have ever happened. AIG would have been but a memory, a total loss to the vast majority of stockholders and policyholders. AIG’s only option to remain solvent was to accept the government’s terms. Of course, they could have walked away, as others did, with no penalty. What galls Greenberg and the cronies he left behind is that the U.S. government acted more like Bain Capital when dealing with them instead of the usual tax and spend liberals. So the Fed stepped in announcing the creation of a secured credit line of up to $85 billion dollars to prevent the company’s collapse, enabling AIG to deliver additional collateral to its credit-default-swaps trading partners. The AIG board accepted the terms of the Fed package that same day, making it the largest government bailout of a private company in U.S. history.
The irony here, of course, is that the bailout worked. It was on October 1, 2008, that the Senate debated and voted on what was then H.R. 1424. Hours later, they voted 74–25 in favor of the bill and two days later, the House voted 263–171 to enact the bill into law. President George W. Bush signed it into law within hours, creating the $700 billion dollar Troubled Asset Relief Program (TARP) to purchase failing bank assets. Analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $7.77 trillion dollars to rescuing the financial system. That’s trillion.
Mr. Boies, while representing Hank Greenberg and AIG back in 2005 in a federal criminal trial that Eliot Spitzer’s U.S. Department of Justice prosecuted – that led to Greenberg’s downfall as an executive at AIG in 2007 when he was forced out by his hand picked board – was quick to settle charges and get prosecutors off their back. The company paid $1.6 billion dollars in fines and took a $3.6 billion dollar charge to undo the fake boost from questionable accounting practices from 2000-2005. Revisionist thinking is that somehow, the U.S. Congress was supposed to offer kindly terms to this too-big-to-fail monstrosity. There’s also a phony line of thinking on Wall Street that the TARP was a failure because it wasn’t needed. In this fantasy world, mighty market forces would have fixed the problem systemically. That’s kind of how Herbert Hoover fixed the Great Depression! Money manager Michael Lewitt wrote in the New York Times in 2008 that “AIG’s collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression.” In 1932, unemployment had reached 25% and major American businesses defaulted on loans. More than 5,000 banks failed and hundreds of thousands found themselves homeless and congregating in “Hoovervilles” (so-called shanty towns) that appeared in most major U.S. cities. Let’s never forget the gloomy  financial outlook back in 2008:
In a Times/Bloomberg poll, a solid majority, 62%, said they believed that insufficient government regulation was partly responsible for the financial crisis and as to where the blame should go, respondents were divided: 32% blamed Wall Street financial institutions, and 26% blamed the Bush administration. The financial crisis has helped push public gloom to a record depth: 79% of adults said they thought the country was “on the wrong track,” the highest rate ever in a Times poll. Asked whether the country was “generally going in the right direction” or “on the wrong track,” 79% said “wrong track” and only 13% said “right direction.” When asked whether they felt the nation’s economy was doing well or badly, 81% said the economy was doing badly, an increase from the 76% recorded in August and close to the record high of 82% recorded in June of 2008, when energy prices were soaring. The nation’s focus on the faltering economy appeared to bolster then nominee Barack Obama, seen by most voters as a better economic leader than Republican John McCain. Asked which candidate could do a better job of handling the financial crisis as president next year (2009), 48% of registered voters named Obama and 35% named McCain. [3]
In 2008, the same year that he won the Nobel Prize, Paul Krugman was prescient about the U.S. economic outlook and possible remedy. He said that while the manic-depressive stock market was dominating the headlines, the far more important story was the grim news about the real economy:
It’s now clear that rescuing the banks is just the beginning: the non-financial economy is also in desperate need of help. And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold… Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long. How nasty? The unemployment rate is already above 6 percent (and broader measures of underemployment are in double digits). It’s now virtually certain that the unemployment rate will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century. If Barack Obama becomes president… He will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable. He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. [4]
April 1, 2015, marks the 30th quarter since October 1, 2008. As unemployment numbers fall to 5.5% we find ourselves below the rate that alarmed Mr. Krugman so much back in 2008 and the trend is for lower unemployment for the next two quarters. In October of that 2008 election year, unemployment increased for 9 consecutive months, eliminating almost a million jobs according to a Labor Department report, prompting the bailout approved by Congress.
