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Editor’s Comment: It is a total farce. Companies that were supposedly saved from the brink of bankruptcy and shame, who played a part in defrauding investors and homeowners across the world are now suing their savior and protector. The people who sit on the Board of Directors of these companies are sitting in a bubble of pure fiction. Yet AIG is now considering the lawsuit as a channel by which they can get even more money from the U.S. Taxpayers and cause even more damage to the U.S. economy.
Greenberg, the head of AIG has had the lawsuit going on for a while now saying, on behalf of himself as a shareholders and on behalf of other shareholders that the onerous terms placed on AIG deprived shareholders of value without due process!
Now AIG itself is thinking of joining the lawsuit because if Greenberg wins then the Board could be liable for failure to act.
“Thank you America” has been advertised by AIG since the bailout. I would now add THANK YOU to Greenberg and AIG for bringing up the one thing that Judges don’t want to hear from investors or shareholders — due process under the 5th and 14th Amendment to the U.S. Constitution.
Besides being spectacularly hypocritical, ungrateful and greedy, Greenberg and AIG have become the new poster boy for Wall Street arrogance. They have also opened the door to consideration of non-judicial foreclosure, as applied, and judicial foreclosure, as applied, in the absence of any proof of payment and standing as a creditor with rights to submit a credit bid at auction.
In the non-judicial states the “private contract” has allowed actions of controlled trustees on deeds of trust appointed by non-creditors in a document common to all loans subject to false claims of securitization (substitution of trustee). The notice of default and notice of sale take the place of a judicial foreclosure — but they are false and we know they are false. The same parties filing a judicial foreclosure would lose.
In both judicial states and all judicial actions the courts have made the assumption that the debt is valid (not true as to the party filing) the default is real (not if the payment isn’t due to the actual creditor who continues receiving payments after notice of default), the note is proper and presumptive evidence of payment or funding of the loan by the payee (almost never true) and that an assignment is presumptive evidence of the sale without proof of payment. The requirement that the party seeking affirmative relief (the forecloser) actually prove a case rather proffer it has been discarded.
There is nothing wrong with the statutes in the judicial states but the non-judicial states have opened a hole of moral hazard the size of the Grand Canyon. And where moral hazard is present, the banks are not far behind. In this case AIG took advantage of the receipt of fees for insurance of bogus mortgage bonds; their failure to perform due diligence and verify the validity of the bonds and the non-existent mortgages that “backed” the bonds was either intentional or negligent. They had insured more than they were worth and that was either intentional or negligent. The government came in, paid off the insurance contracts, and then gave the company back to AIG shareholders when it was “healthy.”
AIG has already sued Goldman on the same facts. The insurance contracts expressly waived any right to go after the borrowers. In most insurance contracts subrogation it is expressly assumed and allowed. The reason for this anomaly was that the banks were able to get 100 cents on the dollar of a loss they never had and they refused to give up a penny of it to the investors they had defrauded or the borrowers whose loan balances would have and should have been correspondingly reduced. What a deal! The investors lose their money, the insurers lose their money, the borrowers don’t get credit for the pay-down of their loans and the bank, claiming the loss to be their own, get the insurance, federal bailout money and the proceeds of credit default swaps.
When I practiced law I learned the hard way that demanding and getting more than your client should get will get you reversed on appeal on the basis that the evidence doesn’t support the verdict or judgment. In lay language, if you are going to be a pig about it, expect to be cooked.
These developments are upside down. AIG should be thanking the American people for the next 100 years and perhaps learning a few things of the due diligence expected of them. Instead, in our litigious society, the lawyers think they have created a long shot of getting billions of dollars more FROM the American taxpayer instead of FOR the American taxpayer.
Many of us were taught as children that there is no free ride. Now we hear there will not be a free house for homeowners whose loan balance has been paid in full. The assumption is that debt is correctly stated and the creditor is correctly identified when neither assumption is true. But the bigger assumption is that all borrowers are either deadbeats or potential deadbeats and that just isn’t true either.
