AIG, Chrysler, and the Russification of the US
Stephen Bainbridge, an eminent UCLA law prof of my (slight) acquaintance, has been rocking on the Ace Greenberg suit against the federal government. He brutally eviscerates those in Congress and the media that exhibited their high dudgeon at the temerity of AIG’s board in even considering joining the Greenberg suit. But more importantly, he reinforces and complements the point in my previous post on the subject. Specifically, he argues that there are serious issues at stake here. That the fact that the government provided “assistance” to AIG during crisis conditions does not give the government carte blanche to dictate the price of that assistance, if in so doing (a) it tramples on the legal rights of AIG shareholders, and (b) expropriates wealth from those shareholders by exploiting AIG’s financial distress to impose punitive conditions on that assistance.
During the crisis, the government asserted that the gravity of the emergency justified extraordinary measures that trampled well-established legal protections and procedures. The terms of the Chrysler bailout are one clearcut example. The AIG case is plausibly another.
This turns things on their head. If particular measures-like protecting AIG’s derivatives counterparties-are so important that they create a substantial amount of wealth, paying fair compensation shouldn’t be a problem. Moreover, doing that reduces fears that the government will expropriate wealth in the future, and that limits the chilling effects on investment that expropriation threats engender. In contrast, the attitude that property and legal rights are forfeit when the government in its wisdom deems that emergency conditions justify it, has an extremely corrosive effect.
Put differently, a government that creates a reputation for protecting property and legal rights even during extreme circumstances also creates an environment that is conducive to growth. In contrast, one that creates a reputation for opportunistically exploiting crisis situations by transferring wealth to itself, or to favored constituencies (like Chrysler’s unions), creates an environment that is hostile to investment and growth.
Sort of like Russia, in other words.
Craig: You are tons more familiar with this stuff than I. But if we assume that AIG would have been insolvent in the absence of the Fed/Treasury rescue/bailout/taking (at the Stephen Bainbridge piece you link to, I saw the argument Greenberg’s legal team is making that the Fed/Treasury action prevented other players from investing in AIG; but let’s ignore that for the purposes of my question), how could “fair compensation” to the AIG shareholders have been positive? Conditional on such insolvency/bankruptcy, don’t the shareholders get wiped out and the creditors receive the funds from selling the firm’s assets?
Comment by Phil Rothman — January 10, 2013 @ 10:34 pm
Why should anyone get a better deal in aig, chrysler, BAC, &c than if the US government put the company into bankruptcy and lent as a DIP lender? Should people get a better deal just because Timmy Geithner and Ben Bernanke weren’t willing to drive hard bargains?
I don’t think so.
Comment by vbounded — January 11, 2013 @ 12:10 am
Reminiscing about the good old days, Doctor: http://cccp.tv/
Comment by Vlad — January 14, 2013 @ 9:06 pm
Ooops, forgot the original reason for my post, Dr: http://www.bbc.co.uk/news/world-europe-20977512#TWEET515584
Comment by Vlad — January 14, 2013 @ 9:07 pm