I will yield to few people in my tubthumping (great disc, btw) populism, and my belief that we’re as screwed up as we are because of regulatory capture by the wealthy and powerful.
And yet I want to take most of the commentariat [who are breathless over the AIG bonuses] out behind the woodshed with my 1-3/4″ Kramer horsehide belt and see that some attention is paid.
Why?
Because they are, collectively being idiots. And when I hear about Obama being “sick” over it, he’s being an idiot too. Look, it’s like this.
When you’re doing a workout, you have two choices. Close the doors and let the creditors collect what they can, or do a workout. When you do a workout, you accept the obligations of the entity and work to negotiate what you can, accept what you must, and try and either arrange an orderly dissolution or the transformation of the company into a viable ongoing entity.
Now I’ve been involved in a lot of workouts, and I know a lot of people who do workouts for a living, and there’s always a key problem – which is how you preserve key assets (or defend against key liabilities) which usually involves spending money on things that you might not otherwise do.
In the case of AIG, the case made by the CEO who was put in to clean the place up seems pretty compelling to me. If you simply break all the contracts, you have two problems – you’ve now broken a lot of enforceable contracts, and you’ve pissed off the human capital that you need to work things though without doing a firesale liquidation.
You can always break or remake contracts – simply threaten to go out of business otherwise.
But the reality is that even in this market, a bunch of the people we need to unwind the mess will probably take a hike – and that’s going to cost me money. You too, if you care.
There is, of course a fine line between paying what you have to in order to keep the wheels turning and looting. I’d like to see a case that someone makes, with real data, that supports looting.
And even if there is looting to the tune of forty or fifty million – how do you balance that against the $100 billion or so that we’re all at risk??
And to people who crow about automaker union concessions, I’ll suggest two points: 1) that there is a small but important difference between prospective and retrospective changes in contracts; and 2) that the prospective pay of the AIG employees is being cut as well.
Fewer pitchforks, more calculators please.
edited for clarity
And go see Tom McGuire’s great posts on the subject (ht Tim Oren).
–
Though I haven’t read the underlying contracts which ostensibly entitle the various guys at AIG involved in selling CDS’s in a big way, I understand that it’s not just tub-thumping to say to them, at least: “If you were supposedly being paid an extra amount for your performance in managing a specific portion of the company, and that portion of the company has now sucked huge chucks of the company’s, and the investors’ (and now the taxpayers’) money into an ill-defined void, we won’t say that you’re never going to get that bonus money, but you’ll have to wait a just a bit, sir, so that we can get out our calculators, and figure out if there’s been any looting or malfeasance. It’s not that we don’t trust you, sir, but there appears to have been some irregularities…”
OK, I understand this; I really do. However, I’m much less persuaded that the people needed to unwind the mess include the people who got us into it. Like, I suppose we could ask the arsonists where the extra fuel cans have been placed, but it might be more useful to fight the fire as best as one can without their ‘help’.
I guess “these people”:http://query.nictusa.com/cgi-bin/com_supopp/2007_C00097725 should give their “bonuses” back, too. That’d be the day, wouldn’t it?
Incidentally, is there anybody who isn’t paying off Chris F–g Dodd? I know that I’ve never stuffed a Hefty Cinch-Sack full of cash and sent it to Chris Dodd, but I can’t be sure about anybody else.
It’s worth taking a look at “this post of Tom Maguire’s”:http://justoneminute.typepad.com/main/2009/03/the-22nd-book-the-book-of-the-dead.html where he tried to reverse engineer the AIG financial debacle. There’s a pretty good chance that most of the losses came from two of the ‘risk books’ that AIG was running, and in fact the credit swaps and derivatives wasn’t the worst of them. Which also means there’s potentially 20 decent lines of business in there – why drive off the people that make them work?
(I’d have much preferred to have seem AIG bankrupt and selling off those lines under court guidance, but having walked into the unknown territory of fiat bailouts, AL’s right that it’s inflicting further gratuitous damage for the sake of political correctness and revenge.)
“However, I’m much less persuaded that the people needed to unwind the mess include the people who got us into it.”
People like Barney Frank and Chris Dodd? When a noted brain trust like Nancy Pelosi and Harry Reid are writing the bills meant to save our economy, we know we’re through the looking glass. At least the Gordon Gekkos of the world know _how_ to loot.
AL has an important point here, regardless of ideology or philosophy. If we are going to continue forcing hundreds of billions down these companies IV to keep them alive, we _really_ need to reconsider holding a pillow over their face.
Pick one or the other, but lets not give a transplanted kidney to a death row inmate.
And here’s “an article from tomorrow’s WSJ”:http://online.wsj.com/article/SB123725551430050865.html?mod=rss_opinion_main laying out what the ‘outrage’ over the bonuses is trying to distract us from noticing.
