AIG, a Federal judge, a bad decision, the Bible, unbridled greed — and the difference between a wise man, a sadist, and a nincompoop

The difference between King Solomon and 

Federa lJudge Thomas C. Wheeler is that 

when Solomon ran a courtroom, the 

baby would survive.

So let us begin this tale of contemporary idiocy with a considerably older tale of wisdom, from the Bible. 

You’re probably familiar with it. Two women are disputing  who is the true mother of a baby. And just for some gratuitous fun and speculation, the Bible mentions that both women are hookers.  The hooker moms go to the top guy in Jerusalem, King Solomon, to settle their dispute. Solomon, known for his extraordinary wisdom, listens to their stories.

Two hookers and a sword

It’s the kind of he-said, she-said arguing — and probably screaming, and glaring, and interrupting, and spitting, and unbridled rage — that would give Judge Judy a headache, never mind Solomon. 

Finally the kingly decider has had enough. He calls for his sword. Solomon tells the women, that’s it! He’s had it! He’s going to be fair. He’s going to chop the baby in half and give each woman an equal share. I don't need to point out that Solomon made a formidably sadistic declaration. Imagine the suffering of a real mother, thinking the all-powerful king is going to kill her infant child.

The real mother is naturally distraught. She doesn’t want her baby sliced up for the human equivalent of lamb chops. She begs King Solomon to give the baby to the other woman. At that point, Solomon decides that a woman who’d rather give the baby away than see it slaughtered must be the real mother. And while it’s several thousand years too late to read Solomon’s mind, it’s possible he thought that even if she wasn’t the real mother, she’d be a better mom to the kid than a woman who says, in effect, “Go ahead, slice him up. Fair is fair, as long as I get half the body parts.” 

Mortgage meltdown madness

So now let us jump ahead to the first decade of the 21st Century. The United States has suffered a mortgage meltdown that threatens the entire U.S. economy and the funds that every depositor has in just about every bank. At the center of this mess is securitized mortgage derivative insurance. This kind of insurance is essentially a wildly irresponsible abstraction of an abstraction. It has been invented by AIG, a greedy insurance company, to rake in bucks — on the theory that guhzillions of securitized subprime mortgages are going to get paid off and the insurance that AIG is charging for will never be needed.

AIG probably could have done better shooting craps in Las Vegas. The whole mortgage market melts down. AIG can't pay the insured banks. So now the banks are teetering on the edge of failure.

Having made a considerable contribution to wrecking the economy, AIG has also wrecked itself and is about to go bankrupt. This will leave AIG’s customers, the banks who’ve spent their depositors’ money on worthless derivative securities, with nothing to collect on their insurance policies. Ditto AIG’s own shareholders, who now own essentially worthless AIG stock. 

Who will get stuck with the multi-billion dollar bill for replenishing the money that the banks have lost because their AIG derivative insurance  didn't work? Why poor citizens like you and me, of course. The “little people.” That’s because our deposits are insured by a reliable insurance company, the FDIC, and the government through FDIC will now will have to spend our tax money put back into the busted bank accounts. If deposits weren’t insured, nobody would ever deposit a nickel in a bank.

Fortunately the United States Federal Reserve  rides to the rescue. It seizes control of  nearly 80 percent of the worthless insurance company. Your bank deposits and mine are saved as the government shells out tons of money to cover meltdown lossses. The AIG shareholders end up slightly less screwed than they were before the Feds took over their vcompany. They get back 20 cents on the dollar.  Actually, that’s a pretty good deal. As one adviser to AIG put it, “20 percent of something is better than 100 percent of nothing.”

AIG gets reorganized and survives. The U.S. taxpayers get back all the money they spent to rescue AIG, plus a $20 billion profit – proving that governments taking over businesses not only don’t create a bottomless hole, but can actually do the taxpayers a favor. And also that sometimes government is a whole lot smarter about running a business than private enterprise.

The economy recovers. AIG is back in business. So are the banks that AIG only pretended to insure. AIG’s greedy  executives reward themselves for being saved by the government from their own incompetence and greed  by paying themselves fat, juicy bonuses.

The Ace of Greed

But then Maurice Greenberg — “Ace” Greenberg as he’s known on Wall Street – feels the sap rising in own his bloated greed gland. Big sums of money have been involved in the death and rebirth of AIG, and he, as former AIG chief exec, wants more of it. He sues “on behalf of the shareholders” among whom he was a very big one, for more money. Remember, had the government not seized AIG, he’d have gotten nothing, nothing, nothing. Ditto the investors. That’s gratitude among the one percent for you. I jump into a raging whirlpool where you're drowning and pull you to safety. You then turn around and sue me for pulling your hair.

Greenberg's case gets tried before a judge at the U.S. Court of Federal Claims named Thomas C. Wheeler. Wheeler must be from Mars, or someplace else in outer space.  Wheeler rules that the 20 percent on the dollar the U.S. gave the bankrupt stockholders was “draconian.” In exchange for not letting the stockholders go bankrupt, the Feds should have given the stockholders even more money, says the judge. Therefore, the takeover was illegal, the judge somehow decides.

K want to know what the Judge was smoking. Maybe he was crushing stupid pills and smoking them in a crack pipe. But perhaps he was only sniffing eau d'Ayn Rand. Hey, what can you expect? He was appointed by Jeb Bush's brother, George Bush.

Now, to quote the Dealbook Column in the New York Times earlier this week:

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.

What all that boils down to is, the next time we have a meltdown, the entire United States economy could end up looking like 12th Century Yemen.

Blood, guts, dead babies, and 

 judicial nincompoopery

In fact, even the judge must have realized, at some level, that his call was worthy of a nincompoop. So then, to appear more fair minded, he went and cut the baby in half. He awarded The Ace of Greed and his fellow shareholders the good news that they’d won on principle. The nasty old government should have rewarded their failure with even more money.Then, to balance things out, he gave them the bad news that they weren’t getting any more money anyway. 

The difference between King Solomonm and Judge Wheeler is that Wheeler actually did cut the baby in half. And all that  baby blood and baby guts, spilling all over the courtroom, are what was once the future economic stability of the United States.

So Judge Wheeler is a nincompoop, the economy is in peril, and the case may eventually wend its way all the way up to the U.S. Supreme Court where, considering the court’s recent history, a court majority that sounds like a musical ensemble called The Scalia Five will pull the plug on what was once a great nation.

You’d think that an economy once as big and as burgeoning as ours would be so strong that it would be idiot proof. But as somebody — I don’t remember who — once said, “Nothing is idiot proof. The idiots are too damn clever.”

Hey, hand me a sword and one of those babies. I’m feeling hungry.