Bailouts

Obama Ally Wages Class Warfare, Says Bailout Victims Are Too Rich to Sue the Government

The outcome of a legal dispute should depend on the substance of the law and the facts rather than whether one of the parties is "megarich."

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“Megarich Plaintiffs, Legally Adrift,” is the headline The New York Times ran over the latest article by Steven Rattner, the money manager and former Obama administration official.

Rattner’s article does the useful service of discerning a unifying theme in two different court cases. One is a lawsuit being pressed by former American International Group CEO Maurice Greenberg, claiming that the government unlawfully seized AIG from its shareholders. The second is a series of lawsuits brought by shareholders or former shareholders in Fannie Mae and Freddie Mac, claiming that those companies and their profits were illegally taken by the federal government.

As the Times headline makes clear, Rattner’s argument concerns less the merits of the property rights cases than it does the wealth of the plaintiffs. “A megarich individual and a battalion of investment funds are claiming unfair treatment and trying to extract billions in undeserved riches,” he writes.

He advises, “Mr. Greenberg and the funds should consider how hard to press on this. Average Americans already feel distaste for Wall Street and rich people; bringing these rapacious lawsuits can only unnecessarily exacerbate class tensions.”

Rattner’s argument fails on several levels. Understanding how requires some retracing of the way that the government response to the financial crisis undermined confidence by arbitrarily trampling property rights.

First, framing these legal battles as a dispute between “Average Americans,” on the one hand, and “rich people,” on the other hand, as Rattner does, misrepresents the reality of what happened in the AIG and the Fannie and Freddie seizures. In the AIG case, for example, according to Bloomberg Businessweek, the money that the taxpayers put in was quickly paid out to AIG’s counterparties. French banks got $19 billion. German banks got $17 billion. Goldman Sachs got $12.9 billion, by the Bloomberg Businessweek count. AIG shareholders were essentially wiped out, while these counterparties were paid back 100 cents on the dollar.

A similar situation applies in the Fannie Mae and Freddie Mac cases, where bondholders, including the Chinese Communist government, were made totally whole, while shareholders were essentially wiped out. As Treasury Secretary Henry Paulson explained in his memoir, after seizing Fannie and Freddie, he called his “old friends Zhou Xiaochuan, the head of the central bank of China, and Wang Qishan, vice premier in charge of China's financial and economic affairs.” Paulson said he told Wang, “I always said we'd live up to our obligations.”

Plenty of AIG and Fannie and Freddie shareholders weren’t rich at all. Some of them are pension funds representing retirees or public employees. Some of them were charities that do philanthropic work. But even if some of the shareholders were rich, as Greenberg is, this litigation isn’t really about rich people versus “Average Americans.” It’s about rich people versus French and German banks, Goldman Sachs, and the Chinese Communist pals of Henry Paulson.

Second, the fact that one party to a legal dispute is rich and another party is not should be entirely irrelevant to the merits of the case. That’s why the classical portrait of justice has her wearing a blindfold. This is such an important principle that it is enshrined in the Bible, in Leviticus 19:15: “You shall not render an unfair decision: do not favor the poor or show deference to the rich; judge your kinsman fairly.” The sages of the Talmud, in the tractate Shevu’oth 31a, took this admonition so seriously that if two litigants came to court, one dressed in rags and the other in fine clothes, they said, “either dress like him, or dress him like you.” Another litigant was reportedly advised, “remove your fine shoes, and come down for your case.”

The principle that the outcome of a legal dispute should depend on the substance of the law and the facts rather than whether one of the parties is “megarich” is one that serves justice well; one needn’t be a religious believer or an adherent of the Talmud or of all of Leviticus to understand its merits.

Which brings us to the third point. The best thing for “Average Americans” is a system where property rights are strong and so is the rule of lawâ€"not one where the government can use a crisis arbitrarily to take control of companies like Fannie Mae, Freddie Mac, or AIG from their shareholders, while seizing future profits and paying off politically connected and influential counterparties and bondholders in full. If Rattner doesn’t grasp that, how’d he like it if “Uncle Sam” took his Manhattan apartment and turned it over to me? If he complained, I’d tell him to be quiet, lest he “unnecessarily exacerbate class tensions.”

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  1. Obama Ally Wages Class Warfare!

    Stop the presses! Overtime for the compositors! Get me rewrite! Call out the newsboys!