You have to remember that the WSJ op-ed page blames government for everything, even the Edsel. That history of how Greenberg ended up leaving AIG is, shall we say, idiosyncratic. It wasn’t Spitzer and Greenberg locked into a love triangle—the SEC was also looking into AIG’s behavior, and finding plenty. I’m also confused why the fact our bailout money went to foreign bank counterparties matters. Is this some new, WSJ-approved form of xenophobia?
I find the Maguire article on the bad management of AIG’s other units more interesting and worth looking into.
_”I’m also confused why the fact our bailout money went to foreign bank counterparties matters. “_
True, in fact this was inevitable. The entire point of this affair is how the worlds lenders tied themselves together financially so tightly via sharing risk. The idea became that the odds of any one bank collapsing was low so the risk seemed less. What nobody realized (or cared maybe) was that this made the consequences of the entire system crashing down catastrophic, while at the same time making that possibility much more likely.
The interesting thing in the Maguire post that I hadn’t read elsewhere was the bonuses were retention-based, not merit-based. This is deferred compensation all the way; they earned the money. If AIG/Obama want to fire these people, it would be no skin off of my nose. If they don’t pay the earned wages though, I suspect AIG is correct that a court would order double payment of the wages (and perhaps attorney fee reimbursement). This country strongly protects wages earned, perhaps more than any other contract. Or should I use the past tense.
*#3 from Armed Liberal*
*C’mon Andrew, I have – like you – worked in finance, and while many of the folks involved are greedy idiots, very few are active criminals.*
Where does the “Retention Bonus” scam fall, in the greedy idiot category or the active criminal column?
Can anyone really believe that these companies were blackmailed by their Rentention Bonus Babies” into entering into the contracts, or that they were taken by surprise by the toxicity of their financial instruments/assets at the time of the issuance of these contracts?
Are we supposed to believe that the powers to be at these firms were shaking in their boots over the fact that people might leave if they didn’t bribe them. Or, that they had no idea that they were not about to collapse months before the TARP was passed.
I wonder how the guys in the military feel about their re-upping bonuses in light of this?
This whole thing falls into the “I don’t mind getting screwed as long as you tell me you love me first.” category or, better yet, Yes, I know I slept with her, but I was thinking of you all the time” box.
In mathematical terms, I would suspect that a portion of the payouts would be expressed thusly:
*Retention Bonuses = Hush Money*
_”Retention Bonuses = Hush Money”_
Is there any evidence that these bonuses are a new practice as opposed to standard procedure at firms like this?
I don’t understand the rage here- obviously not everyone (we can’t even assume most) of these recipients are guilty of malfeasance or even sub-standard work. It seems to me a small number of people created an extraordinary amount of damage. Does the VP of sales or human resources need to feel monetarily responsible for the actions of everyone in the company?
There are a whole lot of companies suffering right now. I don’t think its a good move to endorse breaking compensation contracts by government (or political) fiat. Ultimately, a lot of very smart people have argued that it is the governments ability to force contracts to be enforced that allows a modern economy to exist at all. I think we are playing a dangerous (and childish) game venting our rage on these particular folks, who may or may not have anything to do with the actual carnage.
I sure hope my boss doesn’t come back to me this year and say, you know, business sucks, I don’t care what your employment agreement says you’re not getting your paid vacation.
The contracts were entered into in the First Quarter of 2008. So this would appear to be tinfoil hat territory:
bq. _Are we supposed to believe that the powers to be at these firms were shaking in their boots over the fact that people might leave if they didn’t bribe them. Or, that they had no idea that they were not about to collapse months before the TARP was passed._
Also, in this country deferred compensation is not uncommon in certain employment areas. Part of being an at-will employee means that you can be fired at any time and you can walk at any time. One of the ways a company will try to keep you is to back end the compensation. I know a certain quasi-monopolistic tech company uses these types of arrangements and they are no where near in need of government bailout.
I’ve read some stories on AIG, and still don’t know enough to have a firm opinion. So one big issue is transparency.. Overall, hell yeah, people have a right to be boiling mad about rewards going to the people most responsible for getting us all into this mess!
So is that what’s happening? I can’t tell.
Who’s getting this money? According to today’s (3/17/09) WSJ [Fair use excerpts],
bq. The $165 million is the latest installment of a retention program that is slated to pay the [financial-products division] unit about $450 million.
and
bq. [One] argument that AIG [is using] to justify the bonus payments: that if certain executives leave at this point, their departures would complicate efforts to wind down the financial-products division.
So: Who are these executives/employees and how many of them are there in the bonus pool? What are the mean and median payouts? Gritting one’s teeth and offering yesterday’s star risk-takers some hundreds of thousands of dollars to partly remedy the damage they have done sounds like it might be a reasonable compromise between pragmatism and justice. Millions or tens of millions: not so much.
