The indispensable Alison Frankel reports on an 89-page opinion by U.S. District Judge Paul Engelmayer dismissing claims againt the Fed by a former major AIG shareholder:
Starr’s lawyers at Boies, Schiller & Flexner and Skadden, Arps, Slate, Meagher & Flom offered a different (and singular) view of recent financial history, in which the U.S. government pushed AIG to the brink of bankruptcy by refusing it access to capital; seized control of the company via an offer AIG’s board had no choice but to accept; plundered the company’s assets while paying off AIG’s credit-default swap counterparties in full; and then illegally engineered a reverse stock split to dilute the interests of AIG’s pre-bailout shareholders. “Starr’s amended complaint paints a portrait of government treachery worthy of an Oliver Stone movie,” Engelmayer wrote.
What's striking about Engelmayer's opinion is that he decided the case as a matter of law. In other words, assuming all of Starr's claims to be true, what the Fed did was okay as a matter of law because of dire economic necessity:
The judge, in a gracefully written decision, concluded that, indeed, Delaware fiduciary law is pre-empted by the Fed’s mission. “(The Fed’s) challenged actions with regard to AIG during the financial crisis were integrally bound up in the rescue loan packages it furnished AIG in fall 2008, made with the goal of stabilizing the American economy,” he wrote. “And, where imposing state-law duties upon a federal instrumentality would squarely conflict with its federal responsibilities, as would subjecting (the Fed) to Delaware fiduciary duty law in connection with the terms of its serial rescues of AIG, such state law is pre-empted.”
One wonders what if any limits will remain on the Fed's power to screw creditors and shareholders if Engelmayer's analysis is upheld. If the government can "treachery worthy of an Oliver Stone movie,” could the Fed use unmanned drones to conduct targeted assassinations? And, if not, where's the damned line?
Fortunately, as Ms Frankel reports:
Judge Thomas Wheeler of the U.S. Court of Federal Claims kept alive Starr’s parallel claim that the Fed’s takeover of AIG, including the company’s common shares, was unconstitutional under the takings clause. Wheeler said that the takings claim rests on whether AIG’s board was forced to accept the terms of the government bailout or did so voluntarily; he split with Engelmayer and said that Starr had presented sufficient facts to support the theory that AIG had no choice.
Starr counsel at Boies Schiller sent an email statement, pointing out that Monday’s ruling by Engelmayer will have no impact on the Court of Federal Claims case, which also seeks $25 billion.
Unfortunately, since Kelo, I've completely lost faith in the court's willingeness to use the takings clause to defend private property from government theft.