Hank Greenberg’s legal assault on the U.S. government and the terms imposed in its 2008 bailout of American International Group Inc. brought a parade of financial crisis superstars to a Washington courthouse, providing an insider’s account of the struggle to save the U.S. economy.
Ben Bernanke, Henry Paulson and Timothy Geithner each took the witness stand, attesting to the calamity they faced, and how the way they saved what was once the world’s biggest insurer was the best course for the nation.
The former Fed chairman and ex-Treasury secretaries told their stories not to a jury, but to one man: U.S. Court of Federal Claims Judge Thomas Wheeler. During the two-month trial, the 66-year-old, white-haired ex-government contract lawyer often decided against the U.S., while ruling for Greenberg and his Starr International Co., once AIG’s biggest shareholder.
In consideration for an $85 billion loan from the Federal Reserve Bank of New York, the insurer had to agree to a 14 percent interest rate and a demand for an 80 percent government equity stake, arrangements that cost shareholders as much as $40 billion, Greenberg claimed. Led by attorney David Boies, Starr’s lawyers argued AIG investors deserve that money back.
The presentation of testimony in the case ended last week. Once considered a long-shot, Wheeler’s rulings in favor of Boies, the lawyer’s success in eliciting damaging testimony and the judge’s impatience with the tactics of government lawyers have made a victory for Greenberg and Starr seem plausible.
Wheeler, who sang in his church choir and coached softball, is seen by those who know him as unfazed by the heavyweights who were called as witnesses during the AIG trial.
“Those are big names. That’s not going to intimidate Tom,” said Carl Vacketta, a former law firm colleague who said he taught Wheeler when he was a student at Georgetown University Law Center. “He’s smart and adept,” Vacketta said. “He’s not going to be bothered by anybody from Wall Street.”
The government in 2008 sought to save AIG before it was brought down by billions of dollars of credit-default swaps, fearing its collapse from bad mortgage bets would ripple outward from a firm that insured thousands of municipalities, retirement plans and companies, and was a counterparty to some of the biggest banks.
“AIG exploited a huge gap in the regulatory system” and its Financial Products unit operated without oversight as it made derivative bets on subprime loans, Bernanke told lawmakers in 2009. “This was a hedge fund basically that was attached to a large and stable insurance company.”
The AIG bailout ballooned to $182 billion. The New York- based insurer eventually returned to profitability and repaid the assistance in 2012, leaving the government with a $22.7 billion profit.
In the trial, the U.S. argued that it had authority to demand equity, and that the bailout was voluntarily agreed to by AIG’s board as a preferable alternative to bankruptcy.
Boies, 73, has used government correspondence to argue that, instead of being a hedge against risk as U.S. lawyers argued, the stiff costs of the loan were an attempt to make money.
Much of the case has focused on Starr’s allegations that the government coerced AIG’s board into accepting the bailout, and exercised control of the company at key moments afterward.
Those elements are crucial to Starr’s claim the government took shareholders’ property without just compensation, in violation of the U.S. Constitution.
Wheeler, who declined to be interviewed for this article, repeatedly expanded the range of government documents available to Starr. The judge’s insistence on compiling an expansive record was one of the trial’s defining feature.
He was disinclined to allow the government to use redacted documents, and frequently overruled objections to the introduction of evidence, promising to apply “my reliability yardstick” when evaluating the merits of disputed material.
The judge made at least three rulings that worked to Starr’s advantage, including a pair that increased access to government documents and another that barred the U.S. from calling three lawyers for AIG as witnesses.
Perhaps the most significant decision by Wheeler came Nov. 5, when he ruled that because of the way the government questioned an outside attorney for the New York Fed, it waived attorney-client privilege, opening the door for Starr to access 30,000 additional documents.
“I don’t want there to be any loopholes here,” Wheeler said.
Wheeler rebuked government attorneys for attempting to rely on hearsay, introducing exhibits in violation of rules about redactions and dragging out proceedings by reading lengthy passages from documents into the record.