And I suspect it’s the latter. If there’s $450 million being split among, say, 90 financial-products execs…
The “these particular individuals’ incredible skill and knowledge is essential to unwinding these contracts” line isn’t necessarily bogus, but it doesn’t ring true to me (transparency, again).
At heart, AIG’s credit-default swap agony isn’t that complicated. AIG made a bet with counterparty X that incredibly-unlikely-event-Y wouldn’t happen over a certain time frame. X paid AIG some money, say $100,000, for the guarantee that AIG would pony up a lot of money, say $20 million, if Y did happen.
As we know to our sorrow, not only did Y happen, but a whole bunch of supposedly uncorrelated Ys weren’t independent after all–and many of them happened. So AIG is on the hook for a lot of $20 millions already, and yet more as the CDS dominos continue to fall.
AIG’s big problem seems stark and simple: its counterparties want to get paid what they are legally owed under the terms of these CDSs.
It’s not clear to me how additional fancy footwork on the part of the experienced, clever executives who masterminded AIG’s part in this scheme are going to result in huge savings for the company.
Unemployment among Wall Street financial wizards has got to be pretty high by now. They wouldn’t require any multi-million dollar retention bonuses. What, exactly, is it about the CDS unwinding process that top-notch new hires would be unable to accomplish?
Transparency, again. It seems to me that by feeding at the public trough to the tune of however many hundreds-of-billions-of-dollars, AIG should have lost the right to the “none of your business” retort.
We at least deserve an explanation of the essential work being done on our behalf by these masters of the universe.
_”Contracts written last March guaranteed employees 100 percent of their 2007 bonus amounts for 2008, “despite obvious signs that 2008 performance would be disastrous in comparison to the year before,” Cuomo said.”_
“AP”:http://biz.yahoo.com/ap/090317/aig_cuomo.html?&.pf=insurance
So essentially AIG promised their execs that they would match last years bonuses in the hopes of keeping what they considered their best talent in a rocky economy (but by no means a disaster last March). Hardly stealing wiring out of the walls on the way out the doors.
These are the quandaries we create when the government gets involved in these things. We’re spending hundreds of billions to keep this company alive- should we chase off the people who know how to make it work and risk making things worse to save a fraction of that?
Look, the government owns like 80% of AIG. They could fire every executive in the company if they liked. Is that really what we want with our new mega-corporation? Maybe John Murtha can run it?
If nothing else this should be a stark warning against (further) nationalization. Take Zimbabwe for instance- they nationalize all the farms, chase off the people with the expertise, and within a couple years half the farmland is fallow and the nation goes from a net exporter to a UN charity case.
Our government can’t even run our government. Fat chance they’ll be able to run an actual business that has, at least in the past, turned a profit on occasion.
_”Personally, I’d like to see the regulators and financial journalists who are supposed to be covering this industry step up and show us what they are earning as well, and to publicly justify their errors and omissions.”_
Now THERE is an idea. Where is all the fury aimed at the institutions that are supposed to be preventing this kind of thing? Burney Madoff ran a flat out ponzi scheme and nobody caught him- regulators were terrified to look twice at him.
And why would that be, hmm? Maybe, just maybe these fat cats know they have a few friends on Capitol Hill that owe them favors and aren’t above a little arm twisting to keep the regulators at bay?
THAT should be the outrage here. We could pass a million more laws and regulations, but if our government is too corrupt to enforce them on their pals with the check books, it doesn’t matter. Its sickening that the people who ordered the eyes blinded are now sitting in judgment of this. Dodd is flapping around trying to undue the _protections_ he wrote into law for those bonuses just a few weeks ago.
I’ll say one thing for our ruling class, they sure know how to divert the bullseye.
The cemeteries of the world are full of indispensable men. —De Gaulle
Are these bonuses pay for performance? Given the performance, that would be hard to understand. Are they retention payments? Well, some of the recipients have left the company anyway. Are they part of a Wall Street and corporate culture in which top employees are rewarded with astronomical sums of money more for the level they attained than value added? Hmmmm. Perhaps if top salaries were more rational, there would be less incentive to live so far out on the risk/reward curve, including risk correlation calculations that were willfully blind.
Some of the questions might be answered by reading “AIG’s Explanation”:http://www.foxbusiness.com/story/markets/read-aig-financial-products-employee-retention-plan/ (pdf)
To answer a few of AMAC’s questions, there are about 400 employees getting bonuses, ranging from $1k to nearly $6.5 million. Only seven employees are getting more than $3 million.
