(Bloomberg View) — After seven years, the federal government has finally received its comeuppance. U.S. Judge Thomas C. Wheeler gave the Federal Reserve a severe tongue lashing, a tsk-tsking for the central bank’s financial-crisis overreach.
That ought to teach ‘em.
The actual result of the case is to confirm the status quo. In “emergencies,” restraint on government adds up to precisely nothing.
Consider the case at hand involving the bailout of the giant insurance company American International Group at the height of the 2008 panic.
Wheeler was confronted with an intriguing question of law: What are the limits of government intervention in the economy during times of crisis? It was a case with no good guys, only flawed actors, a suit I like to think of as Chutzpah v. Panic. You may know the case by its formal name, Starr International Co. v. U.S. (11-cv-00779). In more common parlance, it was also referred to as that crazy suit former AIG head Hank Greenberg filed against the feds.
On the one hand, in the cool light of hindsight, this was a clear case of government overreach. The Fed regulates the banking system, and has no jurisdiction over insurance companies. But during the financial crisis the Fed stepped in, covered AIG’s liabilities and claimed majority ownership.
As Wheeler wrote, “The Board of Governors and the Federal Reserve Banks … did not have the legal right to become the owner of A.I.G. There is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan.”
On the other hand, you have a company that was one of the worst and most reckless actors in the financial industry — and that was the least of its problems in this litigation. Before the government bailout, AIG was hurtling straight off a cliff toward bankruptcy, all by its own hand. Its shareholders were destined to get wiped out. As Wheeler noted: “The inescapable conclusion is that A.I.G. would have filed for bankruptcy. In that event, the value of the shareholders’ common stock would have been zero.” Hence, Greenberg’s demand for $40 billion in compensation was why his claim represented pure chutzpah.