Monday, and throughout the week, in a case being heard by U.S. Court of Federal Claims Judge Thomas Wheeler, in Washington D.C. [See: Starr International Co’s, Inc. v. United States, 11-cv-00779, U.S. Court of Federal Claims (Washington)], former Treasury Secretaries Hank Paulson and Tim Geithner, along with former Federal Reserve Board Chair Ben Bernanke, are taking the witness stand† in what already qualifies as one of the most stunning legal events in the historical annals regarding our country’s economic meltdown in September 2008.
I’ve never reviewed a legal document in any civil litigation case (I have read more than a few) that reads like something that I’d reference as a cross between a John Grisham thriller and a Barbara Tuchman historical text. I think that many readers will agree with me when I state: The court document, which I’ve reproduced in the second and third portions of this diary series, made public in Yves Smith’s two posts on this story, yesterday, certainly fits that advance billing.
So, what’s Starr International Co’s, Inc. v. United States about?
Here’s The New York Times’ Ben Protess and Aaron M. Kessler, from two weeks ago…
Wall St. Bankrolls Ex-Executive as He Sues Over A.I.G. Bailout
By Ben Protess and Aaron M. Kessler
New York Times
September 23, 2014 10:01 pm
Documents on A.I.G.
One might call it “chutzpah,” as several irate lawmakers did, or “rubbing salt in the wounds” of the American taxpayer. But to a few Wall Street financiers, a lawsuit that accuses the government of shortchanging the American International Group in its 2008 bailout is something else: a promising investment in a cause they support.
Maurice R. Greenberg, 89, the former A.I.G. chief executive who still holds a large stake in the insurance company, filed the lawsuit on behalf of fellow shareholders. He has now raised several million dollars from three Wall Street companions to help cover the cost of the case. The investors, who are entitled to a cut of any damages Mr. Greenberg collects from the government, contributed about 15 percent of the tens of millions of dollars in legal costs, according to people with knowledge of the arrangement.
Six years after the government saved Wall Street from the brink of collapse, the lawsuit is coming to trial, reopening one of the ugliest chapters in modern financial history. The trial, which begins next week in Washington, will most likely hinge on testimony from the policy makers who orchestrated A.I.G.’s rescue, including former Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Timothy F. Geithner.
With the legal bills mounting in the three-year case, Mr. Greenberg sought support from a certain breed of investor — those who have misgivings about the government. Kenneth G. Langone, the former director of the New York Stock Exchange who spent years fending off accusations from the New York attorney general’s office, contributed to Mr. Greenberg’s legal fund, the people said. Steven A. Cohen, whose hedge fund was indicted on charges of insider trading last year, considered investing, too, but ultimately declined.
The investments from Mr. Greenberg’s friends — their decisions and the details of their arrangement have not been previously reported — have breathed new life into a case that the government thought would never reach trial. After all, by the government’s reckoning, A.I.G. had only one alternative to the bailout: bankruptcy.
The lawsuit, which seeks more than $40 billion from the government, does not dispute that A.I.G. needed a $182 billion lifeline to survive the financial crisis. It instead challenges the onerous nature of the rescue…
As Yves Smith has already noted it at Naked Capitalism, over the past 18 hours, we’re not just talking “bombshell.” With Starr Companies’ legal expenses already well into the tens of millions of dollars, and with a crack team of lawyers that’s led by David Boies, arguably, the most highly-regarded corporate litigator in the U.S., this is Hank Greenberg’s version of “shock and awe.”
†Stories regarding Paulson’s Monday court testimony started hitting the MSM as I was writing this. And, the general media takeaway, IMHO, is that Paulson’s comments on the stand, yesterday, added significant support to Starr International’s case. Geithner’s scheduled to testify today. And, Bernanke’s set to take the stand on Wednesday and Thursday.
Back to Marcy…
(Diarist’s Note: As you’ll see on the DKos diary list, and if you read the second and third pieces in my series this morning, Yves Smith has granted me republishing rights to her two posts on this story, which were originally published over at Naked Capitalism, earlier on Monday.)
With AIG “Bailout,” Did the US become a Planned Economy to Fight Off Takeover by One?
Marcy Wheeler
emptywheel.net
Published October 6, 2014
In two posts concluding, ”the government might find a victory [in AIG's lawsuit] to be more costly than it anticipated,” Yves Smith digs out key details from AIG’s claims that in September 2008, the US illegally took it over.
I think Smith is intrigued by the additional evidence provided by the AIG complaint that the government took several actions that ensured it could use AIG as a bailout vehicle, including (in her second post), by not asking whether the counterparties would be willing to take a haircut.
Another stunning new allegation in the “Corrected Proposed Findings of Fact” document is that, in stark contrast with previous claims by the Fed, that only UBS was willing to take a haircut, it turns out the New York Fed only bothered talking to eight of the 16 counterparties (and then as we already know from the SIGTARP report on this issue, using a script that was delivered by junior staffers, as opposed to having Geithner or Paulson call and force them to take a haircut). Moreover, BlackRock, which was advising the Fed, believed that Bank of America and Goldman would be receptive to discounts.
But I’m particularly interested in what Treasury forestalled with its bailout: bailouts from sovereign wealth funds from Singapore, China, and some unnamed Middle Eastern funders. From the first post:
[The AIG complaint] argues that AIG was forced to take a bailout it didn’t need, that all that was required was a bridge loan until it could obtain private financing. That may sound like a howler. AIG was teetering on the verge of failure and needed to get a $14 billion bridge loan on September 16 (a Tuesday, the day after the Lehman bankruptcy) that in a few days rose to $37 billion simply to carry it through the weekend when the terms of the credit facility were finalized.