AJL, these are clearly not merit-based bonuses. They are retention bonuses for staying the proscribed length of time. There were also performance based bonuses, but there is no expectation that any money will be received under them going forward.
Mark B, I wouldn’t trust Cuomo. For senior management, the bonuses were set at 75% of 2007 level. It was the medium and low-level employees whose retention bonuses were at 100%.
A.L., you’re thinking about this in terms of economics, and my (limited) understanding of the economics tells me you’re right.
But I don’t think you’re thinking about it in terms of power, which Congress (both branches) and the Administration almost certainly are. I see two aspects to this:
First, no matter how well you educate the commentariat, there will be a vast huge groundswell of anti-banking sentiment. That, in turn contributes to pressure on the political class to do something or get voted out of office. Obama doesn’t face election for another four years, but if he is seen as a champion of the bankers (even though rationally the bankers are our best chance of unsticking the credit markets) then he faces the possibility of becoming radioactive in the same way as Bush was after Katrina– then, Republican congressmen were obligated to stay away in order to maintain their seats, and obviously Democrats wouldn’t have any motive to work with him. Here, the parties would be reversed, which will make it hard for Obama to advance any other part of his agenda as well.
And obviously, Democrats taking on a more supportive role on banking in general would do the same to them personally, and I don’t think any of them want to risk moving farther away from a cloture vote in 2010. (ALthough I have a newsflash for them– the economy sucks enough that they’re screwed in the midterms anyway.)
That’s political theory 101.
The second power angle is this: Congress picked a fight with the finance industry when they passed the TARP, for the reasons given above. Just in terms of raw power, can the government (and don’t think Democrat vs Republican, here) afford to lose that fight? What are the consequences of the entire finance industry saying, “Yeah, see, we’re actually too important to play by whatever silly-assed rules you made. We’re going to give out bonuses no matter what you say.”
I don’t know, but you can be sure that either Obama, or Geithner, or their top staffers are thinking in feverish sweat about that very question. What are the consequences this year? Next year? Ten years from now? Twenty-five? I suspect that is in large part behind the desperation we’re seeing now. I mean, seriously, a 98% tax on bonuses? If that’s not desperation, I don’t know what is.
You can argue on economic terms that the fight should not have been picked, but you can’t argue it on political grounds unless you assume noble, self-sacrificing Congressmen willing to lose their seats over it. And once picked, arguing that the federal government can afford to lose is going to be a hard sell.
#13 from mark buehner
Is there any evidence that these bonuses are a new practice as opposed to standard procedure at firms like this?
Mark,
I wrote:
I would *suspect* that a *portion* of the payouts would be expressed thusly:
*”Retention Bonuses = Hush Money”*
Are you saying that these executives are above suspicion? That they should be taken at there word, that they were blind sided by the effect of the poison they were selling might have on themselves.
I think one would have to be naive to to take any of them at their word and let it go at that.
Marcus Vitruvius, part of the political/power equation you left out is that the Constitution doesn’t permit the government to do anything to undo wages earned. If AIG would be foolish enough to do it under government pressure, I think AIG would most likely be liable for an amount two-to-three times the bonuses paid out.
If only we had a President with some knowledge of Constitutional Law.
#17 from mark buehner | March 17, 2009 10:56 PM | Reply
_”Contracts written last March guaranteed employees 100 percent of their 2007 bonus amounts for 2008, “despite obvious signs that 2008 performance would be disastrous in comparison to the year before,” Cuomo said.”_
AP
*So essentially AIG promised their execs that they would match last years bonuses in the hopes of keeping what they considered their best talent in a rocky economy (but by no means a disaster last March). Hardly stealing wiring out of the walls on the way out the doors.*
So, Mark? Case closed! Don’t investigate! You as judge and jury, have ascertained that these guys are pure as the driven snow and their is no reason to suspect them of anything?
I wonder why we even bothered to set up a criminal justice system when all we had to do is ask for your opinion.
*#14 from PD Shaw | March 17, 2009 10:05 PM* | Reply
*The contracts were entered into in the First Quarter of 2008. So this would appear to be tinfoil hat territory:*
Are we supposed to believe that the powers to be at these firms were shaking in their boots over the fact that people might leave if they didn’t bribe them. Or, that they had no idea that they were not about to collapse months before the TARP was passed.
PD,
You might like to at least consider that it might be you who is wearing the tinfoil hat here. I myself would like to see more layers of the the onion rolled back before I am no longer suspicious about early payments and the “This was just prudent business” story from the Wall Street crowd.
There are reasons why the business is so heavily regulated, you know.
If AIG knew it was going to get bailed out a year later and that’s why it committed to bonuses at 75% to 100% of 2007 levels, then the execs at AIG should be running Treasury.
