WASHINGTON, October 18, 2014 — After securing England as part of his realm, the Norman duke lived up to his moniker — William the Conqueror — and ordered that a record be made of all the possessions of his vanquished Anglo-Saxon subjects.
In 1085, William “sent men all over England to each shire to find out what or how much each landholder had in land and livestock and what it was worth … not even an ox, nor a cow, nor a swine was there left that was not set down in his writ. And all the recorded particulars were afterwards brought to him,” reads the Anglo-Saxon Chronicles.
Like a certain American president of craven ambition, William sought tax revenue and didn’t want his new subjects holding out on him.
Many Americans might be surprised to hear that the United States has its very own version. Our Doomsday Book is a tightly held secret of our shadowy Federal Reserve. But some of its hush-hush contents may be revealed as a result of a class action lawsuit now underway in the U.S. Court of Federal Claims, which is within sight of the White House.
The court’s mandate, as stated on its website, reads, “In this Court the federal government stands as the defendant and may be sued by citizens seeking monetary redress.”
Leading the suit against the Fed is Starr International Company, Inc., an investment and charitable fund under the direction of Maurice Greenberg, founder and former CEO of mega underwriter American International Group (AIG). The Federal Reserve is the defendant. At issue is the Fed’s $182 billion bailout of AIG during the financial crisis of 2008.
AIG once thought selling insurance to cover any loss suffered by investors in bundled mortgage-backed securities, Collateralized Debt Obligations (CDOs), was a great idea. After all, the smart money men on Wall Street, not to mention their bipartisan champions on Capitol Hill, believed securitizing mortgage debt “spread risk,” making them a safe bet.
What could possibly go wrong? Subprime loans, that’s what.
As the holders of these exotic insurance policies saw the value of their underlying mortgage holdings evaporate, they called AIG and demanded they make good on their policies. There was just one problem. Although AIG had issued around $60 trillion in such policies globally, it could not pay the $440 billion it owed customers for their mortgage-backed junk bonds.
Had AIG collapsed, many banks around the world would have suffered the same fate. Credit would have seized, markets would have tumbled, and the world would have plunged into a second Great Depression.
That’s when AIG got on the horn to Fed Chairman Ben Bernanke, asking for a handout. The Fed reluctantly agreed, but demanded AIG give the U.S. government an 80 percent ownership stake in the company and pay a 14 percent interest rate on the bailout as punishment for their recklessness.
In today’s lawsuit, Maurice Greenberg contends that forcing AIG to give the government majority ownership, and making it pay a punitive interest rate, the Fed went beyond the legal guidelines of its Doomsday Book.
Oh, and the Fed also deprived AIG’s 300,000 shareholders just compensation as required under the Fifth Amendment to the United States Constitution:
“No person shall … be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
Keynesian economists contend that government spending creates demand. The Fed created demand for homes by offering low interest rates and easy-money policies. Congress did its part by creating the government-sponsored enterprises Freddie Mac and Fannie Mae, which bought over 90 percent of home mortgages underwritten by the banks.
The geniuses on Capitol Hill created even more demand for housing by forcing banks to offer subprime loans. Wall Street securitized and bundled toxic mortgage debt to sell to the world as a safe investment. AIG believed it to be so safe, they insured it against loss. When this Keynesian piñata popped, the Federal Reserve had no choice but to turn to its Doomsday Book for advice.
There are no good guys in this bag of snakes. Not the Fed, not Congress, not Wall Street, nor the people who applied for and received loans they could never repay.
The only hero in this story is the U.S. Constitution. It does not give Congress the power to lend or bailout. Had its enumerated and limited provisions been faithfully obeyed by the public servents who swear an oath to protect and defend it, the overwhelming financial risk to all the parties above would have been incentive enough not to engage in such stupid and reckless behavior.
And those who care about liberty and restrained government power will have the last laugh should the court rule that the Federal Reserve’s Doomsday Book does not trump the Constitution or its Bill of Rights.
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