[snip]
7.6 Defendant directly discouraged sovereign wealth funds from providing liquidity to AIG.
(a) Sovereign wealth funds, including the Government of Singapore Investment Corporation (GIC) and the Chinese Investment Corporation (CIC) expressed interest in investing in AIG (Studzinski Dep. 39:4-40:18, 133:11-19).
(b) Defendant discouraged the CIC and representatives of the Chinese Government from assisting AIG. At 12:25 p.m. on September 16, 2008, Taiya Smith, Paulson’s deputy chief of staff and executive secretary, informed Paulson’s chief of staff and Treasury Under Secretary for International Affairs David McCormick that the CIC was “prepared to make a big investment in AIG, but would need Hank to call [Chinese Vice Premier] Wang Qishan” (PTX 89 at 1; see also PTX 423 at 15-18). The Chinese “were actually willing to put up a little bit more than the total amount of money required for AIG” (PTX 423 at 16).
(c) On September 16, 2008, McCormick spoke to Paulson about the Chinese interest in investing AIG (PTX 423 at 16-17). McCormick then told Smith that Treasury “did not want the Chinese coming in at this point in time on AIG” (PTX 423 at 17).
(d) Later that day, Smith met with Chinese Government officials in California during Joint Commission on Commerce and Trade in Yorba Linda, California (PTX 423 at 16). During that meeting, “all [the Chinese officials] wanted to talk about was AIG” (PTX 423 at 17). Smith spent one or two hours explaining what was happening with AIG (PTX 423 at 18). She conveyed the message that Treasury did not want the Chinese to invest in AIG (PTX 423 at 17).
(e) On September 17, 2008, United States Senator Hillary Clinton called Paulson “on behalf of Mickey Kantor, who had served as Commerce secretary in the Clinton administration and now represented a group of Middle Eastern investors. These investors, Hillary said, wanted to buy AIG. ‘Maybe the government doesn’t have to do anything,’ she said” (PTX 706 at 279). Paulson told Senator Clinton, “this was impossible unless the investors had a big balance sheet and the wherewithal to guarantee all of AIG’s liabilities” (PTX 706 at 279). (numbered text page 17, PDF page 21)
The fact that the Singapore and Chinese sovereign wealth funds both were willing to invest in AIG, and that a separate group of Middle Eastern investors was also pressing to buy in, strongly undercuts the official story that the only way out for AIG was into the Fed’s arms. Yes, we don’t know exactly how much they were willing to put in and whether that would have been enough to make up the $85 billion size of the initial credit line.
But the Chinese statement was a clear general indication that “we’re willing and able to go big”…
In this telling, the US government bailed out AIG to prevent China (and Singapore and some of our “allies” in the Middle East) from bailing it out…
Wheeler notes that Smith points out that there may be legitimate national security reasons for Paulson’s behavior with regard to the overall AIG matter.
She then quotes Smith…
…There is also the not-trivial issue that AIG is widely believed to provide legitimate-looking jobs to CIA assets all over the world. Would letting foreigners obtain control put that sort of information at risk…
Wheeler states…
…While Smith believes these issues could have been addressed by having a consortium of foreigners take over AIG, I suspect Treasury would still regard it as having China take over our critical infrastructure. While I don’t get the finance bit like Smith does, it seems like having the monopoly insurer of excessive “capitalist” gambling in Chinese hands would have been the equivalent of letting them hold one of Wall Streets’ nuts for safe keeping…
…
…To stave that [the foreign takeover of AIG] off, it appears — particularly if AIG’s claims have any basis in fact, which they appear to — the US embraced a command economy…
It’s here where it should be noted that Marcy acknowledges Yves’ expertise regarding the relevant financial/economic issues involved in this story. And, while Wheeler may have overlooked the matter, entirely, in her brief post, readers should be reminded that one of the greater/greatest truths of this over-arching AIG story was widely noted by Yves and countless others--including Matt Taibbi (Read: “
The Great American Bubble Machine”) and
yours truly to refresh your memory—concerning the fact that the quasi-nationalization of AIG in 2008 and 2009 was, most notably, a massive, stealthy bailout of AIG’s (Wall Street, European, Chinese and Japanese) counterparties, with Hank Paulson’s beloved Goldman Sachs being at or near the top of the list of those creditors.
Speaking of Bush II Treasury Secretary and former Goldman-Sachs CEO Hank Paulson—while Marcy’s post was published before Paulson’s court testimony hit the MSM, later on Monday—it appears that his testimony supports many of the plaintiffs’ claims (here are links to a couple of stories):
Ex-Treasury Secretary Paulson says AIG bailout was punitive, Reuters
Paulson Says AIG Harsh Loan Terms Meant to Send a Message, Bloomberg
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And, for all of those misguided, “New Democrat” defenders of Wall Street that are reading this story—you know, the folks who like to talk about how much “profit” taxpayers made from these bailouts--I would like to remind them of Senator Elizabeth Warren’s sentiments about this story, not to mention the inconvenient truth that the crash of our markets in 2008 has created consequences that include the loss of trillions of dollars in domestic productivity over the past six years. (Oh, yeah…“that”…)
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