At times, Wheeler gave Boies, who represented the government in the 1999 Microsoft Corp. antitrust trial and former U.S. Vice President Al Gore in the 2000 presidential recount, a wide berth.
He kept silent as Boies chastised government witness Marshall Huebner of Davis Polk & Wardwell LLP, who served as outside counsel to the New York Fed, for what he deemed insufficiently responsive answers.
“One of the differences between being a lawyer and being a witness is as a witness you’re supposed to answer my questions” while as a lawyer, “you get to make arguments,” Boies told Huebner Nov. 5. “But I would ask you to listen to my questions, as opposed to make the points that you want to make.”
Wheeler gave both sides until next week to finish submitting evidence, including material from the trove he forced the government and others to produce. He set a Feb. 9 deadline for both sides to file conclusions of law, with closing arguments to follow as soon as March.
He set no page limit on the post-trial filing, in keeping with his preference for a broad record.
“He really wants to understand the facts and the circumstances and anything that’s germane to make sure it’s on the record and can be taken into account,” said Fernand Lavallee, a lawyer at Jones Day who worked with Wheeler at DLA Piper LLP. “That was how he practiced as a government contracts litigator.”
In the early stages of the litigation, Wheeler told lawyers for both sides that his daughter-in-law worked for AIG as a paralegal and asked for their views on his participation.
The judge said that, after checking with the court’s ethics adviser, “I don’t think this circumstance creates any cause for recusal whatever, so I’m anxious to remain on the case and be of service to you all.”
Starr and the government didn’t object.
The disclosure followed the best practice of “putting your cards face-up on the table,” said Charles Geyh, a professor at the Indiana University Maurer School of Law. “It tells the lawyers, ‘speak now or forever hold your peace.'”
Wheeler didn’t explain his acquaintance with an expert witness who appeared on behalf of Starr, telling economist Michael Cragg, “I believe I remember you from a prior case.”
Cragg, the judge wrote in a previous opinion, “was the single most helpful expert” in a tax case in which Wheeler rejected BB&T Corp.’s bid to recover more than $688 million in taxes and penalties for a disallowed tax shelter.
In the Starr trial, Cragg testified the government lacked a strong economic rationale for the stringent terms of the AIG bailout, abused its power and treated the insurer “as a political scapegoat” for the financial crisis.
Wheeler had no obligation to disclose anything about Cragg’s earlier appearance, since it was already in the public record, Geyh said.
“In this small legal universe, there is a recycling of these experts,” he said.
Nicole Navas, a spokeswoman for the Justice Department, declined to comment on Cragg’s testimony. Robert Dwyer, one of Starr’s attorneys, said the decision to have Cragg appear as an expert witness was made before the BB&T ruling, but agreed that his standing with Wheeler was an unexpected bonus.
Wheeler was appointed in 2005 to a 15-year-term on the U.S. Court of Federal Claims by Republican President George W. Bush. The court primarily hears financial or contract claims against the federal government. For more than 30 years before his appointment, Wheeler worked in private practice, specializing in government contract issues.
After receiving his undergraduate degree from Gettysburg College in Pennsylvania and a law degree from Georgetown, he worked at law firm Pettit & Martin and then Piper & Marbury, which through mergers eventually became DLA Piper.
Lavallee recalled hearing Wheeler’s wife, Janet, talking about taking him to choir practice.
Wheeler “kind of had that sheepish, humble look on his face, and he says, ‘Yeah, I really enjoy the church choir,'” Lavallee said.
A friend of the couple, Sheila Stark-Bailey, a senior counsel at AECOM Technology Corp., said Wheeler was “an absolutely fantastic mentor” at DLA Piper.
The Wheelers like to tailgate at Penn State University football games, and the judge is sometimes called “Judge Coach” by former law firm colleagues who remember his stint on the office softball team, said Stark-Bailey.
Wheeler used their shared interest in the game to lend a humorous, personal touch when he presided at her wedding in 2007, Stark-Bailey said.
“He was always criticizing how I handled the fielder’s choice,” she said.