Americans were angry when Wall Streets greedy and risky behavior triggered a global financial crisis in 2008. They were angrier still when the government had to borrow and spend hundreds of billions of dollars to rescue mortgage giants Fannie Mae and Freddie Mac, the largest banks and the insurance company AIG. They were outraged when they found out that executives at those enterprises were continuing to receive big salaries and bonuses.
So just imagine how it outrageous it would be if some Wall Street sharpies went to court to argue that they didnt benefit enough from the bailouts and that taxpayers should pay them tens of billions of dollars more.
In fact, they did. And, according to legal observers, they just might prevail.
Lawsuits of the Rich and Shameless is how the comedian Jon Stewart dubbed it.
An absurdist comedy . . . worthy of the Marx Brothers or Mel Brooks, wrote John Cassidy, the New Yorkers economics correspondent.
For taxpayers, it looks to be another example of the old adage that no good deed goes unpunished.
In two separate cases, the government now stands accused of overstepping its authority when it took extraordinary measures to prevent a financial meltdown in the fall of 2008. The Wall Street figures who are suing say their property was seized without compensation, in violation of the Constitution. One case was brought by Maurice Hank Greenberg, the legendary former chief executive of AIG who built it into the worlds largest insurer. Filing the other case is a group of hedge funds that bought Fannie and Freddie stock for pennies per share after the companies were put in government conservatorship.
Federal district court judges in Washington and New York initially dismissed both challenges. Their opinions noted, somewhat pointedly, that the Wall Street plaintiffs were not only unharmed but actually came out better off as a result of the government rescues. Yet both groups have now found a more sympathetic hearing a stones throw from the front gate of the White House, at a little-known brick courthouse called the U.S. Court of Claims.
There, Greenberg is asking the court to award him and other AIG shareholders at least $23 billion from the Treasury. He says thats to compensate them for the 80 percent of AIG stock that the Federal Reserve demanded as a condition for its bailout. Judge Thomas Wheeler has repeatedly signaled his agreement with Greenberg. A decision is expected any day.
In the Fannie and Freddie case, the decision is further off, with the trial set to begin in the fall. The hedge funds are challenging the governments decision to confiscate all of the firms annual profits, even if those profits exceed the 10 percent dividend rate that the Treasury had initially demanded. This profit sweep effectively prevents the firms from ever returning the governments $187 billion in capital and freeing themselves from government control.
Earlier this year, Judge Margaret Sweeney refused to dismiss the case and gave lawyers for the hedge funds the right to sift through the memos and e-mails of government officials involved. Within weeks, Fannie and Freddie shares, which had been trading at about $1.50, started trading as high as $3 based on rumors that the documents revealed inconsistencies in government officials statements. The hedge funds are asking for the return of as much as $100 billion in profits and an end to the Treasury-imposed profit sweep. In her comments, Sweeney has shown sympathy with their argument that the government cant hold them indefinitely in a legal limbo in which they have no claims to assets of the company they ostensibly own.
When these cases were filed, many legal observers thought they were a long shot, even frivolous. But from their procedural rulings and comments from the bench, said David Zaring, a professor of legal studies at the Wharton School of Business, both judges have indicated they are at least open to the plaintiffs legal theories and willing to hold the government accountable for what it did during the financial crisis.
I think peoples views have changed, Carl Tobias, a professor at the University of Richmond Law School, said of the AIG case. Greenbergs lawyers, he said, were able to present evidence and persuade the judge that there were some serious issues here. Its possible the judge could rule in their favor in some way.
