On Monday, Judge Thomas Wheeler of the U.S. Court of Federal Claims ruled in Starr v. United States that the government overstepped its authority when it provided the insurance giant AIG with an $85 billion rescue on harsh terms in September 2008. Judge Wheeler harshly condemns the government’s justification for taking equity as a part of its bailout as “entirely misplaced,” and suggests that the Federal Reserve was clearly transgressing the boundaries of its legal authority. This is the first time a court has decisively rebuked one of the government’s recent financial crisis responses, which I comprehensively examine in my new book, To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis.
Wheeler’s opinion thus represents an historic moment, but its impact is likely to be quite limited. For one, although he found for the plaintiffs, he declined to award AIG’s shareholders at the time of the rescue any monetary damages, saying that had the government not intervened, a bankruptcy filing would have left them with nothing. Hank Greenberg, who built AIG into a global insurance giant and who was the driving force behind this litigation, thus wins a moral victory—but for the crisis decision-makers who dealt harshly with his old company, this ruling will be too little, too late to change their calculus. Indeed, faced with a penalty of $0 and some harsh words from an obscure court nearly seven years after the decisive choices, it is hard to imagine the central participants doing anything other than shrugging their shoulders. The Fed’s press release responding to the court’s decision supports that impression, even if the lawyers there decide to eventually pursue an appeal.
One should therefore be wary of any reports of this case that conclude from the opinion’s strong language that somehow “this changes everything.” It doesn’t. Back in October 2014, I wrote 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.” Now that Greenberg has unexpectedly prevailed but won an empty judgment, ultimate irrelevance looks even more certain—even if appeals make the case go another round in the Federal Circuit.
As I argue in my book, law often takes a back seat to expedience during crises, whether military or financial. Retrospective judicial rulings expressing discomfort about that fact are common, and perhaps they are an important way for our society to rhetorically affirm our reverence for the rule of law—especially in normal times. But history’s judgments about the legitimacy of crisis actions will be based on other factors. For crisis fighters (past and future) at the Fed and throughout the government, Judge Wheeler’s unsympathetic opinion will matter little next to concerns about effectively mitigating the harms of financial panic. And to the extent that its crisis actions created legitimacy problems, the Fed will worry about winning the support of the public and Congress, which can ultimately do far more to clip its wings than the Court of Federal Claims.
» If you are interested in reading Philip Wallach’s To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis, it is available in paperback and as an e-book here.