The Court of Federal Claims splits the difference

June 15, 2015 8:15 PM

Today the U.S. Court of Federal Claims ruled that the Federal Reserve Bank illegally took an equity stake in AIG as a mandatory as a necessary condition of obtaining a bailout....But the court also held that the plaintiffs were entitled to exactly $0 in damages.

Previously.

Money quote from today's ruling from the Court of Federal Claims:

In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value. DX 2615 (chart showing that equity claimants typically have recovered zero in large U.S. bankruptcies). Particularly in the case of a corporate conglomerate largely composed of insurance subsidiaries, the assets of such subsidiaries would have been seized by state or national governmental authorities to preserve value for insurance policyholders.

Davis Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for AIG, like cascading champagne glasses where secured creditors are at the top with their glasses filled first, then spilling over to the glasses of other creditors, and finally to the glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926, 5930-31; see also Offit, Tr. 7370 (In a bankruptcy filing, the shareholders are “last in line” and in most cases their interests are “wiped out.”). A popular phrase coined by financial adviser John Studzinski, in counseling AIG’s Board on September 21, 2008 is that “twenty percent of something [is] better than 100 percent of nothing.” Studzinski, Tr. 6936-37. Others, such as Mr. Liddy and Mr. Offit, also embraced this philosophy, believing the top priority was for AIG to live to fight another day. If the Government had done nothing, the shareholders would have been left with 100 percent of nothing. In closing arguments, responding to Starr’s allegation that FRBNY imposed punitive terms on AIG (which it did), Defendant’s counsel Mr. Dintzer observed, “[i]f the Fed had wanted to harm AIG in some way, all it had to do was nothing.” Dintzer, Closing Arg., Tr. 151.

Coverage:

New York Times
Bloomberg
LA Times

posted by anewnadir (0 comments total)