The Biggest Fraudulent Conveyance Lawsuit Ever
New York Attorney General Andrew Cuomo has been making headlines because he has strong-armed AIG into trying to recover “outrageous” bonuses and other perks while its financial condition was not so great.
Cuomo’s leverage (so to speak) arises from, among other things, laws forbidding fraudulent conveyances and similar transactions. Fraudulent conveyance law is a complex, if vital, corner of debtor-creditor law. It essentially says that a company cannot convey property for less than “reasonably equivalent value” if it is “insolvent,” undercapitalized, or the like. If you’re in financial trouble, the saying goes, “you must be just before you are generous.”
Among other things, this means that if a company like AIG was paying bonuses (or redeeming stock) while it was in fact in distress, those who received AIG’s cash—like Joe Cassano, who was paid millions for running AIG’s brilliant credit default swap shop–should have to pay it back unless they gave AIG “reasonably equivalent value.” Gifts are axiomatically not supported by any (much less reasonably equivalent) value.
But if AIG is Cuomo’s only target, he’s thinking WAY TOO SMALL. Today’s New York Times reports the following “grim milestone: All of the combined profits that major banks earned in recent years have vanished:”
In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount
What does this mean? Well, it may mean that all those profits they declared weren’t exactly, uhm, profits. Which may mean that they actually weren’t so healthy financially after all. Which may mean that all those bonuses and crazy severance packages—remember when we thought Stan O’Neal’s $57 million looked reasonable?—should, in theory, be as vulnerable as Joe Cassano’s $1 million/month “consulting” fee at AIG.
I know, I know. The accounting and bankruptcy wonks will start shouting that proving insolvency is a fool’s errand. And in any case, there will be serious defenses that the recipients of these companies’ largesse can assert (their brilliant performance was “reasonably equivalent value”, Cuomo lacks standing, etc).
Perhaps. But the real point is, as I observed here earlier, if we care about recovering some of the ill-gotten gains from the mortgage crisis, we need to reconceptualize the whole program. We can’t just give money to the banks and hope (against hope) that they will start lending. We might want to figure where the money went, and how to get some of it back.