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LEE: Private property rights at stake in AIG shareholder case

Stockholders have no reason to be ‘grateful’

- - Sunday, March 17, 2013

People reading the business news recently may have glossed over a report that a Washington claims-court ruled that a particular plaintiff could pursue its case against the U.S. government. Much more is riding on this determination, however, than is apparent at first blush. To paraphrase Arthur Miller, a terrible thing might be happening, so we must pay attention.

In fact, without exaggeration, the courts will be deciding the fate of American capitalism. The plaintiff is C.V. Starr & Co., headed by the former chairman of AIG, Maurice Greenberg. He is suing the federal government for taking away the rights of AIG’s stockholders of record at the time of AIG’s nationalization. In so doing, Mr. Greenberg is defending nothing less than the principle of private property rights in the United States. 

A few years ago, AIG, no longer chaired by Mr. Greenberg, was nearly destroyed by a truly stupendous breakdown of risk controls. With the explanation that they were protecting the economy as a whole, the U.S. Treasury department rode with a lifeline in exchange for an 80 percent stake in the company. Treasury has since divested of its position. However, it did not return that position or the capital gains to the owners of record at the time of confiscation. This is the heart of the issue.

The Starr case is a class action suit on behalf of all these dispossessed shareholders. A great many editorials have chided Starr for its ingratitude in light of Treasury’s rescue of AIG. But my question is, who should be grateful, and for what? If AIG were a human, he or she should be grateful to be alive. If AIG’s destruction would have destroyed the American economy, then perhaps the American economy would have reason to be grateful. Without question, AIG’s employees have reason to be grateful. But for what should Starr and all the other former shareholders be grateful? For having its lunch eaten?

Interestingly, the current board of AIG voted unanimously not to join the suit. But another principle is at stake here. I can illustrate with a personal example. Some years ago, I had the pleasure of working for the institutional investing subsidiary of a global financial institution. In the wake of a merger between that institution and another, our subsidiary’s board of directors convened to vote on our dissolution. The top two officers of our subsidiary had seats on the board, but because they had “skin in the game,” they abstained from the vote.

I wonder if AIG’s current board members should done the same. If they received their seats on the board as the result of Treasury’s ownership stake in the company, then they had “skin in the game,” and it would seem they should have abstained on a vote which called on the company to sue that very owner.

Some have commended the government for its perspicacity in making such a fine trade. Yes, the government engineered a tremendous rise in the stock’s price for the time it owned AIG. Since there was such a strong gain, however, it would make eminent sense to me that this gain should belong to those who previously owned the stock, in very belated compensation for having had their stock taken in the first place.

In the end, the dominant issue is whether the government has the right to seize private property without compensation. It would be very difficult to reconcile a continuation of the capitalist model without recognizing the sanctity of private property rights.

In business schools across the country, students receive a firm grounding in the principles of corporate governance. Surely case studies of every major company have been written. Surely that AIG is among them. However, the conclusion to the AIG case studies should be left blank. That’s because that ending is still to be written. Attention must be paid. 

Michael Justin Lee, a lecturer in the Department of Finance and the Center for East Asian Studies at the University of Maryland, is author of the new book, “The Chinese Way to Wealth and Prosperity: 8 Timeless Strategies for Achieving Financial Success” (McGraw-Hill, 2012).