Court of Federal Claims Judge Wheeler issued an Opinion and Order in Starr International Company, Inc. v. United States, No. 11-779C (June 15, 2015), the case that Hank Greenberg brought against the government over the terms of the bailout of AIG during the financial crisis. The judge found that the government exceeded its authority in taking an equity interest in AIG, but did not award the plaintiffs any damages. Many will read the tea leaves of this opinion to see what they tell us about the litigation brought against the federal government by shareholders in Fannie and Freddie arising from the bailout of those two companies. I think it offers little guidance as to liability but lots as to damages.
My most important takeaway from the opinion (which seems well-reasoned to me) is that the holding is based on a close reading of the Federal Reserve Act. The Act enumerates the powers and limitations of the Fed. The Court held that the Act does not authorize the Fed to take equity in a company as part of a bailout.
Fannie and Freddie are regulated by the Federal Housing Finance Administration (FHFA). The FHFA’s powers and limitations, in contrast, derive from the Housing and Economic Recovery Act of 2008 (HERA), passed during the financial crisis itself. HERA explicitly granted the FHFA broad powers as conservator. Section 1117 of HERA authorized the Secretary of the Treasury to make unlimited equity and debt investments in the two companies’ securities through December 31, 2009. (There is a disagreement as to whether the the Third Amendment to the Preferred Stock Purchase Agreement, discussed here, created new securities after that date, but the more general point is that HERA authorized equity investments in a way that the Federal Reserve Act did not.)
In sum, I would not read too much into the GSE litigation from the AIG litigation as it relates to the government’s ability to take equity in Fannie and Freddie. The two cases arise under two completely different statutes.
As to the damages component of the opinion, there are many cases when a court finds for a plaintiff but only awards nominal damages. Thus, the Court’s opinion is not particularly out of the ordinary in this regard. Here, the Court relied on the reasoning of the Court of Appeals for the Federal Circuit in a TARP case, A&D Auto Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014). In that case, the Federal Circuit found that absent allegations that “GM and Chrysler would have avoided bankruptcy but for the Government’s intervention and that the franchises would have had value in that scenario,” there was no basis to argue that the government caused “a net negative economic impact” on the plaintiffs (Starr at 66, quoting A&D at 1158).
It would appear that to prove damages, the GSE litigation plaintiffs will need to overcome that bar too, even if they were to succeed in proving that the government had acted improperly in bailing out Fannie and Freddie.