by Yves Smith, Naked Capitalism
One of the most striking things about the testimony in the AIG bailout trial is the degree to which Fed officials play fast and loose with the truth. And I don’t mean the normal CEO version of having no memory of events that are inconvenient and very detailed recollections of things that boost their case. I mean statements that are flat out false.
Two key examples come at the very top of the trial, namely, Scott Alvarez, the general counsel of the Board of Governors, and Tom Baxter, the general counsel of the New York Fed. They are also the most important government witnesses, given the plaintiffs’ strategy, that of Hank Greenberg, via Starr International and the class of AIG shareholders that Starr represents. Their case hinges on the legality of the central bank’s conduct in the bailout, as in whether it exceeded its authority under its “unusual and exigent” powers, more formally known a Section 13 (3) loans. These two attorneys are critically important both in having told their principals, meaning for Alvarez the Board of Governors and for Baxter, Tim Geithner, what they thought was permissible conduct, and as players in their own right.
Much of the time Alvarez and Baxter try, with mixed success, to navigate a credible, government-defending path through the facts on record, but there are times they simply punt, as in this exchange between David Boies, Greenberg’s attorney, and Alvarez:
Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities? A: I don’t know.
And Alvarez simply would not drop trying to maintain that black was white. This is from Day 2 testimony. Q is again Boies and A is Alvarez, and Boies is referring to the Financial Crisis Inquiry Commission report:
Q. Let me ask you to turn to page 382 of the exhibit. And let me ask you to look at the second full paragraph. And it begins, “As it had on the weekend of Bear’s demise, the Federal Reserve announced new measures on Sunday, September 14, to make more cash available to investment banks and other firms. Yet again, it lowered its standards regarding the quality of the collateral that investment banks and other primary dealers could use while borrowing under the two programs to support repo lending, the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF).” Do you see that? A. I see that Q. And do you remember colloquies that we had yesterday about whether the Fed was accepting collateral that was not as good, in layman’s language, as it had before? 3 A. I do recall that. Q. Using the language here, would you agree that the Federal Reserve had lowered its standards regarding the quality of the collateral that investment banks and other primary dealers could use while borrowing under the PDCF and the TSLF? A. No. Q. You would not agree with that. A. Right.
It’s one thing to see people representing banks, which is what Alvarez and Baxter are in this case, try to pull a fast one over judges in foreclosure court. It’s another thing to see attorneys of this stature pulling the same tricks with a smidge more finesse. And this isn’t my view; I’ve conferred on many of the examples below with well recognized legal experts on lending, bankruptcy, and bank regulation who don’t have a dog in this fight. Via e-mail, here’s the reaction of one to some of the AIG bailout trial testimony:
Alvarez either a fool or a liar, and I know he’s not a fool. Of course, there’s no chance that the DOJ will prosecute him for perjury given that they’re defending the Fed.
Let’s just look at some examples of what I am talking about. I tried to find relatively short ones, and that was not as easy as I’d like, give how uncooperative Baxter and Alvarez were when caught out. But trust me, there are quite a few more.
Quacks Like Perjury
Alvarez, on the second day of testimony (see the transcript as in this exchange between David Boies, Greenberg’s attorney, and Alvarez). Q is Boies:
Q. Now, the interest rate that was set for the AIG 13(3) loan was an interest rate that you believed at the time of your deposition was the interest rate that had been discussed between AIG and certain private-sector banks; correct? A. That’s correct…. Q. And insofar as you are aware, that interest rate was simply accepted by the Federal Reserve without any analysis or consideration as to whether that interest rate was a reasonable interest rate; correct, sir? A. No. Q. Let me ask you to look at your 2012 deposition at page 33, lines 16 through 20: “QUESTION: Was any analysis or consideration done or given by the United States to the question of whether the interest rate that the banks were asking for in the discussions was a reasonable interest rate? ANSWER: No, not that I’m aware of”
Here is another eye-popping statement from Day 2, again from Alvarez:
It is common for banks in the business of banking to obtain equity interests in connection with distressed debt and speculative – in distressed debt situations, and the comptroller of the currency has authorized this in a variety of circumstances, so it is within the business of banking and incidental to the business of banking.
This was such a rank falsehood that reader grayslady jumped on it. A recognized bankruptcy expert was if anything more indignant. Via e-mail:
Total bullshit. DIP [debtor in possession] loans only get paid in cash: fees and interest. They cannot require warrants, much less equity, because at the time the DIP loan is made, nobody knows who will be getting the equity in the reorganized company or if there will even be a reorganized company. The DIP loan is the super-senior piece of the capital structure. It’s secured up the wazoo and often has serious governance rights (like appointment of a chief restructuring officer). But it’s not equity. That said, there’s plenty of loan-to-own in bankruptcy, but that’s based on pre-bankruptcy investment getting converted into equity. It’s very rare that the DIP loan itself gets converted into equity under the plan. (Sometimes the DIP loan will rollup the pre bankruptcy senior facility, but its rare to see that plus an ultimate equity conversion).
