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Aig - Govt Bailout Illegal Judge Rules.

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http://www.zerohedge.com/news/2015-06-15/dramatic-decision-judge-finds-fed-bailout-aig-was-illegal-government-violated-federa

Earlier today, former AIG head Hank Greenberg's long-running legal battle of the US government came to a dramatic end when in a 75-page ruling, U.S. Court of Claims Judge Thomas Wheeler found that Greenberg was indeed correct in claiming the government overstepped its legal boundaries in its "unduly harsh treatment of AIG in comparison to other institutions" which was "misguided and had no legitimate purpose."

But because “the question is not whether this treatment was inequitable or unfair, but whether the government’s actions created a legal right of recovery for AIG’s shareholders" Wheeler found that Greenberg was not owed any money as AIG would have gone bankrupt without the government's forced intervention. Greenberg was seeking at least $25 billion in damages for shareholders.

The reason for the case is that years after the initial $85 billion bailout which eventually ballooned to $182 billion, AIG - with the government's explicit backstop and thus zero credit risk - managed to repay the government bailout funds and the government with a $22.7 billion profit. Greenberg argued that the pre-bailout equity holders deserved a piece of the pie, very much the same way that Fannie and Freddie stakeholders are also arguing they too deserve a piece of the post-government bailout pie.

However, “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" the judge found, and admitted that the pre-government bailout equity value of financial companies - since all of them were facing bankruptcy without a bailout - was zero. Whether this opens up the door to a class action lawsuit by all those who were short financials into the bailout and were then squeezed by the Fed's bailout which the court has found to be an "illegal exaction" remains to be seen.

Here are the key sections from the court ruling:

The weight of the evidence demonstrates that the Government treated AIG much more harshly than other institutions in need of financial assistance
. In September 2008, AIG’s international insurance subsidiaries were thriving and profitable, but its Financial Products Division experienced a severe liquidity shortage due to the collapse of the housing market. Other major institutions, such as Morgan Stanley, Goldman Sachs, and Bank of America, encountered similar liquidity shortages.
Thus, while the Government publicly singled out AIG as the poster child for causing the September 2008 economic crisis
(Paulson, Tr. 1254-55), the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions.

Well, there was Lehman too, whose stock most certainly went to zero and which never got a government bailout but that was to be expected: after all Goldman needed to eliminate its biggest fixed income competitor at the time, and what better way than to wipe it out completely.

Wheeler continues:

The notorious credit default swap transactions were very low risk in a thriving housing market, but they quickly became very high risk when the bottom fell out of this market. Many entities engaged in these transactions, not just AIG. T
he Government’s justification for taking control of AIG’s ownership and running its business operations appears to have been entirely misplaced.
The Government did not demand shareholder equity, high interest rates, or voting control of any entity except AIG. Indeed, with the exception of AIG,
the Government has never demanded equity ownership from a borrower in the 75-year history of Section 13(3) of the Federal Reserve Act. Paulson, Tr. 1235-36; Bernanke, Tr. 1989-90.

In other words, there has never been a Fed-mediated nationalization of a private corporation prior to 2008. Which is accurate. It is also illegal according to the court, a ruling that may have dramatic repercussions for all future government/Fed bailouts of banks that Goldman deems relevant.

Starr alleges in its own right and on behalf of other AIG shareholders that the
Government’s actions in acquiring control of AIG constituted a taking without just compensation and an illegal exaction, both in violation of the Fifth Amendment to the U.S. Constitution
....
Having considered the entire record,
the Court finds in Starr’s favor on the illegal exaction claim
.

I wonder if this will have any repercussions?

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In A.I.G. Case, Surprise Ruling That Could End All Bailouts

By ANDREW ROSS SORKIN 9:10 PM ET

A decision that the Fed acted beyond its legal authority in bailing out A.I.G. could have far-reaching consequences should another financial crisis occur — and if history is any guide, one will.

The NY Times view.

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Whether this opens up the door to a class action lawsuit by all those who were short financials into the bailout and were then squeezed by the Fed's bailout which the court has found to be an "illegal exaction" remains to be seen.

That could be interesting :)

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