Give me a break: Did they not have some idea these bonuses were coming when they handed out the money? Sure they did: They proposed prohibiting them, and then decided not to. It’s right there in the record.
Why? These are their donors! The companies that got the bailouts almost perfectly track the companies that were sending money by the sack-full to members of Congress. They fully expected the money to come back to them, at least in part.
But now the fecal matter has hit the rotating element, the public is getting restive, and needs to be distracted, lest it’s angry gaze settle on Congress. And nothing distracts the public like a nice witch trial.
Really, it’s pathetic, the recourse of every petty dictator who’s screwed over the people, and needs to redirect their anger someplace else. Get them hating somebody else, and they’ll forget they’ve got reason to hate you. Watching our government do it stinks.
PD, “earned” is a rather nebulous concept. “Paid” is one on firmer ground, since it implies something tangible has changed hands and undoing it would require another positive action.
And I think you’ll be surprised at the Constitutional creativity that can be mustered by a riled up White House and Congress who both see the same populist forces acting on them, when they own 80% of the institution in question anyway. I would wager a month’s pay that, should they decide, they can be sufficiently creative to muddy things up for at least the length of time required for the Supreme Court to reverse the action– which they won’t, with any certainty. And that will be good enough.
Again, I’m not arguing whether this is right or wrong. I’m arguing that this is what it *is*. It’s a question of power.
The link PD Shaw supplies in #21 to AIG’s defense makes interesting reading. It argues against the view I’ve expressed here. More particularly, it argues against the (well-founded) moral outrage on the granting of the bonuses being easily translated into solid policymaking by AIG’s current management. Or Congress, for that matter.
The 2008 payout to 400 employees of the Financial Products group will be $313 million. The range is $1,000 to $6.5 million, with 7 executives getting over $3 million. So the mean payout will be $780,000. The median will be about $700,000.
AIG’s continued exposure to further disaster is extraordinary. Their derivatives portfolio was $2,700 billion in 1Q08. This month, it stands at $1,600 billion. Probably still enough to plunge the world financial system into (worse) crisis.
The PDF ably explains the nightmarish complexity of AIG’s money-making strategy through the first half of 2008, which has been characterized as “credit-rating arbitrage” and “regulatory arbitrage.” Current management provides examples, such as
bq. AIGFP is a [guarantor of] derivative and structured transactions… that allow counterparties to terminate in the event of a “cross default†by AIGFP or AIG… In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral… the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP…
bq. Although we view the large-market risk books at AIGFP as generally well hedged, the hedging is dynamic – that is, it must be monitored and adjusted continuously. To the extent that AIGFP were to lose traders who currently oversee complicated though familiar positions and know how to hedge the book, gaps in hedging could result in significant losses. This is driven to some extent by the size of the portfolios. In the interest rate book, for example, a move in market interest rates of just one basis point – that is 0.01% – could result in a change in value of $700 million dollars if the book were not hedged. It has virtually no impact on the hedged book. There are similar exposures in the foreign exchange, commodities and equity derivatives books.
TOC2 #27 wrote:
> There are reasons why the business is so heavily regulated, you know.
Sarcasm or misunderstanding, I’m not sure which. Bush’s folks decided not to regulate CDSs, on the basis that they were just plain ‘ol contracts rather than “insurance.”
Hence this spectacle. An AAA rated insurance company trading on its reputation to the tune of $2,700 billion — perhaps enough to plunge the world into depression, if things were to go wrong.
And no outsiders even understanding what was going on.
A no-regulation variant of the Fannie/Freddie “too big to fail” playbook.
Per comments upthread, it seems the extent of the crony-capitalism angle is not yet known. And with oversight formerly by Bush and Cox and currently by Frank and Dodd, it may never be.
Mr Cassano will have some ‘splaining [pdf] to do.
“Mr. Cassano” is Joseph Cassano, President (in 2006/7) of AIG’s Financial Products division. The 10-page letter AJL links to is ex-AIGFP senior employee Joseph St. Denis’ 10/4/08 account to Rep. Waxman of his time at AIGFP. As it begins, Pompeii is still a thriving city, though ash is beginning to cover the streets by St. Denis’ resignation in October 2007. Interesting read.
Today’s (3/18/09) WSJ page 1 lists 62 AIGFP employees and 11 AIGFP ex-employees as receiving over $1 million from the retention-bonus pool.
Page 2:
bq. The fact that AIG was set to pay bonuses to employees at the financial-products division wasn’t a secret. AIG disclosed the retention payments in May 2008 in a securities filing, and lawmakers routinely criticized them… In negotiating rescues of AIG late last year, som ewithin the government argued the bonuses should be curtailed. Others said that such a move could cause employees to flee and prompt the firm’s collapse…
bq. AIG set up a committee in November [2008] to examine the bonus issue… The group included representatives from the Federal Reserve and Ernst & Young, the Fed’s auditor. “If they had wanted to reject the bonuses, they had four months to do so [before the 3/15/09 payout date].”