And worst of all, you have AIG et al tying up the government process with a discovery demand of 16 million documents — opening yet another door for those practicing under the rubric of Deny and Discover. Don’t shy away from asking for what you want and nail down the money trail with demands for canceled checks, wire transfer and ACH receipts. And where a judge accepts a proffer instead of proof, call him or her out on it. That’s where due process comes in. Due process doesn’t promise justice but it does promise a hearing in accordance with required notice and an opportunity to be heard. At that hearing the burden is always on the party seeking affirmative relief (foreclosure). Once it comes down to real proof instead of proffers, it is the banks who reveal themselves as pigs to be cooked.
Deny the whole transaction because there was no payment or funding alleged and no payment or funding proven. That is because investors supplied the money thinking that they were buying into REMICs. They didn’t. Investor money was commingled from all investors in accounts that were layered over with false documentation to give the investor the impression he was the owner of a bona fide mortgage backed bond issued by a REMIC trust. In fact the pension fund investor owned nothing and had merely loaned the money to the investment banker who played with it and created the appearance of trading profits and fees and expenses and then funding bad mortgages in REMIC tranches where the investment banker could torpedo the whole thing, collect insurance, CDS proceeds and federal bailouts.
The government has been reluctant to get into the complexity of these fictitious transactions. Now that they are being sued, they might well be forced to do the digging they should have done in the first place. So Thank You again Mr. Greenberg!
Rescued by a Bailout, A.I.G. May Sue Its Savior
By BEN PROTESS and MICHAEL J. DE LA MERCED
Fresh from paying back a $182 billion bailout, the American International Group Inc. has been running a nationwide advertising campaign with the tagline “Thank you America.”
Behind the scenes, the restored insurance company is weighing whether to tell the government agencies that rescued it during the financial crisis: thanks, but you cheated our shareholders.
The board of A.I.G. will meet on Wednesday to consider joining a $25 billion shareholder lawsuit against the government, court records show. The lawsuit does not argue that government help was not needed. It contends that the onerous nature of the rescue — the taking of what became a 92 percent stake in the company, the deal’s high interest rates and the funneling of billions to the insurer’s Wall Street clients — deprived shareholders of tens of billions of dollars and violated the Fifth Amendment, which prohibits the taking of private property for “public use, without just compensation.”
Maurice R. Greenberg, A.I.G.’s former chief executive, who remains a major investor in the company, filed the lawsuit in 2011 on behalf of fellow shareholders. He has since urged A.I.G. to join the case, a move that could nudge the government into settlement talks.
The choice is not a simple one for the insurer. Its board members, most of whom joined after the bailout, owe a duty to shareholders to consider the lawsuit. If the board does not give careful consideration to the case, Mr. Greenberg could challenge its decision to abstain.
Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief, but would put A.I.G. in line for a potential payout.
Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street.
Some government officials are already upset with the company for even seriously entertaining the lawsuit, people briefed on the matter said. The people, who spoke on the condition of anonymity, noted that without the bailout, A.I.G. shareholders would have fared far worse in bankruptcy.
“On the one hand, from a corporate governance perspective, it appears they’re being extra cautious and careful,” said Frank Partnoy, a former banker who is now a professor of law and finance at the University of San Diego School of Law. “On the other hand, it’s a slap in the face to the taxpayer and the government.”
For its part, A.I.G. has seized on the significance and complexity of the case, which is filed in both New York and Washington. A federal judge in New York dismissed the case, while the Washington court allowed it to proceed.
“The A.I.G. board of directors takes its fiduciary duties and business judgment responsibilities seriously,” said a spokesman, Jon Diat.
On Wednesday, the case will command the spotlight for several hours at A.I.G.’s Lower Manhattan headquarters.
Mr. Greenberg’s company, Starr International, will begin with a 45-minute presentation to the board, according to people briefed on the matter. Mr. Greenberg is expected to attend, they added.
