Hammerin' Hank

Big up to the board of directors of AIG, who want nothing to do with a lawsuit against the US government  over the bailout the company received at the height of the financial crisis in 2008.  The company's former Chairman, Hank Greenberg, who still controls something like 10 percent of its shares, wanted the board to support his action, which seeks $25 billion in compensation for the losses which the bailout supposedly inflicted on the equity holders.  Most of the US media coverage of the story has veered between bemusement and rage, so here's a link to a reasonable BBC take on the story.

A lot of small shareholders in Northern Rock in the UK were similarly aggrieved, and similarly threatened to go to court, when the British Government rode to the rescue of their company.  However, Greenberg's is the first proposed suit that I'm aware of that's being brought by a financial market professional, someone who really should know better.*

Equity is not the same as debt and does not carry the same legal rights.  The returns to equity are not fixed in advance: they consist of whatever value is left over after all of a company's other obligations are met.  So if a company is unable to meet its other obligations, which was glaringly the case with AIG (and Northern Rock), then the shareholders' stake dwindles in value, possibly to nothing.  It wasn't the intervention of the US Treasury that made Hank Greenberg poorer -- it was the company's own actions, during the time that he supposedly was its chief steward.

Or look at it another way.  Shareholders are the owners of a company.  If that company builds up debts, then those debts are in a very real sense the debts of its shareholders, even though the principle of limited liability sets a ceiling on how much they can lose if things go badly wrong.  If a company can't meet its debt obligations, and someone else steps in to do so instead, thus allowing the company to survive, you'd think the shareholders might have cause to be thankful.  And indeed, that's just what's happened at AIG, which has been running a series of TV commercials thanking the US government (and taxpayers) for the bailout, just as Hank Greenberg has been concocting his lawsuit.

One of Greenberg's charges in the proposed suit is that AIG had no choice but to accept the bailout.  The Treasury has responded that it did so have a choice: it could have rejected the money on offer and gone into bankruptcy.  Actually, there was a third possibility: the existing shareholders could have put up the money needed to rebuild the company's capital base.  I wonder how long Hank and his fellow shareholders spent considering that option in AIG's hour of need.

* No doubt he does know better, but he figures it's worth finding out whether the legal system might have a less rigorous view of the rights of shareholders.