Even if AIG sues the government that bailed it out, Democrats and Republicans alike would be wrong to yell at the company's board
On Tuesday, Washington was abuzz with murmurs that AIG — the catastrophically managed insurer of untold amounts of Wall Street mortgage debt that required a $182 billion bailout in 2008 — may join a $25 billion lawsuit against the United States government (i.e. the taxpayer) over the terms of that bailout. Outrage — manufactured and genuine — ensued.
The Tea Party crowd will undoubtedly go insane if the AIG board does in fact join Hank Greenberg and Co.'s lawsuit against the government. But a group of congressional Democrats — including Wall Street's least favorite senator, Elizabeth Warren, the always animated Maxine Waters, and three run-of-the-mill House Democrats — were the first leaders to publicly react to the news of the potential lawsuit. It seems that the Democratic lawmakers are surprised that a firm that was so recently saved by the American taxpayer would even consider suing these same taxpayers. This confusion shows how little our leaders have learned about how corporations work.
Our leaders and citizens continue to believe the financial crisis was created by nothing more than immoral, greedy investment bankers. They are mistaken. Indeed, the financial crisis was not caused by a band of irrational, greedy fools, but rather by some of the smartest people in the United States acting exactly as we might have expected them to act had we taken a disinterested look at the incentives the legal and regulatory framework provided them. That we have not come to terms with this unpleasant reality is underscored by Congress' typically hasty reaction to the crisis. Contrary to the claims of the lawmakers responsible for passing Dodd-Frank, no less an expert than Weil's Harvey Miller, probably the top bankruptcy lawyer in the United States, maintains that the law has not so much as made a dent in the systemic risk posed by financial institutions that were and remain too big to fail.
Of course, despite all of the huffing and puffing going on inside the beltway, DealBreaker's Matt Levine correctly points out that AIG will almost certainly not join the lawsuit. Aside from the fact that doing so would bring an immense amount of bad publicity to a company that is not exactly beloved by the public at large, the lawsuit appears to be a loser. The suit, the brainchild of former AIG CEO and "Master of the Universe" Hank Greenberg, failed before the United States District Court for the Southern District of New York. Greenberg's latest attempt, which is before the Court of Federal Claims in Washington D.C., is unlikely to fare much better. The board, therefore, will probably elect not to join the lawsuit.
But what if the lawsuit did present a real chance of actual recovery for the shareholders? What then? Would it be acceptable for AIG's board to sue the very government that saved it from liquidation? The congressional Democrats who have chimed in so far certainly seem to think not. After ripping into the company and exclaiming that it should be taxed more in the future, Sen. Warren stated that "AIG should thank American taxpayers for their help, not bite the hand that fed them for helping them out in a crisis." Rep. Waters, the ranking Democratic member on the House Financial Services Committee, was even less circumspect, stating that she would "urge the board to drop its consideration of the lawsuit, thank the American public for the $182 billion rescue package that prevented the company's collapse and support the reforms in the Dodd–Frank Wall Street Reform and Consumer Protection Act that ensure that systemically important financial institutions can no longer hold our economy hostage." Finally, and most notably, three Congressional Democrats — Peter Welch, Michael Capuano, and Luis Gutierrez — sent AIG chair Robert S. Miller a letter in which they very thoughtfully state: "Don't do it. Don't even think about it."
Like any taxpayer, I am a bit irked with the possibility that after having bailed out AIG, the U.S. government might also have to defend a lawsuit against the company for not being generous enough. That said, and this is important, anyone who thinks that the government or the public ought to have any say in the board's decision is mistaken. Contrary to the sentiments expressed by leaders like Rep. Waters and Sen. Warren, the government has no more a right to make business decisions for private companies today than it did prior to the financial crisis. The basic rules have not changed. Financial institutions are just as free to act selfishly (at least from the non-shareholder's perspective) as they have ever been. In fact, if AIG's board were actually stupid enough to listen to Rep. Waters and blindly supported every crazy idea for "reforming" Wall Street she and her fellow members of Congress came up with, or refused to consider suing the government, as Reps. Welch, Capuano, and Gutierrez command in their letter, the board would be breaking the law by breaching their fiduciary duty to the shareholders who own their company.
We should not be surprised or disappointed that AIG is considering screwing the taxpayer to enrich itself. We want our corporations acting to maximize their own value using every lawful means at their disposal. That is what they exist to do. When corporations do well, they create jobs and stimulate economic growth, which is the only way we will ever emerge from the seemingly endless amounts of government debt we have piled up since the turn of the century. It is also time for everyone to move past the incorrect and dramatically oversimplified idea that the financial crisis of 2008 was precipitated by a bunch of irrational, greedy, stupid bankers who didn't care about whether they blew up the economy or not. If you want to explain the financial crisis to your 6-year-old in those terms, go for it. But that is not what happened. Indeed, given the systemic incentives in place prior to 2008, it is little wonder how any of us expected the outcome to be different. In his book on the financial crisis, A Failure of Capitalism, Judge Richard Posner (a conservative judicial icon and one of the few true public intellectuals of our time), wrote that bankers reacted much as we should have expected them to given the incentives built into the financial system. Bankers exist to maximize profits. Regulators exist to protect the social welfare from overly ambitious bankers. We do not need "more responsible" or "less greedy" bankers. We need regulations that understand reality — that dollars drive corporate decision-making — and use it to incentivize corporations to make decisions that promote financial stability and minimize systemic risk. In other words, we need a regulatory regime that seeks to align private profit motives with society's desire to promote stability.
We do not have such a regulatory regime, and so long as our lawmakers continue to rant and rail about "corporate greed" rather than addressing the incentives problem, we will never have a regulatory regime that encourages less risky decision-making. The problem is not greed. Indeed, if anything, greed can be part of the solution. Our nation's founders understood this, and created a system of law that channeled that avariciousness in ways that promoted the common good. It is time for our lawmakers to stop complaining that men are not angels and instead start doing what they should have done long ago, which is appoint a commission comprised of the best minds on both sides of the aisle to go through every financial regulation, eliminate the ones that are not needed, and recommend the ones that are. In the meantime, they should stop yelling at AIG's board for fulfilling its legal obligations to its shareholders.
Jeb Golinkin is a 3L at the University of Texas School of Law. From 2008 to 2011, he served as an editor and reporter for FrumForum. Follow Jeb on Twitter: @JGolinkin.
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