Federal Reserve crossed legal line saving AIG (nerd alert)

[lotstodo]

In what was to be one of the most bizarre legal challenges to come out of the financial crisis, the Federal reserve lost big...and also won. For those of you who don't know, AIG's former chairman sued the Fed for bailing out AIG and demanding a huge ownership stake for it. If that sounds strange, it is.

What was thought to be a sure win for the Federal Reserve turned into a loss, but no damages were awarded. It was quite obvious to the Judge that although the Fed did in fact way overstep it's authority in bailing out AIG, the counterfactual result would have surely been a bankruptcy in which AIG stakeholders would have lost everything. The final result however, will likely be that if presented with the same set of circumstances in the future, the Federal Reserve will act differently. It now has the Dodd Frank Act to rely upon, but many still think that Dodd Frank may be found to exceed the charter of the Federal Reserve, which they say must be changed. Anyway, it is nice to see the Fed lose one every once and awhile, at least for us who watch the money printers and the banksters.

http://www.nytimes.com/2015/06/16/business/dealbook/judge-sides-with-ex-aig-chief-greenberg-against-us-but-awards-no-money.html?_r=0

 

[stradial]

Got something with pictures?



(like the G&O videos you need to watch)

 

[lotstodo]

Got something with pictures?



(like the G&O videos you need to watch)

 

[Waski_the_Squirrel]

I'm glad to say I pulled my investments out of AIG many years ago.

 

[lotstodo]

Without getting too far into it, I've always thought that preventing "runs" on traditional banking institutions is a valid Fed activity since they are in fact the fractional reserve. But I draw the line between preventing irrational behavior by backstopping member institutions and letting member institutions do whatever they want with the knowledge that they will be bailed out by taxpayers. AIG wasn't even a member institution, nor was GMAC (later Ally Bank) or a dozen others that suddenly came with their hand out or were coerced into playing along by taking loans that they didn't want. The Fed should have lost this case.

Granted, a lot of people would have been a lot more butthurt, but the risk should always lie with the reward. The bankruptcy process is the right process in which to sort out the failure of a business or institution to serve the interests of it's customers. It wasn't any secret that the derivative business done by AIG's insurance arm was based on the premise that housing values will never go down enough to put that many mortgages under water. Dirty deeds done dirt cheap. That was a risk that was taken by AIG and those other institutions who bought and traded these contracts. That was a foolish risk insured by vapor and wishes. Now we have Dodd Frank which gave them all a roadmap to taxpayer bailouts that they followed judiciously while increasing their risk exposure. Of course they are now assured that we will pony up again, Barney saw to that.