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In AIG Trial, Private Property Rights And Preferential Treatment At Issue

by Mark Melin October 10, 2014, 11:23 am

After having documented preferential terms given to investment bank, question of government's right to seize a business and force it to accept harsh terms when other options were available could decide case

It’s funny how some of the financial elite, whose iron clad control is seldom questioned, get testy when someone finally asks tough questions. That’s playing out in court as the lawsuit over the government’s 2008 seizure of a private business, American International Group Inc (NYSE:AIG), on terms that plaintiffs say have been documented to have been severe relative to bailout terms given to large banks.

AIG trial: Ben Bernanke annoyed by tough questions about property rights

In a Washington D.C. courtroom, where a trial that is about property rights is the toughest question, former Federal Reserve Chairman Ben Bernanke appeared annoyed that anyone would dare question the incident. Bernanke was reported in the New York Times to be giving “terse” and “clipped responses” as tough questions, as opposed to softballs thrown by fawning journalists, came his way.

The toughest question is that, had the government guaranteed the AIG deal, a Chinese Sovereign Wealth fund would likely have been a buyer on better terms, as ValueWalk identified. It’s hard to deny that, based on public information, if the U.S. government had essentially guaranteed the success of the AIG deal to some degree, as it eventually did with the larger banks, the Chinese would have been interested buyers.

Was the deal with a competitive foreign interest, a country that is actively working to displace the U.S. dollar as the world reserve currency of choice, at issue?

To Bernanke these questions don’t matter because the other offer didn’t exist.

“It was evident from the fact that the board took the Fed’s offer that they didn’t have a better offer,” he testified, but then didn’t offer definitive proof in this regard. The Chinese are documented to have expressed interest the day of the American International Group Inc (NYSE:AIG) board vote to accept the Fed’s take it or leave it offer.

In emails uncovered under a pseudonym “Edward Quince,” an avoidance technique used extensively on Wall Street to not have communications found in regulatory filters, Bernanke speculated that had the government provided open ended funds to AIG it would have been a “bridge to nowhere.” But this leads to a logical follow up question which apparently wasn’t in press reports on the topic.

What would have AIG done if it was not controlled by the government

Would American International Group Inc (NYSE:AIG) have prospered differently after the crash if it was given open ended funds as opposed to the government taking control? A “bridge to nowhere” implies the firm would not have survived if the government had provided unrestricted funding for the firm to ride out the storm.

In the emails Bernanke said American International Group Inc (NYSE:AIG) was “acting like an investment bank,” which is interesting. It implies that in doing so AIG was looking for treatment like an investment bank. But equal treatment is not what happened. After AIG was seized by the government, the large investment banks, the same organizations that were responsible for creating an opaque investment structure that contained unknown toxic waste, were essentially provided enough funds without restriction to ride out the storm.

It is this talk, wondering why those that created a faulty and some say fraudulent investment products that led to the 2008 financial crash received such preferential treatment, that is usually censored. Facing such harsh reality isn’t something the elite who control the economic levers are used to accepting responsibility for. This was evident in Bernanke’s responses, which at many times were limited to “yes, sir” or “no, sir” and highly abbreviated explanations.

The key to this case is will the court allow the government to seize private property on its own terms when other options were available, and then at the same time give other private companies preferential treatment.

In AIG Trial, Private Property Rights And Preferential Treatment At Issue

MB