Thank You America - Now We Are Suing
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While this column was written before AIG smartly officially decided not to join the lawsuit, the information here is still pertinent, and a display of greed and a demonstration of game theory by former AIG CEO Greenberg, at its worst.
AIG is currently running a nationwide ad campaign with “Thank You America,” as a tagline. Well, isn’t that nice, how about that it actually, rather surprisingly, worked out for everyone.
That of course was a joke, seeing as multi-millionaire, former CEO and 87-year-old Maurice Greenberg sees money left on the table. He’s attempting to get AIG’s board to join him, in a lawsuit, and you know who he’s suing? YOU. That’s right US taxpayer. And guess who’s paying for the defense costs and the 16 million pages in documents they have requested from the government (yes, 16 million.) YOU. Maybe they’ll find a misspelled word allowing them to foreclose on the White House.
Quoting the Times, Greenberg, “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.”
I will keep it brief and uncomplicated- all here is what I learned from HIGHLY suggested reading: “The Big Short” by Michael Lewis.
2005-2006- strawberry pickers making $14,000 a year receive $750,000 with no money down to purchase a McMansion in a housing market spiraling ever upwards. Those who say the borrower played a part here, I don’t buy it, they were encouraged to lie on their applications because-
Banks have the incentive to make these bad loans. They and their loan officers are making tons of money on them, plus re-financing, and packaging them into collateralized debt obligations (CDO’s- essentially a portfolio of a large number of loans). By inserting a few debts in the package that were good (likely to pay-off), the CDO's were “magically” able to garner the coveted AAA from ratings agencies like Moody’s.
Goldman Sachs (NYSE: GS) sells insurance to one of the first to bet against the housing market, Mike Burry of Scion Capital. Banks keep producing loans as long as there are buyers for the trash being given AAA ratings (we are talking pension funds, Germany, etc.)
AIG bosses want to collect insurance premiums on “AAA” loan packages which they consider free money, as AAA has "no chance" of defaulting. They sell the insurance very cheaply. AIG can’t write insurance fast enough, and shell out large bonuses for the collected premiums.
The balloon/bubble continues to inflate, lifting Wall Street and banking stocks into the stratosphere, Goldman Sachs is the first investment bank to let go of the balloon and buys insurance from AIG.
Not at all oddly, Goldman refused to post collateral as required by contract to Mike Burry’s hedgefund and as more and more homeowners defaulted, refusing to recognize that the CDO had lost its value until, guess what, they had bought their own insurance to hedge- a very tepid demonstration of the ethics on Wall Street, and the zero sum game of eat or be eaten.
So, AIG is pulling the trigger, issuing insurance on a game which corporate-wise is Russian Roulette. Guess what, the bubble implodes, BANG. AIG is dead, but former Goldman Sachs CEO and then Treasury Secretary Hank Paulson resuscitates them, and, surprise, the first order of business is to make Goldman whole on their bet against AIG.
Don’t Save The Drowning
So, we were at the beach recently and a swimmer went under the water, I thought it was a long shot he’d survive, but we pulled him out and gave him serious CPR, and by miracle he lived! We felt great, and two weeks later he knocked on our door, expressing his “gratitude,” and gave us a notice he was suing us for bruising his ribs.
Suing us. What’s the alternative? You’re dead. Play the role of Good Samaritan and get sued? We saved your life!
You would have been wiped out Mr. Greenberg. Any remaining money you or any other shareholders have in AIG stock is solely based on the taxpayer rescuing you, and the risk we took with our money. And now we have to pay to fight you in court, and one of the primary reasons your lawyers give is to quote us an interest rate that we charged you of 14%? And you claim this to be excessive and usurious?? Question: How much do banks charge us for credit card debt? 14% or more! Should we all collectively sue the banks? Did most people in debt run a multi-billion dollar company into the ground and come asking for a rescue? Which, at the time, had more risk?
Yes, I understand that AIG might be sued by its shareholders if Greenberg gets a payout from the government and shareholders don't because they didn't enter into the lawsuit, and yes, AIG has not yet announced that it will participate, but merely entertaining the idea should cost them your business. Is there no honor left in the world?
Sidenote: Now that AIG has stated it would not join in Greenberg's lawsuit, you know whose shareholders benefit most? Golman Sachs. You think they want all those documents and subpoenas and testifying in court why it was so important to make them 100% whole on their bets. No way. No way Jose.
margiecfl has no position in any stocks mentioned. The Motley Fool recommends American International Group and Goldman Sachs Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!