The government’s approach to the bailout, which also benefited the taxpayer, was to avoid putting public money only into the financially weakest banks, both to avoid stigmatizing them and, more importantly, to give taxpayers a return on their investment by allowing them to share in the upside that strong banks will enjoy when weak banks are bailed out. JP Morgan and Wells Fargo, which were relatively healthy, did not need government money. But they and their share price would benefit from government bailout of weak banks. By forcing these healthy banks to accept government recapitalization, and by demanding warrants from those banks allowing the government to buy shares at the distressed September 2008 price, the American taxpayer got to share some of the financial benefit of the U.S. bank bailout plan – which only seems fair, given that they did pay for it. [5]
In fact, the Treasury Department recovered every penny of the bailout money and the American people were rewarded with their prudent investment by earning between $10 to $20 billion dollars. Of course, if Mr. Boies, Greenberg and 275,000 stockholders succeed in their federal lawsuit, the U.S. people will need to fork over all of these profits, on top of another $20 billion of the remaining TARP balance in order to satisfy the judgement. A decision is expected this summer.
It is one of the great ironies of modern politics that the U.S. bailout has been so politically toxic. Barney Frank, chairman of the House Financial Services Committee in 2008, quipped the bailout “will go down in history as the most successful wildly unpopular thing the federal government has ever done.”[6] Thus far, the U.S. economy has created more than 1 million jobs over the past three months, the best stretch of hiring in 17 years. That job growth, along with improved consumer confidence and spending, suggests the recovery has finally found higher ground, more than five years after the recession officially ended. [7]
Most economists expect that 2015 will be the best year for American workers since the recession. Less important than the pace of hiring is the emergence of solid wage growth, an indicator of full labor market health. The average hourly worker saw a 12-cent-per-hour raise in January, the best one-month increase since 2007. Over the past year, wages have risen 2.2% and in the meantime, consumer prices are seeing inflation below 1% as gas prices plummet. [8] The national average price of regular unleaded gasoline was $2.43 Friday, unchanged on the week. Friday’s average remained $1.11 below year ago prices. Global crude prices began the week at six-year lows. Lending rates are hovering around 4% for a 30 year fixed loan and all 31 banks the Federal Reserve stress-tested recently were deemed strong enough to weather a severe economic meltdown without any help from the government. The only caveat is that the national public debt is almost 75% of GDP (almost $17 trillion dollars) where in 2008 it was only 40%. Considering that the country was facing the worst economic meltdown since the Great Depression, I’ll take that bargain any day. Too bad for us that Hank Greenberg and AIG doesn’t see it that way.
John Underhill (March 30, 2015)
[1] Phil Milford and Andrew Zajac (March 24, 2005). Greenberg Fires Last Shots in AIG Fight as Trial End Nears. Retreived March 30, 2015.
[2] Wikipedia Article American International Group. Retreived March 30, 2015.
[3] Doyle McManus (September 24, 2008). Americans Reluctant to Bail Out Wall Street. Bloomberg Business. Retreived March 30, 2015.
[4] Paul Krugman (October 16, 2008). Let’s Get Fiscal. New York Times. (Retreived March 30, 2015)
[5] Pepper Culpepper (November 17, 2014). America’s Bank Bailouts Worked. (Retreived March 29, 2015)
[6] Mark Sorkin (January-February, 2014). After The Disaster. University of Chicago Magazine. (Retreived March 30, 2015)
[7] Chico Harvin and Jim Tankersley (February 6, 2015). Healthy Economy Forces Republicans to Rethink Obama-Skewering Strategy. Washington Post. (Retreived March 30, 2015)
[8] Paul Krugman (October 8, 2014). In Defense of Obama. Rolling Stone Magazine. (Retreived March 29, 2015)

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