Verdict in AIG Case <br>Could Echo in Congress <br>Like a Chinese Gong

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It will be at least until summer before a verdict in Maurice “Hank” Greenberg’s $40 billion lawsuit over the Federal Reserve’s seizure of AIG. But already the smirk has been wiped off the face of the government and its apologists.

That was acknowledged by The New York Times on the eve of Wednesday’s final arguments. It reported that Greenberg, who built the company that was taken from him in 2008, has “already achieved something that few thought possible: a chance to win.”

Maybe the Times reporter doesn’t read the Post, but I warned in these pages back in October that the lawsuit was “no joke.” A commentator in the Times had called the case “ludicrous,” the New Republic dubbed it “mostly insane” and the New Yorker “absurdist comedy.”

But, I wrote, the Fifth Amendment to the Constitution — which says that the government can’t take private property for public use without due process and just compensation — is no laughing matter. It is our nation’s most basic protection of property rights.

This perspective began to come into view as the case unfolded in Washington, where Greenberg has been represented by one of America’s most brilliant litigators, David Boies. So, the Times acknowledges, the “legal odds are shifting.”

It may still be too soon to predict how the case will come out. The government argues the company wasn’t worth anything when it was seized. And the Federal Reserve contends that under the law it has wide leeway in “exigent” circumstances.

That’s all up to Judge Thos. Wheeler of the United States Court of Federal Claims, but it’s not too soon to predict that if Mr. Greenberg does win, it’s going to ring like a Chinese gong. It would be an enormous vote of no confidence in the Federal Reserve.

That’s because it was the Fed that forced AIG to hand over, in return for an $85 billion bailout, 79.9% of its stock. It then put the shares in what Mr. Greenberg’s lawyers called a “sham trust” — meaning, an entity created simply to get around the prohibition on the Fed owning private companies.

AIG used the money it got from the Fed to settle with big banks AIG had been dealing with. They were the real winners in the transaction. It turned out to be an early move in a vast expansion of the Fed’s balance sheet by trillions of dollars.

Why does this matter to the rest of us? It would be one thing if the Fed’s seizure of AIG aborted the recession that started in late 2007. Or if the central bank’s subsequent campaign of buying up government bonds resulted in a quick end to the recession.

It didn’t, though. That slump turned into the Great Recession, with unemployment above 6 percent, 7 percent or even 8 percent for much of the Obama presidency. Just like in the Great Depression of the 1930s, big government, claiming to help the little guy, may have lengthened the travail.

Congress is starting to fret about this possibility. So in the AIG case, a ruling against the government would resound in Washington, where Congress is considering a handful of bills to reform the Federal Reserve.

It’s not just the Republicans. When Audit the Fed — legislation that would enable Congress to dig into how the Fed makes policy — passed the House in September, some 109 Democrats voted with 224 Republicans. That’s a veto-proof majority.

Now the Senate, newly led by the GOP, has been holding hearings. The current Fed chair, Janet Yellen, is fighting against any such investigation. She told the Congress in recent testimony that she’s opposed to having it set any rules on how the bank makes monetary policy.

That’s a line that’s getting ever harder to hold. The chairman of the House committee that oversees the Fed, Rep. Jeb Hensarling of Texas, was in New York a few weeks back and, at a small breakfast, told a remarkable story.

He was buying a quart of milk at a 7-Eleven in his home district. When he went to pay, he remarked to the cashier on the high price. This ignited a tirade from the cashier against Janet Yellen.

When he’s being lectured on the Fed chair by a cashier at a 7-Eleven, Hensarling remarked, “something is happening.” That’s not a climate in which the Federal Reserve wants a court to conclude that, in one of the biggest bets in the Fed’s history, it was on the wrong side of the law.

This column appeared originally in the New York Post.

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