« AIG: The Commentary | Main | About that Referendum... »

March 17, 2009

Comments

aig systemic risk presentation

http://www.scribd.com/doc/13112282/AIG-Risk-Bankruptcy-Report

The govt meant well when they threw all that money at AIG but the devil is in the details. Now the unintended consequences come out.

"Boo hoo hoo, they're misusing our money." say the president, congress, and taxpayers. But what did you expect? These guys wasted their own money and money from nearly every place in the world. What made you think they would suddenly get sober and use govt money well? The govt threw our good money after bad and now they're pointing at AIG instead of themselves. Who gave AIG taxpayer money to waste? And where are the people who keep saying the govt is in the best position to solve problems. Pffft. They throw money and point fingers elsewhere when things go wrong. What is Hugo's model? When the last govt intervention goes wrong he just blames it on an incomplete revolution and nationalizes another industry to cloud the picture.

Okay. I'll stop ranting now.

Wait. One more.

AIG didn't steal your money. The govt did...and gave it to AIG.

Okay. Now i'm done.

"I don't think that the Wall Street types have any idea at all how angry people are at them."

Hilzoy: You could not be any more right.

Many of CNN's shows are on the road this week covering the economic mess. Perfect timing. Anderson Cooper's show was live outside Staples Arena in Los Angeles and it was all but a pitchfork rebellion.

All of the local newscasts here -- we get ours out of Philadelphia -- led off with similar working-people stiffs who long ago forgot to spell b-o-n-u-s expressing something much stronger than outrage.

There wasn't a single person today in the store, customer or colleague, who didn't express overwhelming disgust and dismay with AIG and Wall Street's bailout binge addiction.

President Obama laid his outrage bare today at the press conference he held, doing a pretty good job of it, seeing how this is now happening under his watch.

Timothy Geithner showed up in some clip, looking . . . well, looking stupid, inept, useless.

(Great pick, Barry.)

You reap what you sow, and this one is a doozy, whether it's Obama, Geithner, Paulson, Bush or AIG, Wall Street had better find a way out of this recession on its own.

I keep hearing economists saying how more bailouts will be needed.

Oh, really.

I'd like to see the elected offical, Democrat or Republican, who gets behind the next one.

I'd like to see the village idiot -- that would be Geithner -- explain why we need to pour billions more into so-and-so.

March 16, 2009. Mark it down: The Day the Bailouts Died.

I rather agree with you on this one, Dave.

There is just one little annoying detail in this that it seems to me people are not looking at too closely.

The bonuses are CONTRACT bonuses, aren't they ?

So, are we all saying that AIG and others don't need to honor their CONTRACTS to their employees, just because we don't like it, and because we feel that the money has been misused to pay salarial contractual obligations to people who don't MERIT them ?

Sounds to me like maybe there is some initial perversion in the CONTRACT system that should be looked into, no ?

These guys were ideologically invested like a modern day American aristocracy...
THAT'S where the outrage is coming from...
Too much disappointment in the air when the bubble bursts.

These guys wasted their own money and money from nearly every place in the world.

The problem with AIG had very little to do with "waste" as the term is commonly used. It had to do with an ill advised financial strategy which quite a bit of the financial world colluded with them on. No one cares how much of their own money AIG spends/wastes under normal circumstances. Nor should they. What matters is that they accepted leveraged "bets" that they had no way of paying in the event that they lost. There is an awful lot wrong with that financial strategy but "waste" is the least of it.

Moreover, as has been pointed out many times, the money losing part of AIG was a relatively small division of the company. For the most part, AIG is both profitable and well run. The Financial products division is what managed to drag the whole company down.

The govt threw our good money after bad and now they're pointing at AIG instead of themselves.

That seems like an awfully broad claim based upon very little real evidence. Your underlying assumption seems to be that we would be better off if we had left AIG to fail, or if we do so now. Despite the particularly upsetting nature of this situation, it does not demonstrate anything of the sort. Indeed, it seems one of the main reasons that the Financial Products division feels that it can behave this way is because they are well aware that the alternative, letting them drag a huge portion of the financial markets down with them, is considerably worse then paying them their extortion/bonuses.

So, are we all saying that AIG and others don't need to honor their CONTRACTS to their employees, just because we don't like it, and because we feel that the money has been misused to pay salarial contractual obligations to people who don't MERIT them?