It will be an unusual homecoming of sorts for Mr. Greenberg, who ran A.I.G. for nearly four decades until resigning amid investigations into an accounting scandal in 2005. For some years after his abrupt departure, there was bitterness and litigation between the company and its former chief.
After the Starr briefing on Wednesday, lawyers for the Treasury Department and the Federal Reserve Bank of New York — the architects of the bailout and defendants in the cases — will make their presentations. Each side will have a few minutes to rebut.
While the discussions are part of an already scheduled board meeting, securities lawyers say it is rare for an entire board to meet on a single piece of litigation.
“It makes eminent good sense in this case, but I’ve never heard of this kind of situation,” said Henry Hu, a former regulator who is now a professor at the University of Texas School of Law in Austin.
It is unclear whether the directors are leaning toward joining the case. The board said in a court filing that it would probably decide by the end of January.
Until now, the insurance giant has sat on the sidelines. But its delay in making a decision, some officials say, has drawn out the case, forcing the government to pay significant legal costs.
The presentations on Wednesday come on top of hundreds of pages of submissions that the government prepared last year, a time-consuming and costly process. The Justice Department, which assigned about a dozen lawyers to the case and hired outside experts, told a judge handling the matter that Starr was seeking 16 million pages in documents from the government.
“How many?” the startled judge, Thomas C. Wheeler, asked, according to a transcript.
Struck just days after the collapse of Lehman Brothers in September 2008, the bailout of A.I.G. proved to be among the biggest and thorniest of the financial crisis rescues. The company was on the brink of collapse because of deteriorating mortgage securities that it had insured through credit-default swaps.
Starting in 2010, the insurer embarked on a series of moves aimed at repaying its taxpayer-financed bailout, including selling major divisions. It also held a number of stock offerings for the government to reduce its stake, which eventually generated a roughly $22 billion profit.
Overseeing that comeback was a new chief executive, Robert H. Benmosche, a tough-talking longtime insurance executive. Mr. Benmosche has won plaudits, including from government officials, for his managing of A.I.G.’s public relations even as he helped nurse the company back to financial health.
But he and the rest of A.I.G.’s board must now confront an equally pugnacious predecessor in Mr. Greenberg.
In the case against the government, Mr. Greenberg, through his lead lawyer, David Boies, contends that the bailout plan extracted a “punitive” interest rate of more than 14 percent. The government’s huge stake in the company also diluted the holdings of existing shareholders like Starr, which at the time was A.I.G.’s largest investor.
“The government has been saying, ‘We’re your friend, we owned and controlled you and we let you go.’ But A.I.G. doesn’t owe loyalty to the government,” a person close to Mr. Greenberg said. “It owes loyalty to its shareholders.”
The government, Starr argues, used billions of dollars from A.I.G. to settle credit-default swaps the insurer had with banks like Goldman Sachs. The deal, according to the lawsuit, empowered the government to carry out a “backdoor bailout” of Wall Street.
Starr argued that the actions violated the Fifth Amendment. “The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency,” the Starr complaint says.
The Treasury Department declined to comment. A spokesman for the Federal Reserve Bank of New York, Jack Gutt, said, “There is no merit to these allegations.” He noted that “A.I.G.’s board of directors had an alternative choice to borrowing from the Federal Reserve, and that choice was bankruptcy.”
A federal judge in Manhattan agreed, dismissing the case in November. In an 89-page opinion, Judge Paul A. Engelmayer wrote that while Starr’s complaint “paints a portrait of government treachery worthy of an Oliver Stone movie,” the company “voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and imminent bankruptcy.”
The United States Court of Appeals for the Second Circuit recently agreed to review the case on an expedited timeline. The judge in the United States Court of Federal Claims in Washington, meanwhile, has declined to dismiss the case and continues to await A.I.G.’s decision.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: AIG, Deny and Discover, Federal Bailout, Greenberg | 48 Comments »