Shame on the politicians for turning this into kabuki. Obama, Grassley, Geithner, and the rest who are piling on, shocked, shocked to find that gambling is going on in here!
The pretty-faced reporters on NBC’s Today show (what I happened to see this morning) are no better.
_”So, Mark? Case closed! Don’t investigate! You as judge and jury, have ascertained that these guys are pure as the driven snow and their is no reason to suspect them of anything”_
Of course investigate! Investigate to your hearts content. I’M the judge and jury?! I’m not the one assuming something illegal/immoral/untoward is happening here and moving to block it, potentially bringing down the company we’ve spent 140 _billion_ bailing out. Just who is assuming guilt here?
If somebody is lying or committing fraud, particularly covering up, then we will actually have a _crime_ committed, instead of some sort of general ickiness that people seem to want to prosecute somehow.
A couple points of interest. The “retention” bonuses tend to be paid at the end of the retention period. So if you had a bonus structure that pays you at the end of your term, be it 1 month or 2 years, the payments come at the end, thats why people who are no longer at AIG got paid their bonuses.
Second, the “Stimulus” bill expressly prohibited not paying bonuses that were contractual obligation prior to Feb 11 2009:
So how can Obama/Dodd/Congress bitch about something that was in a bill they were desperate to pass (and which none of them read)?
Of course this is all just a planned distraction from the bigger issue, which is the failure of Treasury to do anything at all about the meltdown of AIG and the outflow of AIG’s funds and to whom. Yeah we should follow the money, but at this point, it should be the Billions we follow instead of the Millions.
bq. _And I think you’ll be surprised at the Constitutional creativity that can be mustered by a riled up White House and Congress who both see the same populist forces acting on them, when they own 80% of the institution in question anyway._
Of course, we’re entering Terry Schiavo territory. Emotional, public outrage over past events that cannot be changed, leading to disgusting grandstanding and an Unconstitutional law.
Look, we have year-old contracts, which AIG lawyers looked into breaking, the Treasury Department agreed they couldn’t be broken, and the money has already been paid, out the door and in most cases out of the country. Plus, Congress and the President passed a law implicitly approving the bonuses when it barred post February 19(?), 2009 bonus contracts.
What the government can do, as 80% owner of AIG is to burn down 10% of it’s buildings as a burnt offering to the Golden Bull. Not a good way in my book to recoup an investment, but maybe the deity will admire our senseless self-sacrifice.
AMAC: You may want to consider the argument that the CDSs are not the big story with AIG.
“Tom Maguire”:http://justoneminute.typepad.com/main/ has been pointing out that the majority of losses and bailout money at AIG has not been in CDS division, but in more conventional insurance products. Nearly 50% of the bailout money to AIG is going to the securities lending program in the insurance division (compared with less than about 28% to the CDS division). That’s the division that loans money to banks and brokers to make trades. “Link”:http://www.bloomberg.com/apps/news?pid=20601103&sid=aoGjre8ctFFk&refer=us While some insurance companies invest their money in this type of program in treasuries, AIG put two-thirds of its collateral in mortgage backed securities, which began reporting losses last June when subprime mortgages began to fail. (see Link, which also mentions a poor spread between short and long term investments by AIG).
This strikes me as traditional insurance risks that existing state regulators are supposed to manage. AIG was not diversified in this division from a housing downturn. Maguire doesn’t appear to address the question of whether those mortgage backed securities include CDSs, but I’m not sure it matters. Their existance may not matter as much as the use to which they are put, i.e. insurance regulators should limit insurance pool exposure without at least better evidence of what the CDSs consist of.
PD,
Of course, we’re entering Terry Schiavo territory.
Well, that’s part of my point. I have never said that any of this is a good idea– not for the banks, not for Congress, not for the state, not for society.
But that’s what it is. We are, after all, in an environment where Congressmen are making public calls for bankers to either step down or commit suicide in shame! This is not a rational environement, but that does not mean it is not a real environment.
I’m also not convinced that there would be anything illegal or unconstitutional about writing a particularly well-targetted tax law that just so happened to tax those bonusses at 98% or 100%. Laurence Tribe happens to agree with me, and I’m pretty sure his expertise exceeds mine in this matter. It’s not like we haven’t seen state level tax codes written specifically to punish Wal-Mart. I think those are stupid and self-defeating, too, but it does not follow that what I do not like is actually unconstitutional.
(Of course the real irony here is that, unnoticed by most, housing starts were up last month.)
