Caveat Emptor

For those who are hot to get in line to buy from the US government bad assets that the government will buy from banks and sell back to private investors, former Arnold & Porter partner Edward Sisson has some advice: get ready to invest in the US government's "breach-of-contract court system."

Mr. Sisson ought to know. He was in the thick of the litigation that resulted from the mass breaches of contracts by the U.S. government following the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). We've discussed those lawsuits many times, most recently here.

Mr. Sisson, in an opinion piece in a recent issue of the American Banker (paid subscription required), describes himself as "the lawyer who coordinated litigation strategy and communications between the 65 law firms that represented more than 120 plaintiffs from across the country who ultimately all were sent to the United States Court of Federal Claims in Washington, D.C." Although the plaintiffs won the basic issue of the government's liability for breach of contract in 1996 in the landmark Winstar decision, and more favorable rulings on common issues a year later, that didn't stop the government. I didn't even slow them down.

And yet, despite victories in 1996 in the Supreme Court and in 1997 in the "Sisson issues," stubborn Department of Justice litigation tactics, combined with a pro-government Court of Appeals for the Federal Circuit, so dragged out the litigations that many plaintiffs gave up, or were finally undone by late rulings in the appellate court. Even today, some of the largest cases are dragging on, 19 years after the government breached the contracts.

A wise and experienced small-city lawyer from Oregon, representing plaintiffs in one of the cases, said after years of frustration that litigating against the United States "is like dancing with a bear. You don't stop dancing until the bear gets tired."

As you contemplate buying bank-related assets from the government, never forget: you are beginning a dance with a bear — a marathon reminiscent of dance marathons in black-and-white newsreels of the 1930s, in which sleep-deprived partners shuffle around the floor, hoping to last long enough to win the prize. After you buy the government assets and do the deal, and after the Congress and the president pass the laws that breach your deal, the government bear will dance with you until you drop. And unless you have crafted a comprehensive agreement that anticipates all the bear's steps, you will win no prize at the end.

Space does not permit listing the bear's litigation dance steps here. Believe me, as one who danced with the bear for 14 years, its steps are numerous, tricky, and full of trips and twists.

Sadly, investing in the U.S. government's breach-of-contract court system (by paying lawyers to pursue claims in that system) is an economically irrational choice for any competently run business that could deploy the same cash in its own productive activities. Taking into account the 10 years or more of delay before buyers receive payment of damages, the interest that does not accrue on the damages during all those years, the amount of the litigation fees (in the millions), and the lost interest and income buyers would have earned on those litigation fees had they invested those sums in their businesses rather than in their litigators, even a large judgment will leave buyers less well off than if they just let the government get away with the breach scot-free.

I can hear the prospective buyers now: "That was then. Now, it's a whole new ball game."

Yeah, the new game is called "Murderball" and you're the last nerd standing on the wrong side of the gym, with the Duke Lacrosse Team on the other side. And they're all drunk, pissed off, and kinda horny.

Don't say you weren't warned.