Yesterday Judge Thomas C. Wheeler of the United States Court of Federal Claims ruled that the federal government broke its own law when it bailed out insurance giant AIG (AIG) in the height of the financial crisis in 2008.
In this morning’s New York Times Aaron Ross Sorkin had this to say of the impact of that ruling:
The judge’s decision could have far-reaching consequences should another financial crisis occur — and if history is any guide, one will. Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted.
Our own experts at Yahoo Finance respectfully disagree.
“The era of the bailouts is not going to end,” says Yahoo Finance Columnist Rick Newman. “It’s never going to end because when we enter a crisis...there’s overwhelming political pressure to do something about it and policy makers and elected officials will do something about it, whatever that has to be.”
He notes that if the situation were dire enough Congress could pass new laws that would allow it. It’s not unprecedented either. “They passed TARP,” Newman points out, “which was the big bailout for the banks. They basically created the law that allowed the bailouts to happen then.”
Yahoo Finance Senior Columnist Michael Santoli agrees, assuming the next crisis warrants it. “It won’t be exactly that way,” he says. “They’ll probably try to prop up the markets, they’ll probably try to have other kinds of liquidity lifelines.”
Even if the government is forced to act sometime in the future, that doesn’t mean they want to. “I don’t think the government wants to be in the business of buying majority stakes in operating companies like [AIG],” Santoli says. “But at the time it seemed like this was dire and this was the main mechanism to do it and they found some language in an old law that they said permitted them to do it. Nobody is saying the government can’t break it’s own laws in the moment.”
And why wouldn’t they? In the case of the most recent ruling the judge found in favor of Maurice “Hank” Greenberg, the former AIG CEO who brought the case against the government, but doled out no penalty to the government for the wrongdoing.
“Greenberg essentially sued the doctor that saved his life for malpractice,” Santoli says. Judge Wheeler saw it the same way and, in the eyes of both Santoli and Newman, let the government off the hook and left the door open for such extreme measures should another crisis force their hand as it did in 2008.