Tribe hasn’t reached any conclusion yet, but he seems to be focussed on bill of attainder issues. The laws being discussed have problems under that prohibition, as well as the takings clause and the due process clause (and according to Clarence Thomas, the ex post facto clause).
In my view, the “conditions”:http://business.theatlantic.com/2009/03/laurence_tribe_is_taxing_aig_legal.php that Tribe laid out cannot be met by the Congress. He theorizes a broad regulatory law that would impact not only AIG, but many other businesses. In particular, the court decision “referenced”:http://business.theatlantic.com/attainder%20note.pdf relied upon “whether the legislative record evidences a Congressional intent to punish.” I think the cows out of the barn on that one.
Unintended consequences. Passing a law to ex post facto punish people who haven’t even committed a crime is not going to make people, particularly people with money to invest, particularly comfortable.
We are at a political point where we simply need to figure out if we are more interested in punishing or in building.
Leadership is supposed to mean addressing and defusing unconstructive anger and desire for vengeance, not give into it. Say what you want about Bush, he wouldn’t be caving into the prevailing public wind on something like this. Obama has an opportunity here to show he is not only willing to defy the polls, but that he can truly lead and change people’s minds (which is where Bush’s greatest failures were).
Among other things we’re supposed to be distracted from may be the “fact that Fannie and Freddie Mac”:http://online.wsj.com/article/SB123739512036672809.html are due to pay out similar bonuses. You know, the GSEs that helped start the whole mess, and have so far sucked down $60b of an up to $400 billion bailout. There may be AIG management whose work had nothing to do with their default swap and collateral debacles, but you can’t argue that about Fan and Fred – they were exclusively in the mortgage purchase and repackaging business.
Not to keep flogging the matter, but I’d have more confidence in Professor Tribe’s opinions if he acknowledged that most of the bonuses went to employees living in London and other countries that don’t pay U.S. income taxes.
Are these U.S. citizens?
AJL: Tom Maguire asserts that 300 of the 400 AIG employees work overseas and pay taxes overseas. He doesn’t link his source and that doesn’t quite answer the question of whether these employees are U.S. citizens.
The “AIG explanation”:http://www.scribd.com/word/full/13291401?access_key=key-2gwyro2y3cncg39dpfwe states that there are employees in foreign jurisdictions that are not U.S. taxpayers. No numbers.
If I heard correctly on CNBC yesterday morning, most of the bonuses, including most of the top bonuses, were going to employees in London, and that part of AIG’s concerns were the additional intricacies of foreign law implicated by blocking the payments.
The plot thickens. “Here’s”:http://abcnews.go.com/Politics/story?id=7110145&page=1 a list of political contributions to the major political players from AIG employees that occurred _after_ the bailout in September.
Now this would be fun to crosscheck if AIG ponies up the names of the bonus people.
Cassano must be a US citizen, as he’s an active donor, according to “Open Secrets.”:http://www.opensecrets.org/indivs/donor_lookup.php?name=cassano
Cassano, Joseph – Westport,CT
7/31/08 $2,300 Obama, Barack (D)
1/10/08 $2,300 Obama, Barack (D)
11/22/06 $2,100 Dodd, Chris (D)
3/16/07 $2,000 Baucus, Max (D)
7/24/08 $200 DNC Services Corp (D)
Watching the news tonight, and seeing Mitch McConnell and other Republicans fall over each other complaining that Obama could have broken the contracts, while Democrats say they still can . . .
I wonder (again) if my views are represented by any of the parties. Sigh.
They’re actually going through with this lunacy.
I’m lobbying my congressman to have A-Rod’s salary seized if he doesn’t produce 50 home runs.
The lights are going out:
bq. Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. … Very properly therefore have the Convention added this constitutional bulwark in favor of personal security and private rights; … The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and with indignation, that sudden changes and legislative interferences in cases affecting personal rights, become jobs in the hands of enterprizing and influential speculators; and snares to the more industrious and less informed part of the community. They have seen, too, that legislative interference, is but the first link of a long chain of repetitions; every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.
“James Madison, Federalist 44”:http://press-pubs.uchicago.edu/founders/documents/a1_10_1s5.html
No problem; I certainly think the words merit consideration before they become moot.
Presently, our problems are not that we have difficulties in the financial system, but rather we may not have a financial system, at all.
This present AIG situation coupled with the a long line of similar Wall Street gaffes perpetrated by Merril, AIG in the recent past, Pandit’s 10 MM office renovation, et al, shows how The Street has yet to come to grips with how rapidly the world has changed and how impotent they are.
Those seven bankers who came before Congress a couple of weeks ago came as mendicants, not captains of finance. Their impotence has long since past the point of rendering them meaningless, especially to those that are paying their bills, the taxpayer. Their obvious detachment for the present mood of the country and their continuing to dig ever deeper holes for themselves is quite fascinating.
