Category: Corruption

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Starr and Greenberg FileTakings Claim in AIG Takeover

When the federal government seized control of American International Group at the depths of the financial crisis in 2008, officials commandeered nearly 80% of the company’s equity in exchange for what were nominally called “loans”, without ever obtaining a shareholder vote or paying shareholders compensation for the seizure.  The government treated all other financial firms far more favorably, even using some of the “loans” to secretly bail out other financial institutions.  The government never conducted a valuation of the assets it commandeered. 

To owners of AIG stock, this amounts to a taking in violation of their Fifth Amendment rights, according to their class action lawsuit against the United States in the  U.S. Court of Federal Claims. The complaint, filed by AIG’s largest private shareholder, Starr International and its CEO Maurice (“Hank”) Greenberg, was drafted by David Boies (Boies, Schiller & Flexner) and John Gardiner (Skadden Arps).  The suit seeks at least $25 billion in damages. 

Pivotal paragraphs from the complaint read as follows:

10. The Government is not empowered to trample shareholder and property rights even in the midst of a financial emergency. The Fifth Amendment . . . directs that the Federal Government shall not deprive any person of “property without due process of law” and forbids the Government from appropriating private property “for public use, without just compensation.”

11. [A]lthough public policy goals may justify the taking of private property to serve public ends, when the Government does so it is required by the Constitution to ensure that the property is acquired in accordance with law, that the burdens associated with the taking are not imposed in a disparate and unfair manner, and that just compensation is paid. . . .  As Justice Holmes long ago admonished, “a strong public desire to improve the public condition is not enough to warrant achieving the result by a shorter cut than the constitutional way of paying for the change.”

13. The Government’s actions were ostensibly designed to protect the United States economy and rescue the country’s financial system. Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed by the Government to achieve that goal. Even in exigent times, and perhaps most especially then, the Government may not ignore basic protections afforded under the United States Constitution or disregard established legal rights.

A few additional paragraphs laying out the factual basis for the claim follow. Read More

Ciara Torres-Spelliscy: American Corporate Political Transparency Is 44 Years Behind the UK

Ciara Torres-Spelliscy is an Assistant Professor at Stetson University College of Law and the co-author along with economist Dr. Kathy Fogel of Shareholder-Authorized Corporate Political Spending in the United Kingdom.  I am posting her views on American corporate political transparency below [FP]: 

by Ciara Torres-Spelliscy

As I told my law students in a recent class, when I was in law school, no one cared a fig about corporate political spending.  I did not hear about it in Constitutional Law, Corporate Law or Fed. Tax.  It was a non-issue because for the most part, it was banned.  It made sense that back then, the SEC would not have a corporate political spending reporting requirement.  That would have been tantamount to the agency’s asking, “have you committed any federal election crimes?”  Now that such political spending is legal, the SEC should respond to the growing calls for a new disclosure rule.

Much has changed in the years since I was on the business end of a Con Law exam.  In particular, in 2010, the Supreme Court did away with corporate source limits on election ads altogether in the infamous Citizens United case.  The upshot of this case changed not just federal law going back to 1947, but also state laws, some of which dated back to the turn of the twentieth century.

The new normal is corporations can spend an unlimited amount of their treasury funds on independent political expenditures in local, state and federal elections.  This brings us back to the SEC and its utter lack of political disclosure rules.  Because of this gap, publicly-traded corporations can spend in elections without ‘fessing up.  This seems odd given how passionate shareholders are about transparency.

In the summer of 2011, ten corporate law professors petitioned the SEC for a new disclosure rule to rectify this situation.  These professors are both conservative and progressive, yet they all agree transparency of corporate political spending is a must.

Economists have already written in support of the professors’ petition.  Economist Dr. Michael Hadani of Long Island University noted that one of the reasons why shareholders should want more reporting on corporate political spending is that it can backfire.  His regression analysis of over 1,100 companies over an 11 year period found political spending had a negative impact of firms’ market value.

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Post-Soviet Russia: Just Like 15th Century England?

Yesterday I noted that I would blog a bit this month about the rule of law in Russia.  Today’s Wall Street Journal carries a front-page feature article by Guy Chazan that offers a rare look into the world of Russia’s oligarchs.  I’m interested in the fate of Mikhail Khodorkovsky, once Russia’s richest man, now its most famous prisoner.  Chazan’s story focuses on two more oligarchs: Boris Berezovsky and Roman Abramovich.

The collapse of the Soviet Union led to a decade in which vast fortunes could be made in the chaos of the new Russia.  These men (and they were all men) built empires from scratch on unstable legal foundations in the rubble of post-Soviet society.  The strength or permanence of the law didn’t matter much to the oligarchs; indeed, they relied on its weakness to amass their wealth.

