The possibility that AIG might bite the taxpayers' hand that fed it by joining a lawsuit against the government filed last November by AIG's former chairman, Hank Greenberg, on behalf of Starr International, AIG's largest shareholder at the time of the bailout, has generated more news stories and commentary than SBM Blog has time to sift through and curate. (Greenberg actually initiated two lawsuits, one in New York against the New York Federal Reserve Bank, and one in D.C. federal court against the U.S. government ; the New York lawsuit was dismissed last November.)
In the wake of AIG's decision not to join the D.C. lawsuit and to prevent Starr International from recovering damages for any shareholder other than itself, the Wall Street Journal published this op-ed sympathetic to the litigation. We thought our readers might want to read the complaint itself and come to their own conclusions -- here's the 50-page complaint (PDF). The attorney of record is David Boies; not surprisingly, it's a good read. Here are some key excerpts:
The Government's taking of an approximately 80% equity stake in AIG, and ultimately the complete control over AIG that the Government sought, depended on the authorization of additional shares of AIG's common stock. This is so because there was not sufficient common stock authorized under AIG's Charter to transfer the nearly 80% equity stake that the Government intended to take. The Government fully understood that in order to implement its proposed takeover of AIG and the rights of the Common Stock shareholders, the clear legal rights of existing Common Stock shareholders required that they be entitled to an independent vote to decide whether their Company should increase the number of authorized common shares sufficiently to enable the Government to obtain the nearly 80% interest in the issued and outstanding common stock that the Government sought. Indeed, in a Delaware Court of Chancery proceeding considering the Government's actions, AIG expressly represented that this vote would take place. Consistent with AIG's express representations to the Delaware Court, all subsequent securities filings by AIG and the applicable Stock Purchase Agreement, explicitly stated the holders of the Common Stock of AIG, by a separate class vote, would vote on whether or not to amend the AIG Certificate of Incorporation to increase the authorized shares of the Company in order to permit the Government to obtain a nearly 80% interest in the Common Stock of AIG. … [N]ot only did the Common Stock shareholders of AIG not agree to the proposed taking of their property and rights through an amendment of the Charter of their Company, but when the Common Stock shareholders voted to reject the increase in authorized shares, the Government deliberately ignored and evaded that vote.
Providing guarantees to back-up AIG's obligations, as the Government did with other comparable financial institutions, would have been less costly and more efficient (and more fair) than the course the Government took with AIG. However, the unprecedented approach the Government took with AIG enabled the Government to use AIG as a vehicle to covertly funnel billions of dollars to other preferred financial institutions, including billions of dollars to foreign entities, in a now well-documented ''backdoor bailout" of these financial institutions. In so doing, the Government discriminatorily took AIG's property without due process or just compensation.
The Government is not empowered to trample shareholder and property rights even in the midst of a financial emergency. The Fifth Amendment of the United States Constitution directs that the Federal Government shall not deprive any person of "property without due process of law" and forbids the Government from appropriating private property "for public use, without just compensation." U.S. Const. amend. V. Financial emergencies do not eviscerate this Constitutional protection.
To the contrary, although public policy goals may justify the taking of private property to serve public ends, when the Government does so it is required by the Constitution to ensure that the property is acquired in accordance with law, that the burdens associated with the taking are not imposed in a disparate and unfair manner, and that just compensation is paid. "The Fifth Amendment's guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." Armstrong v. United States, 364 U.S. 40, 49 (1960). As Justice Holmes long ago admonished, "a strong public desire to improve the public condition is not enough to warrant achieving the result by a shorter cut than the constitutional way of paying for the change." Pa. Coal Co. v. Mahon, 260 U.S. 393,416 (1922).