Originally published in The New York Times.
SO this is the thanks that Uncle Sam gets.
Six years after a forceful rescue of the financial system (and, derivatively, the economy) by two presidents and the Federal Reserve, a megarich individual and a battalion of investment funds are claiming unfair treatment and trying to extract billions in undeserved riches.
Call it by its proper name: extortion.
The weapon of choice is litigation — expensive, time-consuming court battles that have chewed through millions of dollars of taxpayer money in fees and countless hours of government officials’ time.
For the past few weeks, a trial has been underway in a Washington courtroom on one suit, the claim of Maurice R. Greenberg, the former chief executive of American International Group, that the harsh terms on which funds were provided to the company amounted to an unconstitutional taking of shareholders’ property.
His argument, simplified: The federal government saved other institutions on less onerous terms, so A.I.G. should have gotten one of those better deals.
As a legal matter, that’s irrelevant. What’s relevant is that in 2008, no private capital would touch A.I.G., and without taxpayer money, A.I.G. would have collapsed, declared bankruptcy and liquidated itself. Mr. Greenberg would have received even less, i.e., nothing.
That’s why the directors of A.I.G. voluntarily accepted the government’s rescue package.
The litigation against the mortgage giants Fannie Mae and Freddie Mac, which are government-sponsored entities, is more complicated but equally meritless.
In September 2008, with losses mounting at Fannie and Freddie, the Treasury put the two huge lenders into conservatorship and ultimately pumped nearly $200 billion into them.
In 2012, the complex arrangement was restructured to provide that Treasury would forgo dividends and instead receive profits from these companies.
Since then, some hedge funds and other investment vehicles have been braying that the original deal should be reinstated, thereby allowing the investor group to collect a share of Fannie and Freddie’s current large profits.
But here’s the key point: The 2008 legislation that enabled the conservatorship gave the government sweeping powers and limited the ability of the courts to second guess.
From that moment, all investors were well on notice that the companies would no longer be operated for the benefit of private shareholders.
Then there’s the ultimate chutzpah: Some of the funds bought their shares after the agreement was amended in 2012 and still expect to reap a windfall at taxpayer expense.
The government is also on strong moral ground. All the profits that Fannie and Freddie are now making are thanks to the government, which continues to implicitly guarantee the debt that the companies sell.
Happily, none of the cases have gone well for the plaintiffs. Mr. Greenberg has lost at every turn; the Supreme Court wouldn’t even hear his case. Meanwhile, a Federal District Court judge just handed the Fannie and Freddie adversaries a stinging defeat, harshly dismissing four of the suits
Seeking a more sympathetic ear, both sets of plaintiffs also sued in a little-known branch of the judiciary, the Court of Federal Claims.
Because the claims court was established in the 19th century as a “people’s court,” where individuals or small businesses would have recourse to challenge the government on matters such as taxes and contracts, predicting the outcome of these legally creative cases is particularly difficult.
But even if the plaintiffs prevail in the Court of Federal Claims, the government can appeal through the main federal court system, where Mr. Greenberg and the funds have yet to notch a win.
These two high-profile cases are not alone; there are at least a dozen related cases against Fannie and Freddie winding through the courts.
And lawsuits stemming from the auto rescue have been filed by aggrieved automobile dealers and by pensioners of a formerly bankrupt supplier, Delphi. While the plaintiffs may be more sympathetic figures, having led the president’s auto task force, I believe these claims are equally specious.
Like any defendant, the government can compromise and settle litigation. But with the merits so clear, it should remain true to the principle of “millions for defense, but not one cent for tribute.”
As a longtime denizen of Wall Street, I’m firmly on the side of investors trying to make money.
But in this case, 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.