On Monday, Judge Thomas Wheeler of the US Court of Federal Claims issued a ruling in the lawsuit by former AIG CEO Maurice Greenberg through his Starr investment group, alleging that the federal government’s September 2008 bailout of AIG was partly illegal because it included conditions that amounted to an uncompensated taking, in violation of the Fifth Amendment. Greenberg and other AIG stockholders demanded some $40 billion in compensation for himself and other AIG stockholders. The opinion is available here.

Judge Wheeler ruled that the government’s actions were an “illegal exaction” because they were not authorized by any federal law:

[T]here is nothing in the Federal Reserve Act or in any other federal statute that would permit a Federal Reserve Bank to take over a private corporation and run its business as if the Government were the owner. Yet, that is precisely what [the Federal Reserve Bank of New York] did. It is one thing for FRBNY to have made an $85 billion loan to AIG at exorbitant interest rates under Section 13(3), but it is quite another to direct the replacement of AIG’s Chief Executive Officer, and to take control of AIG’s business operations. A Federal Reserve Bank has no right to control and run a company to whom it has made a sizable loan. As FRBNY’s outside counsel from Davis Polk & Wardwell observed on September 17, 2008 in the midst of the AIG takeover, “the [government] is on thin ice and they know it. But who’s going to challenge them on this ground?”… Answering this question, the “challenge” has come from the AIG shareholders, whom the Government intentionally excluded from the takeover process.

However, precisely because the Federal Reserve’s actions were not authorized by federal law, they don’t qualify as a “taking” that requires “just compensation” under the Fifth Amendment:

A ruling in Starr’s favor on the illegal exaction claim, finding that the Government’s takeover of AIG was unauthorized, means that Starr’s Fifth Amendment taking claim necessarily must fail. If the Government’s actions were not authorized, there can be no Fifth Amendment taking claim….
Fifth Amendment taking claims and illegal exaction claims are two sides of the same coin: taking claims are based upon authorized actions by government officials, whereas illegal exaction claims are based upon unauthorized actions of government officials.

As Judge Wheeler notes, the rule that illegal exactions cannot qualify as takings is based on longstanding precedent. But I am nonetheless skeptical of its validity. It seems to me that a taking occurs any time the government seizes private property, regardless of whether the government’s action was otherwise properly authorized or not. Just as unauthorized government action can violate other constitutional rights, such as those protected by the First Amendment or the Fourth Amendment, so too it can violate the Takings Clause of the Fifth Amendment. Nothing inherent in the logic of either takings or illegal exactions requires them to be mutually exclusive categories. The same government action could be both.

Be that as it may, both takings and illegal exactions generally require compensation for the losses suffered by the property owner. But, as I noted in a post written back when the case was first filed in 2011, in this case the government’s action may well have actually enhanced the value of the owners’ holdings rather than diminished them. Absent the bailout, AIG might have collapsed, thereby obliterating all or most of the value of the stock owned by Greenberg and others.

That is exactly what Judge Wheeler concluded. Although the federal government acted illegally, the court ruled that it did not owe the plaintiffs any compensation, because “the government did not cause any economic loss to AIG’s shareholders.” To the contrary, the bailout and associated conditions actually “significantly enhanced” the value of their stock, because otherwise AIG might have collapsed and been forced to file for bankruptcy, which would have pushed the value of its stock down to zero, or close to it. I lack the financial expertise necessary to assess the factual basis for this part of the court’s ruling. But it’s an important holding, and one that could potentially affect future cases involving conditions attached to government bailouts of financial institutions.

Both the government and Starr could potentially appeal those parts of the ruling that went against them. If Judge Wheeler’s decision stands, it will have at least two important implications for future cases. First, the government would not be able to engage in bailouts with similar conditions in the future, unless – of course – Congress changes the law to authorize them. Second, the ruling on damages might be an important precedent preventing stockholders for getting compensation for conditions attached to bailouts in cases where the bailout ultimately enhances the value of their holdings more than it diminishes it.