â€œMegarich Plaintiffs, Legally Adrift,â€ is the headline The New York Times ran over the latest article by Steven Rattner, the money manager and former Obama administration official.
Rattnerâ€™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, Rattnerâ€™s argument concerns less the merits of the property rights cases than it does the wealth of the plaintiffs. â€œA megarich individual and a battalion of investment funds are claiming unfair treatment and trying to extract billions in undeserved riches,â€ he writes.
He advises, â€œMr. 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.â€
Rattnerâ€™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 â€œAverage Americans,â€ on the one hand, and â€œrich people,â€ 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 AIGâ€™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 â€œold 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.â€ Paulson said he told Wang, â€œI always said we'd live up to our obligations.â€
Plenty of AIG and Fannie and Freddie shareholders werenâ€™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 isnâ€™t really about rich people versus â€œAverage Americans.â€ Itâ€™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. Thatâ€™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: â€œYou shall not render an unfair decision: do not favor the poor or show deference to the rich; judge your kinsman fairly.â€ The sages of the Talmud, in the tractate Shevuâ€™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, â€œeither dress like him, or dress him like you.â€ Another litigant was reportedly advised, â€œremove your fine shoes, and come down for your case.â€
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 â€œmegarichâ€ is one that serves justice well; one neednâ€™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 â€œAverage Americansâ€ 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 doesnâ€™t grasp that, howâ€™d he like it if â€œUncle Samâ€ took his Manhattan apartment and turned it over to me? If he complained, Iâ€™d tell him to be quiet, lest he â€œunnecessarily exacerbate class tensions.â€