Now that those empires need protecting, however, it is to law that the oligarchs turn.  Berezovsky, once the éminence grise behind Boris Yeltsin, now lives in luxurious self-imposed exile in London.  The WSJ reports that he is worth about $750 million.  Abramovich owns the Chelsea Football Club and the world’s largest yacht; his worth is estimated at about $16.5 billion.  Berezovsky has sued Abramovich for $6 billion, alleging that the latter violated oral agreements about various oil and metal companies in Russia.  Berezovsky claims he left his stake in them in Abramovich’s hands after he fled to London to escape the wrath of then President Vladimir Putin.

According to Abramovich’s attorney, Jonathan Sumption, there is nothing to this claim.  The dispute arose, he says, in a “society without law,” and the deal the two men made was itself “corrupt.”  That might seem like a strange legal defense but, as Sumption continued, “the reality was that that was how business was done in Russia at the time.” 

The case is being heard at London’s High Court.  To help the judge understand the millieu in which the oligarchs did business, Sumption told the court: “In our own national experience, we have to go back to the 15th century to find anything remotely comparable.” 

Maybe.  But the average Russian citizen observing this legal squabble might note that 15th century England had something that 21st century Russia lacks: Robin Hood.

The Moral Authority of Occupy Wall Street

The Occupy Wall Street protests continue to grow, and to gain support from public intellectuals. Joe Stiglitz, Anne Marie Slaughter, and Paul Krugman are the latest luminaries to praise the cause. The movement has also provoked derision. Let’s consider the latest Norquist/Limbaugh memes as the protest nears the one-month mark:

1) “They’re just spoiled hippies who can’t get a job.” A quick glance at the “We are the 99%” tumblr could easily dispel this notion. The economic suffering in this country is deep and broad. As one news story put it, “one in three Americans would be unable to make their mortgage or rent payment beyond one month if they lost their job.” Even if the most down-and-out people are too poor or busy to get to Wall Street (or the hundreds of other actions now taking place), many of them think of the OWS crowd as speaking for them.

There is so much needless suffering going on now, and so much wealth accumulating at the very top. It is hard to understand how critics dismiss the protesters so cavalierly. I used to find the Biblical passage about God hardening Pharaoh’s heart one of the more mysterious parts of the Book of Exodus; now I feel like I’m witnessing it firsthand.
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Labor Day Links

Just a few points of interest on Labor Day:

1) Alan Hyde, The Idea of the Idea of Labour Law: A Parable.

2) Yves Smith, The Decline of Manufacturing in America: A Case Study.

3) Mark E. Anderson, $500 a Month Less.

4) John Bowe, Nobodies: Modern American Slave Labor and the Dark Side of the New Global Economy.

5) Liza Featherstone, Selling Women Short: The Landmark Battle for Worker’s Rights at Wal-Mart.

6) Robert Reich on the great regression.

7) Kyle Leighton, Less Fruits Of More Labor.

8. Andrew Leonard, The Big Squeeze on Labor.

9) Washington Post, Breakaway Wealth.

10) But don’t worry, CEOs are doing something to stanch the flow of such disheartening news:

Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee. The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company “useless.”

But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.

Opaque pay is a big problem in the UK, too. In pay-without-performance world of corporate titans, expect a lasting war against disclosure.

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More Secret Money Went to Goldman

Kept secret by the U.S. government until today, Goldman Sachs borrowed $15 billion from the U.S. Federal Reserve on December 9, 2008 to stay afloat.

That was the largest sum taken that day by a coterie of 19 favored Wall Street and foreign banks in a furtive $80 billion capital infusion to the banks that created the crisis.

Today’s astonishing disclosure, and the strenuous efforts of officials to keep it quiet for nearly three years, raises still more questions about the integrity of the government kingpins who called the shots during the financial crisis of 2008.

Especially compromised are Henry Paulson, Goldman’s former CEO who ran the U.S. Treasury at the time, and his chief lieutenant, Tim Geithner, who has run the U.S. Treasury since.  Read More

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Geithner Wistful for Goldman Sachs

Treasury Secretary Tim Geithner is eyeing the exits from his wonky Washington post. Rumors about what he’ll do next swirl on Wall Street.

Heavy betting is on Goldman Sachs, though taking a job there would cut very close to the bone of revolving door piracy in the Washington-New York corridor. After all, Goldman owes its existence to Geithner.

In late 2008, when Geithner was President of the New York Federal Reserve Bank, he co-engineered, along with his Treasury predecessor and former Goldman CEO, Henry Paulson, the clandestine bailout of Goldman that rescued the investment bank from oblivion.

Earlier that year, Paulson and Geithner provided billions of government money to rescue Goldman’s peer, Bear Stearns, but took enormous heat for doing so; late in that year, the duo capitulated to the pressure by allowing Lehman Brothers, another Goldman peer, to disintegrate in bankruptcy. They promptly took heat for that too.

To avoid both fates in the case of Goldman Sachs, Paulson and Geithner decided to nationalize American International General. They bought 80% of that company with $85 billion in government money.

They then furtively transferred nearly $20 billion of that money to Goldman, and other banks, to prop them up. The transfers settled financial contracts between AIG and Goldman the two companies had been renegotiating for months.

