Monday, June 15, 2015

Judge Wheeler's Opinion in Starr, and Is There Any Read Through to FNMA?

Judge Wheeler found liability, that there was an illegal exaction under the 5th Amendment when the government insisted on taking equity in connection with the extension of the loan by the Fed to AIG, since the Fed didn't have legal authority to take equity in connection with the loan extension under section 13(3) of the Federal Reserve Act.
Judge Wheeler also found no damages, on the theory that if the government hadn't acted illegally (meaning in his view, hadn't made the loan), AIG would have been bankrupt and Starr's interest in AIG would have been worthless.
Of course, there is another view as to what damages would have been if the government hadn't acted illegally, meaning not have illegally exacted an equity interest in AIG.  This would imply that one determines damages by what plaintiff's interest would be valued at, had the government made the loan but not made the illegal exaction of equity, as opposed to simply not making the loan.
This will form the basis for an appeal by Starr on damages.  I expect the US also to appeal on determination of liability.  I like Starr's chances on appeal on damages better than US chances on appeal on liability.
Judge Wheeler held out a tantalizing thought to Starr in his opinion, namely that if Starr had plead for disgorgement of illegal profits, or restitution, he might have awarded damages:  
"Turning to the issue of damages, there are a few relevant data points that should be noted. First, the Government profited from the shares of stock that it illegally took from AIG and then sold on the open market. One could assert that the revenue from these unauthorized transactions, approximately $22.7 billion, should be returned to the rightful owners, the AIG shareholders. Starr’s claim, however, is not based upon any disgorgement of illegally obtained revenue."
Later, Wheeler stated "As the Court noted during closing arguments, a troubling feature of this outcome is that the Government is able to avoid any damages notwithstanding its plain violations of the Federal Reserve Act. Closing Arg., Tr. 69-70. Any time the Government saves a private enterprise from bankruptcy through an emergency loan, as here, it can essentially impose whatever terms it wishes without fear of reprisal. Simply put, the Government often may ignore the conditions and restrictions of Section 13(3) knowing that it will never be ordered to pay damages. With some reluctance, the Court must leave that question for another day."
I would expect that on appeal Starr would argue that the restitution argument identified by Judge Wheeler should be applied, as well to argue that one should reframe the damages inquiry into not what would have happened had no loan been made, but simply what would have happened had the illegal exaction not occurred. Damages arise from illegal conduct, and the illegal conduct by the US was the illegal exaction of equity, not the making of the loan.  It would seem that Judge Wheeler decided that he had done heavy-enough lifting in finding liability, and that he will pass on the onus of imposing a $20B damage award to judges at a "higher pay grade".
Read through to FNMA? Yes as to the psychological notion that when the US acted in connection with the financial crisis, no private party can complain....that you can't fight city hall.
You can fight city hall.
As to legal theory, FNMA is asserting no illegal exaction claim, so there is no precedential value. But in many ways, FNMA presents an easier case regarding damages than AIG, since it is clear that when the "net worth sweep" contained in the 3rd Amendment was entered into, FNMA was not only profitable but, with the prospect for the reversal of the deferred tax assets, or DTAs, that the US was well aware of, there was over $100B of equity value for the taking....which is exactly what the US did.