I certainly cannot speak for what we are all saying but speaking for myself, I would say that, as we continually do with the labor class in this country in times of crisis, we should have "adjusted" the contracts to something more appropriate to the situation. We, meaning people who pay taxes, are now the owners of a failing company. We should be behaving appropriately toward our newly acquired employees, most especially toward the employees who caused the company's failure in the first place, and not as if nothing has changed. I certainly don't applaud the concept of breaking contracts but there comes a point when there are bigger issues at stake. This is, in my opinion, undeniably one of those points.

So far we can glean at least six conclusions from this fiasco:

1) Tim Geithner and Larry Summers need to go. They're old-school crony capitalists who fundamentally don't get it because they're too embedded in the culture of Wall Street. They should be replaced by advisors who aren't totally clueless -- people like Robert Reich and Paul Krugman, for example.

2) The behavior of the corporate leadership may be politically tone-deaf, but it was absolutely foreseeable. The rage is more suitably directed at politicians: the people who either saw this coming and accepted it, or who should've seen it coming and acted to prevent it.

3) If U.S. taxpayers own AIG (nearly 80%) and the zombie banks, we should exercise a proportionate amount of control over their management.

4) Legal platitudes about the sanctity of contracts were notably absent when the Big Three abrogated contracts with the UAW and other unions. Worst case: to hell with the contracts -- let the executives make their arguments to a jury.

5) Scary as it sounds, bankruptcy is a better alternative for AIG and the zombie banks than endless bailouts with no transparency. For one thing, Chapter 11 filings would allow these corporations to avoid pre-existing contractual obligations to provide bonuses and golden parachutes. It would also allow them to dump the most toxic assets.

6) Obama's adaptive skills are impressive enough that he can quickly clean house, learn the necessary lessons and move on to a more populist model for economic recovery (with a little help from Reich and Krugman, among many others).

Tim Geithner and Larry Summers * * * should be replaced by advisors who aren't totally clueless -- people like Robert Reich and Paul Krugman, for example.

Absolutely. This is one time I think Hilzoy is wrong, i.e. that rage won't be put to good ends here. This is the kind of excess that creates social and economic revolutions. What we're witnessing is the final, unmistakable breach of the social contract between Corporate America and the rest of us.

You've paid $170 billion to own AIG, are you going to flush that money down the toilet by allowing all the key human talent to walk over a couple hundred million?

If we let the mob decide how companies like AIG are run, then we'll quickly see that investment go up in smoke. It's not encouraging that Obama now seems to be caving into demagogic pressures on this issue.

d'd'd'dave:

Did someone hijack your nickname? I ask that because you've proposed two diametrically opposite propositions: first, that the consequences of allowing AIG to fail would cripple the world economy, and second, that the government should never have bailed out those scallywags.

You can make either argument; I've heard the first from insurance industry people, who tell me that (for example) without the insurance coverage only AIG has the size and expertise to provide, airlines could not fly. Airplanes, like cars, have a legal obligation to carry liability insurance, and the inability to insure themselves would ground most airlines.

That, in turn, would put a halt to huge areas of the economy, which would put millions of people out of work, affecting retail, industrial, educational, and even financial opportunities worldwide. A spiral like that could turn a recession into a lengthy depression. The AIG document you quoted basically makes this case.

Then on the other hand, we have the case that your government should simply have let AIG go down the tubes, that the bailout would have worse long-range consequences than allowing AIG to fold.

I just wonder which of these you believe, and I note that neither of these options really addresses Hilzoy's contention that, having accepted taxpayer money, the employees and decision-makers of AIG should accept strictures on their incomes.

The people who took Bush's disgracefully large deficits, and turned them into deficits of a scale we've never seen before, and who show every sign of intending to repeat the performance over and over, have just made sure that they will continue to get automatic pay raises in perpetuity. And you're outraged about a few bonuses in the private sector.

I'd thought they were totally incompetent, but it's obvious they're pretty good at distractions, if nothing else. Any outrage about this? Or is it only unmerited pay in the private sector that gets you sputtering?

"having accepted taxpayer money, the employees and decision-makers of AIG should accept strictures on their incomes."

Great idea, but I'm not entirely clear why it should extend to payments for services already rendered under the existing compensation scheme before AIG accepted the taxpayers' money. (I was certainly pissed when my last employer pulled that retroactive pay cut stunt right before laying me off, he'd have seen me in court if I hadn't so desperately needed the reference.) And I'm a bit dubious about the notion that anybody at AIG besides those "decision makers" can actually be said in any meaningful sense to have "accepted taxpayer money". Did they hold a company-wide vote before cashing the check?