  2. “Release the Class Warfare!”

  3. “A megarich individual and a battalion of investment funds are claiming unfair treatment and trying to extract billions in undeserved riches,” he writes.

    “The law should be applied on each case according to my moral views and not according to the legal precept of Rule of Law. These guys are sinners and thus should receive no justice or made whole.”

  4. That’s one of the more punchable faces Reason has posted recently. I’m not sure I would be capable of a civil conversation with this guy. Well, I’d manage it, but I might hate myself for it.

    1. That’s one of the more punchable faces…

      I would say it is more capriole-able.

  5. Redistribution is more holy than justice, because in the minds of Obama apologists, redistribution IS justice. And whenever the government does anything at all, regardless of whether it is legal or constitutional, it is considered good, because at least one person thinks it is just. There is a mindset here that desperately needs to be rectified, but rectifying this mindset is as impossible as any of the redistribution schemes put forth by government.

    Since you cannot render the minds of morons into minds of clear headed men, you must therefore design a society that by default does not allow morons to hoist their moronic ideas upon society with the use of force. Since the default state of man is one in which all men share an equal right to pursue their own means of survival without interference from others and without interfering with others, it is logical to conclude that only such a default state could allow individuals to act entirely as individuals without the imposed consequences designed by morons and assholes to be imposed on their particular modes of survival.

    Thats a direct quote from the book of El Duderino 19:76

  6. There is no escape ? we pay for the violence of our ancestors.
    Paul Muad’Dib

  7. Fuck that sleazy little crook.

  8. If one looked up “Megarich Plaintiff” in the dictionary, wouldn’t the illustration be a picture of Mr Rattner?

  9. A similar situation applies in the Fannie Mae and Freddie Mac cases, where bondholders, including the Chinese Communist government, were made totally whole, while shareholders were essentially wiped out.

    Isn’t this how bankruptcies generally work? All the creditors get paid out in order of priority and the shareholders only get any residual equity leftover afterwards?

    1. Not if the CnC decides the union members are more deserving.

    2. Not if the CnC decides the union members are more deserving.

    3. To the extent there are actual assets. In this case the taxpayer made them whole. In a real bankruptcy the assets would have been liquidated and paid out in order of the pecking order. The shareholders would have been wiped out and the Chinese gotten far less than 100 cents on the dollar.

    4. Yes, but only in the event of liquidation. That actually gets to the crux of Greenberg’s argument. He’s contending that a liquidation wasn’t necessary and that the decision to liquidate, rather than force the banks to retain the credit risk of their derivative contracts with AIG forced the shareholders to incur the liquidation at the worst possible time.

  10. Second, the fact that one party to a legal dispute is rich and another party is not should be entirely irrelevant to the merits of the case.

    I can’t entirely agree. Rich litigants, especially in the plaintiff’s seat, are well known for dragging cases out with endless motions and continuances just to exhaust an opponent’s budget, so the opponent will be forced to settle on favorable terms. Real reform will require not only loser-pays, but also procedural reforms that prevent that tactic.

    The same especially holds true where the rich plaintiff is (any level of) the government itself.

  11. Frankly the AIG CEO should have had to watch his company go down in flames for his stupidity instead of getting this horrible crony capitalist bailout in the first place.

  12. Yet another instance where modern libertarians (and obviously Randians) are dead silent during the true screwing of ordinary people (just look at the lack of articles or comments on Reason about the TARP bailout during 2008) but get their hackles up because some crony capitalist thinks they should’ve gotten a better deal then.

    Effin pathetic.

  13. So contract law only applies to certain favored classes?

    Progs are evil motherfuckers.

    1. Maybe progs want to make this about class warfare. But as long as libertarians/Randians are basically mute about cronyism, then the progs will win that argument.

      It was Adam Smith who pointed out that cronyism is at the heart of government’s existence. And it is therefore impossible to separate reducing the intrusion of govt from reducing cronyism. But modern libertarians absolutely have their heads up their ass about this issue because they are mortified about possibly offending someone rich or of being accused of ‘class warfare’ if they attack cronyism.

      “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all” – Adam Smith

  14. My roomate’s aunt makes $71 /hour on the laptop . She has been out of a job for six months but last month her income was $12021 just working on the laptop for a few hours.
    You can try this out. ????? http://www.jobsfish.com

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