Thursday, October 23, 2008

AIG, Cuomo, and a Possibly Haunted Hunting Lodge

Perhaps you heard about the $86,000 trip AIG executives took, post-bailout, to an English hunting lodge named Plumber Manor. Surely AIG could have defended itself by pointing to some of the joint’s poor reviews on TripAdvisor: One visitor termed the service “appalling,” while another complained of “massive cobwebs hanging from the bathroom ceiling.”

But, after getting a nasty letter from New York State Attorney General Andrew Cuomo, AIG head Ed Liddy decided to skip the cobweb defense. Pronouncing the company "very grateful for the guidance of Attorney General Cuomo," Liddy promised not to spend any more on “junkets” and said he'd help get back some of the millions in severance paid to ousted executives like former CEO Martin Sullivan.

In his letter, Cuomo threatened legal action if AIG didn’t cooperate. News reports implied Cuomo had discovered some secret weapon in New York law that allowed him to snatch excess compensation back from overpaid executives. “Where have you been all my life, secret clawback law?” I wondered.

However, Cuomo’s “new toy,” as law professor Dale Oesterle called it on his blog, turned out to be something old: calling AIG's expenditures a “fraudulent conveyance” under New York’s debtor/creditor statute. This is a tool you’d find in the laws of every state. The idea is that a business that’s going bankrupt can't give out cash to its friends and then greet creditors at the door with an empty piggy bank and mournful puppy eyes.

According to the skeptical Professor Oesterle, Cuomo’s trick would work only if he could prove AIG was insolvent when it signed the compensation deals, which was long before the bailout in some cases. (If so, the wording of Cuomo’s letter was kinda sloppy; he talked about money being spent “as the company slipped towards insolvency.”)

But law professor Jonathan Lipson cheered Cuomo on, scorning “accounting and bankruptcy wonks" who say "proving insolvency is a fool’s errand.” In fact, Cuomo is thinking “WAY TOO SMALL,” says Professor Lipson. (His caps, not mine.) He argues that, since all the profits made by some banks and investment banks over the last few years have vanished, maybe “they actually weren’t so healthy financially after all. Which may mean that all those bonuses and crazy severance packages... should, in theory, be as vulnerable as Joe Cassano’s $1 million/month consulting fee at AIG.”

I’m not afraid of cobwebs, so I suggest we all repair to Plumber Manor for Halloween and discuss these legal niceties by the fire.

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