Like most things in America, even rage becomes a commodity. Too many news organizations are trying to keep audiences by exploiting the public's rage rather than breaking down the AIG bonuses info.
Not everybody who works at AIG is a crook. Ten million split among 43 executives, 600 million split among 4000 employees and 121 million split among 6400 from a set contract to keep people from jumping ship is a way-less breakdown than say, the NFL or the Yankees lineup ($19000 per lower level AIG person amounts to what a Dallas Cowboy would pay in tips during a week in Aruba, but nobody's calling for their heads). Throw the specific culprits in prison, but let the institutions salvage and repair themselves.

I don’t know about all this. I guess the Limbaugh feud has played itself out and it’s time for a new distraction.

The bottom line is that it was compensation already earned – it was owed. The checks were sent out on Friday and much of the money went to non-Americans, who I suspect don’t give a rat’s a** what we think about it. Comparison with auto-workers current or future contracts doesn’t work. Why didn’t we hear about this on or before March 2 when this fourth round of bailout money was approved? No one asked AIG what they needed the money for? (via various Insty links.)

While we wail over this $165 million what gets lost is: “Goldman Sachs Group Inc and a parade of European banks were the major beneficiaries of $93 billion in payments from AIG -- more than half of the U.S. taxpayer money spent to rescue the massive insurer.” That’s $93 billion (with a B).


Don’t worry though. Obama will more than cover the cost of those bonuses by requiring wounded veterans to pay for their VA treatments (via 3rd-party insurance). I thought this was just a trial balloon (and a rather dumb one) when I first read about it, but it appears to be serious. We’re throwing around billions and trillions with little to no oversight. But let’s raise $540 million by having wounded vets pay for their medical care. I think I’ll save some outrage for that.

This from WaPo:

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

AIG disclosed its retention-payment program more than a year ago, and the amount of the bonuses -- more than $400 million for Financial Products alone -- had been widely reported. But as the payments were coming due in recent days, the White House began to express its indignation.

You mean you're going to actually pay those bonuses you told us you were going to pay, which you are legally obligated to do (a conclusion with which we concur)? Outrageous!

Hilzoy: I also want to note that I think you, and most everyone else, are making a mistake conflating retention bonuses with performance bonuses. No one is claiming anyone should get a bonus based on the company’s performance.

A retention bonus is simply an acknowledgement that a key employee can easily find greener pastures or has other reasons to leave the company. It’s a contract where the employee agrees to defer part of their compensation for some period of time. The people who received these bonuses met the terms of that agreement. To make the comparison with the UAW accurate we’d have to be asking their members to give back or forgo compensation they already earned.

You could certainly argue that AIG had an idea 6 months or a year ago just how bad things were likely to get, and that’s why they offered these retention bonuses. But the fact remains that these employees met the terms of the contract and thus earned the bonus – it has nothing at all to do with performance.

And do you suppose that these employees knew when they signed the agreement that as part of it the President of the Unites States would personally demonize them to the entire nation?

ah yes, they earned it. lucky they got a little vacation from all that difficult earning! also on our dime.

And do you suppose that these employees knew when they signed the agreement that as part of it the President of the Unites States would personally demonize them to the entire nation?

I believe they're getting off easy. If AIG had not gotten a bailout and had defaulted on its CDS I'm pretty sure those employees in London would have spent the rest of their lives and fortunes in court, defending themselves to the counterparties. Really, if I were Geithner, I'd just state that the next counterparty to be paid should look to those employees for their money. The U.S. has absolutely no reason to pay off their gambling debts and retain them while doing it.

lucky they got a little vacation from all that difficult earning!

Uh, cleek: that's an offsite meeting, for your information. And it probably worked; they're almost not even a penny stock anymore.

Looks and sounds to me like those bonuses (thanks for the clarification, OC Steve) are part of the globalization mess that means that if the U.S. government defaults on its sovereign debt in any way or form, then it loses all credibility as an actor in the economic system.
Am I wrong about this ?
Puts things into perspective if I'm right, though.
Personally I'm in favor of bankruptcy and starting over with a better idea than fiat currency, but I'm a little radical on this point, I acknowledge.

Uh, cleek: that's an offsite meeting, for your information.

Uh, Slartibartfast: it's a fncking $1000/night resort.

a meeting is a bunch of people checking their Blackberries under the table while listening to Bob from Marketing talk about last 1/4's sales numbers. meetings don't have spas.

