Over the last couple weeks, financial crisis junkies (myself included) have been gobbling up news of the extraordinary trial now taking place in the Court of Federal Claims, Starr International v. United States—or, more informally and recognizably, Hank Greenberg v. the AIG Bailout. Greenberg, the man who built AIG into a global insurance empire before being forced out of the company’s management in 2005, remained one of AIG’s largest shareholders when it was bailed out by the Federal Reserve in September 2008, and his claim is that the Fed overstepped its legal powers and wrongfully devalued AIG shareholders’ equity when it took a 79.9% stake in the company. The trial has paraded the main crisis fighters to the witness stand, including Hank Paulson, Tim Geithner, and Ben Bernanke (lately of Brookings).
Commentary about AIG’s bailout could fill many books—indeed, it is a major topic in my forthcoming book, To the Edge: Legality, Legitimacy, and the Financial Crisis of 2008 (Brookings Press, 2015), and a focus of Greenberg’s own book, The AIG Story (Wiley, 2013), too. The legal details, largely neglected in press coverage of the trial, center on whether the government improperly overrode shareholders’ rights, either in September 2008 when the AIG board approved the initial bailout or later, in June 2009, when a reverse stock split enabled the government to obtain the share of the company it was promised back in 2008. Some of the legal details are fairly uncomfortable. Taking equity in the firm as “collateral” and then keeping it regardless of principal repayment is a decidedly odd sort of loan. And the corporate law maneuverings needed to make the deal come off as the AIG Board had agreed to (but the AIG shareholders may not have signed off on if given the chance to weigh in) practically define skullduggery. But, as Bloomberg View’s Matt Levine puts it, “[M]ost of [Greenberg’s] rhetoric, and most of the celebrity witness examinations, are about the unfairness and malice of AIG’s bailout, not the boring legal stuff, because honestly nobody wants to hear about class votes on reverse stock splits.” Quite so, and I won’t go on about those matters here.
Greenberg is very likely to lose his case. Courts have a long history of showing deference to executive branch actions taken during national crises, even when they are legally problematic. More importantly, AIG’s Board did agree to the government’s terms. That may have been a cowardly “capitulation” in Greenberg’s estimate, but it kept the company (and the shareholders) afloat when it would have otherwise probably been lost in the flood. Given the (really quite impeccable) logic of the board’s position—saving a diluted something is better than salvaging nothing—and the fact of their acceptance, mostly Greenberg’s trial is a testament to the sourness of his grapes.
The point I’d like to make here, however, is that even if Greenberg unexpectedly prevails and wins a monster judgment against the government, it won’t matter very much in the big scheme of things. There is a natural desire to see the trial as a potential historical turning point of some kind. Mercatus’s Hester Peirce suggests a Greenberg victory could somehow dislodge the hard-to-solve problem of too big to fail. National Review’s Tim Cavanaugh implies that Greenberg’s case has merit and hopes a Greenberg victory would serve as overdue comeuppance for the crisis-fighters’ high-handed and seemingly arbitrary dealing in dispensing taxpayer largesse, perhaps even discouraging the government from repeating its bailouts-for-all strategy in future financial crises.
Don’t believe it.
As the Wall Street Journal reported, Bernanke took the stand with visible annoyance, and all of the top policymakers whose conduct is being questioned clearly regard the trial as a farce. Were the government to lose (including on inevitable appeals), that sense of irritation would undoubtedly flower into disgust at the legal system’s willingness to engage in Monday morning quarterbacking, but it is almost impossible to imagine that any of the central players would become contrite about their actions. In the history books, their failure to save Lehman will count as a major strike against them; the purported illegality of their AIG rescue, which can plausibly be said to have stopped the crisis from getting much worse, will be a footnote at most.
In reaching this conclusion, I look to past cases in which courts have rebuked emergency actions well after the crisis has passed, such as Ex parte Milligan (1866), in which the Supreme Court found that Abraham Lincoln’s application of martial law to civilians was unconstitutional. Some legal scholars celebrate the case (and others like it) as precedents confirming law’s ability to discipline government actions even during the worst crises. But doing so vastly overestimates the importance of formal legal decisions compared to history’s judgments about legitimacy. Lincoln is celebrated for his ability to prosecute the Civil War successfully, and few people’s opinions about him are very much affected by the fact that—after the Union was victorious and Lincoln in his grave—the Supreme Court rebuked his use of martial law. As Edward Corwin put it in 1940, “To suppose that such fustian would be of greater influence in determining presidential procedure in a future great emergency than precedents backed by the monumental reputation of Lincoln would be merely childish.”
The Financial Crisis of 2008 was no Civil War, and of course Bernanke, Paulson, and Geithner will not enjoy anything like Lincoln’s historical stature. But there is something rather naïve about the idea that their historical legacies will be importantly affected, either for good or for ill, by the proceedings in the Court of Federal Claims. When future crisis-fighters think about what kinds of actions are available to stop a developing financial crisis, they will give exactly zero weight to the worry that, six years later, their conduct might be second-guessed by a judge who would then slightly redistribute the fruits of crisis survival. Whatever one makes of that as matter of normative ideals, it is an empirical prediction worth taking to the bank. If future financial crisis fighters repudiate the methods of 2008, it will be for very different reasons.