What pisses me off about all of this is that these morons have made great progress towards destroying capitalism. No mean feat, I might add. The left has been trying to do this for nearly 200 years.
I doubt that anything will or should be done about getting back any of the bonuses, but the very fact that the citizenry has shown vociferous outrage with the fear that it engenders, seems to me to be what the country is founded on.
Perhaps, by my points are that 1.the anger is misplaced at least in scope and 2.if preserving the financial system is the top priority we have no room for what is essentially theater, yet adds another layer of uncertainty a very fragile industry (ie, government deciding it can jump in an retroactively muck with contracts one way or the other to its liking).
This is a distraction. What we need to be figuring out is how to craft careful law to prevent this kind of ‘too big to fail’ conglomerate of international dependence by a very few companies.
Government is one reason a lot of these dominoes fell, whether through overturning Glass-Steagall, super-charging Fanny and Freddy, or simply leaning on regulators to stop enforcing the regulations already on the books.
We should really be asking ourselves if new regulations are any kind of answer when the old ones were ignored, basically do to the incestuous contribution/good ol boy network between big wigs and government. But who is watching the watchers? Certainly not congress itself, certainly not the media.
Nobody is talking about ways to break this cycle of privatized profits and socialized losses. Nobody is wondering how to diversify these institutions so that stupid decisions take down bad companies and promote good ones.
bq. Nobody is talking about ways to break this cycle of privatized profits and socialized losses. Nobody is wondering how to diversify these institutions so that stupid decisions take down bad companies and promote good ones.
Page 1 of today’s (3/20/09) WSJ provides another example:
bq. Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government’s latest attempt to heal the credit markets. The new rescue effort, run by the Federal Reserve, kicked off Thursday with bond deals totaling more than $7 billion. Each bond issue will need to be blessed by at least two of the three big ratings firms: Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings.
Where have I heard those three names before?
The outrage over financial stupidity and misconduct is focused on one aspect of one division of one company’s role in one part of the meltdown. The news as presented in generalist outlets (Baltimore Sun, NBC News) is so lacking in context that the reader or viewer is less informed after exposure to the story. “Not even wrong.”
What seems to be important is that the proper narratives be reinforced. That will surely lead to implementation of the correct policies, as they are expressed by the Good Politicians. That will save us.
Further evidence of how the U.S. elites’ OODA loop is broken.
_”But I’d say one problem has been a generation of “Private enterprise good, government bad” drivel from Ronald Reagan and his disciples.”_
And i’d argue that several generations of attempting to use the federal government as a private sector cudgel to enact social change inexorably led to some of the most lunatic loan policies in history (no money down, no credit check, teaser rates? Really?).
But I think we’re both right. Look, government has a critical role in keeping playing fields even and preventing monopolies. BUT that doesn’t follow that they can also get in on the game themselves without serious and unpredictable repercussions. You can’t talk about this debacle without recognizing that Freddy and Fanny were buying up bad paper by the boatload under the implicit guarantee of their viability by the federal government. That skewed the market in ways that are impossible to fully even understand.
What i think needs to be discussed is the _proper_ role of government, and how to keep politics (specifically politicians) away from it.
I admit I don’t love strict government oversight and regulation in and of itself, but I accept it as necessary to a truly free market. But lets not mix that up with the government interfering in the markets (much less becoming a quasi-player). This is a case of the government managing to do _everything_ wrong. Failing at their primary responsibility while creating havoc by dabbling where they shouldn’t.
I’m more than willing to talk about how to get the government out of this market and back into a disinterested oversight role, and to hell with the fake-free marketeers that just want a free ride.
But I think we’re both right.
I agree. I don’t understand the logic of quasi-private entities like Fannie and Freddie—or Blackwater/Xe. Or maybe, I do understand; it was an opportunity to socialize losses and to spread the wealth around—to companies and contractors with the right connections.
I also agree that this was to a considerable degree an institutional failure. DougJ posting at Balloon Juice put this well.
See also Yglesias.
That would be the Fannie and Freddie that were commissioned to make and buy loans to those who couldn’t afford them, provided positions with 10m’s salaries to out of office Democrat apparatchiki, and were protected from any sort of control by Barney Frank and Maxine Waters, among others. Socializing losses, indeed. Yeah, I guess I don’t understand quasi-private entities either. (Or how many national-scale f’ups Jamie Gorelick has be associated with before she’s toxic.)
I think I did figure out the Blackwater and GSE analogy though: They’re both in charge of protecting corrupt government officials.
This may sound sarcastic, but i mean it absolutely: this country needs to get back to a time when government and business were adversarial. I think even the staunchest Reaganite should realize that government as an over-officious referee is far better for our nation than government as a slimy partner for whatever rationale.