Rather than complete those negotiations, in which both sides would have taken losses, the government-appointed leadership at AIG paid them out one-hundred cents on the dollar. That injected badly-needed liquidity into Goldman in a way that did not hurt its balance sheet. Of course, it killed AIG.

Geithner and Paulson hid these details from the public for months, until the press and Congressional committees unearthed the truth.

Geithner might love to land a job at Goldman, and senior folks there may welcome this chance to repay their man in Washington. But given this background, it may be too shocking even for a man who did such things to take such a job.

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Treasury’s AIG Gag Order

Top business executives in the United States regularly contact Members of Congress to lobby on legislation and other matters of public policy. But since the September 2008 government takeover of AIG, executives of that company have been forbidden to do so, unless they first get the Treasury Department’s permission, and the Treasury Department refuses to grant it.

Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.

This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for their takeover actions, the successive Treasury Secretaries tried to keep from the public how the government funds injected into AIG did not support it or its shareholders or employees but were funneled as a backdoor bailout of Goldman Sachs and other Wall Street firms.

It is thus par for the course—but equally outrageous—that we now learn that when Paulson and Geithner imposed this straightjacket on AIG, they also made the company (a) adopt a policy suspending all lobbying and then (b) sign a loan agreement prohibiting it from changing that policy without Treasury’s consent—which apparently may be withheld for any reason or no reason. Read More

Deceptive by Design: Derivatives as Secret Liens

Secretive practices and institutions are common in contemporary finance. For those who’ve ceased the search for long-term value creation, temporary information advantage is key. Even commonplace practices can be reinterpreted as havens of hiddenness. My colleague Michael Simkovic’s article “Secret Liens and the Financial Crisis of 2008” exposes the role of derivatives and securitization as secretive borrowing strategies, designed to keep the naive or trusting from discovering the fragility of the institutions they loan funds to. His work has been presented to the World Bank Task Force on the Bankruptcy Treatment of Financial Contracts, and is relevant to both private and sovereign debt risks.

Simkovic argues that 80 years of erosion of classic commercial law doctrine ensured that “complex and opaque financial products received the highest priority in bankruptcy.” Products like swaps and over-the-counter derivatives were not adequately disclosed (either by banks in their consolidated financial statements or by their counterparties in publicly accessible transaction registries). By concealing those debts, these already overleveraged financial institutions were able to attract ever more credit and investment, at better rates than those who reported their overall financial health more accurately. (All other things being equal, it’s safer to lend to an entity that owes 10 billion rather than 100 billion dollars.) The genius of Simkovic’s article is to show how “fundamental causes of the financial crisis are relatively old and simple,” even as an alphabet soup of instrument acronyms (CDO, CDS, MBS, ad nauseam) and government programs (TARP, TALF, PPIP, et al.) makes our time seem unique.
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The War Against Disclosure

Three remarkable recent lobbying campaigns go beyond the normal bounds of partisan sniping over “markets vs. regulation.” They threaten our capacity to understand how society is ordered: whom it serves, for what purposes, and at what costs. Consider these attacks on basic disclosure norms in politics and business:

1) Campaign Finance Disclosures: Regardless of ideology, almost everyone used to agree that campaign funding sources and amounts should be disclosed. 92% of Americans had that position in 2010. Justice Scalia has eloquently insisted that such disclosure laws violate no one’s rights. But thought leaders in the Republican party are now vigorously resisting disclosure, as Norm Ornstein observes:

The 2010 mid-term elections showed clearly how legal loopholes involving non-profit groups called 501(c)4s, and the failure to adopt clear regulations surrounding campaigns, can result in hundreds of millions of dollars of spending to influence campaigns that masked the identity of huge donors. In response to these realities, the Federal Communications Commission is considering requiring robust disclosure by TV stations of the major donors of political ads; the Securities and Exchange Commission is considering requiring public corporations to disclose to stockholders their spending on politics, and the White House has drafted an executive order to require companies applying for federal contracts to disclose their spending on political campaigns. . . .

Last month, Mitch McConnell [said] he views disclosure as “a cynical effort to muzzle critics of this administration and its allies in Congress.” . . . The Wall Street Journal’s full-throated support for transparency has disappeared as well; it blasted the FCC recently for considering requiring TV stations to put donors of campaign spots on the Internet . . .

John Yoo has also joined the debate, arguing that presidential power stops just short of the prerogative to require federal contractors to disclose their political donations.

2) Conflict Mineral and Extractive Industry Disclosures: One of the surprising victories for decency in the Dodd-Frank Act last year was a provision requiring certain disclosures from mining and resource extraction companies, and companies using “conflict minerals” from in or around the Congo. If you’re a consumer with preferences for certain industrial processes (say, those that don’t create incentives for rape, murder, and starvation), you want to be able to see which companies are fueling conflict and corruption and which are not. But intense corporate pressure is now delaying the rulemaking process needed to implement the disclosure provisions. According to Gerry Fay, “it is estimated that going ‘conflict free’ would cost companies just one penny per product.” But apparently that is too high a price to end corporate complicity in one of Africa’s bloodiest wars.
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