When I first read about the takeover of AIG I was curious about the details of how that worked. I read that the Government took a 80% owenership in the AIG stock and diluted the existing shareholders. There was scarce mention of any of the details and as a lawyer I was shocked about how fast the takeover was implemented. The insurance subsidiaries of AIG are regulated by the various states where they do business and insurance companies can be put into receivership by the state authorities. There is no Federal regulation of the insurance companies. The parent or holding company of AIG was apparently where the problems were and the bad investments. That was the company taken by the Feds. You have read that the insurance policies will all be honored and I am not surprised by that because the insurance companies are required to have assets both liquid and non liquid backing up their obligations under the policies they write. AIG holding had obviously invested heavily in the securities backing the subprime mortgages and it was that position that caused the takeover, at least that was the announced version. I can only go on what has been made available like you.
They did the whole thing over a weekend and that was what really got my curiositiy up. How did they obtain the necessary corporate and shareholder approvals on such short notice? Well, the facts are emerging. There was no approval other than apparently by some board vote of the holding company. I don’t know what state AIG is incorporated in but every state has corporate laws in place that regulate corporate governance and the rights of shareholders. In all the states a takeover like that would require a vote of the shareholders since their ownership and rights were being affected. For such a takeover it is usually at least a two thirds votes of each class of shares. You can understand that a board or no one else can simply come in and take away your stock. I do wish I had all the details about the structure of this because on the surface it would appear to be illegal. I know the Federal Reserve has a provision in its enabling statutes that gives it powers to intervene in “exigent circumstances” whatever the hell means. And when did the Federal Reserve get into the insurance business and the brokerage busines and the investing business.
As you know if you have read here before I have no love for AIG or its shareholders. Had bad dealings with the company myself a few years ago. But I do like things to be done according to Hoyle. Do we even know that AIG was bankrupt? Did it have a net worth? Was it paying its bills on time as they came due? If you know the answer I would sure like to know and where you got the info. Point is those shareholders may have had value, maybe a lot, and it was confiscated by the Government. Even if it had minimal value the shareholders have the right to expect their company to file a Chapter 11 and see if things couldn’t be worked out over time and return value to them. Everyone from Barney Frank to Boehner agree those underlying mortgages have long term value. Saving a company by allowing it to access that long term value is exactly what a Chapter 11 is designed to accomplish. That right has also been foreclosed by the Government.
Under the 5th amendment to the US Constitution, it provides that “nor shall private property be taken for public use witnhout just compensation” . No matter the statutory authority of the Fed I think they still have to comply with the Constitution, don’t you? The Constitution trumps any statute that contravenes its precepts. What was the public use of the shares of stock taken by the Government? You know as well as I what things and purposes have been considered as a public use over the last 200 years–roads, schools, post offices, public buildings, utilities, etc. When did owning stock become a public purpose? It is one thing to regulate an industry but quite another to seize it and take its value (whatever that may be, great or small) into the Government coffers. Those share ownership rights are private property. They apparently have been seized by the Government. The Government barged in and said we are taking 80% of your stock. I have read not one word of what compensation the Government is giving those shareholders. If the stock was completely worthless as some might argue–then answer me this–why was the Government rabid as hell to get it? What person what industry might be next on the Government list for takeover for the public good as some bureaucrats and politicians determine that public good. I don’t even like AIG and frankly thought all along and do now that if it failed then so be it. If the shareholders lost everything because of that then I have no sympathy for them. No one seems sorry about my losses in the last couple of months. However, I am appalled at the naked power play of the Government and what seems to be nothing more than confiscation of property the Government wanted for its own purposes, not a public purpose. If that is going to be the new game in town then let’s at least do it right and amend the Constitution. Maybe some of the shareholders will file suit at some point. Sure would be interesting to follow that case.
We have those Constitutional rights at great costs over the years. I hate to see them evaporated like a wisp of morning fog on the lake. Remember the sign off on the Declaration of Independence–“we pledge our lives, our fortunes and our sacred honor”.