Oh, I'm not sure what it was about that comment that had you think I was serious, cleek. The last sentence was, I thought, a dead giveaway to the kiddingness.

Oh, I'm not sure what it was about that comment that had you think I was serious, cleek.

heh. indeed. oops. also.

Seriously, though: lots of reasonable-sized companies do host offsite meetings for their execs, and those are typically somewhere that's nicer than the home office. And yes: spas.

And yes, they typically do have meetings during the days, as well as some scheduled fun activities.

Really, if AIG hadn't financially stepped on their unit, this offsite wouldn't have raised any eyebrows, because no one cares. And the guys who get invited make so much money that even if the IRS decided that the hotel stay counted as income and taxed it, no one would care.

It's just the tin-eared-ness of it that irks, especially. I'd wager that once the public eye is off of Big Auto a bit, their execs will revert to using private jets for travel once again.

I'm not saying I approve of such things, just that such things are commonplace.

If I were an investment banker making millions of dollars a year, I would be trying to convince the people around me to simply take the hit for a couple of years

Clearly, you are not an investment banker.

What made you think they would suddenly get sober and use govt money well?

Personally, I had no expectation that they would use govt money well. We should have taken them over and kicked the SOB's out.

A retention bonus is simply an acknowledgement that a key employee can easily find greener pastures or has other reasons to leave the company.

"Don't the let the door hit you in the @ss on the way out".

Without government assistance AIG would be insolvent and none of them would be getting a damned thing. The doors would be shut and they wouldn't get cab fare home.

They 'earned' their bonuses by blowing their company and much of the rest of the economy up. We're cleaning up their mess. If they're going to walk if they don't get paid, all I have to say to them is let me open the door for you.

Put the company in bankruptcy, bring in public sector people to run the place until the dust settles, and hand these greedy pricks their hat and coat.

Looks and sounds to me like those bonuses (thanks for the clarification, OC Steve) are part of the globalization mess that means that if the U.S. government defaults on its sovereign debt in any way or form, then it loses all credibility as an actor in the economic system.
Am I wrong about this ?

AFAIK, those bonuses have nothing to do with U.S. debt, except that the U.S. probably paid for them. AIG could write contracts promising their executives a golden pony every six months for just showing up (and probably have) and it's AIG's problem.

I work (still) on Wall Street and the sense of entitlement here is astounding. I'm probably in one of the few places north of the Mason-Dixon line where people can talk freely out loud, criticizing Obama under the safe assumption that everyone around them agrees with them (except me).

The hypocrisy is so thick you can cut it with a knife, and the level of thought is next to zero. In the same breath, they can defend bonuses to firms propped up by public money and then lambast auto workers for their mythical $70/hour salary. The underlying assumption is that they deserve their bonus because they "work so hard" (as if the maids cleaning their offices at midnight don't), and their work adds such value to the economy (which, um, it doesn't, apparently). It's the only place on the planet where half the crowd has read Ayn Rand and thinks she is a genius and that they are all Randian individualistic heroes that have striven to become the rich people they are. Greenspan is still Einstein in this world, though they are notably silent on his recent admission that he didn't see this one coming and may have been wrong.

They can sit and carry on about the insanity of piling on debt and actually talk about spending freezes in this economy, and they think that CNBC is brilliant. It's an upside down world where things are so distorted that most everyone has no idea they've flipped so often their heads are up their rears.

I think it may be safe to say that never in American history has a class of people so had a fall coming - and sadly, while populist explosions typically do more harm than good, I think we're way overdue for one that clears the decks of the buffoons, and I do not use that word lightly, that populate this industry. Those still working have learned absolutely nothing so far. Time to go

The public is obsessing over nickles and dimes in comparison to the big picture. Having invested hundreds of billions of dollars in AIG and other companies, it would be epic folly to run those companies even further into the ground by scaring away their best employees and by making it impossible for them to do business with other companies afraid that any agreement might be torn up after the fact by rabble-rousers in congress.

Yes, the whole situation sucks. Yes, lots of irritating people will still come up smelling like roses. Any policy based on indulging retributional sentiment is only going to makes things worse.

The public is obsessing over nickles and dimes in comparison to the big picture. Having invested hundreds of billions of dollars in AIG and other companies, it would be epic folly to run those companies even further into the ground by scaring away their best employees and by making it impossible for them to do business with other companies afraid that any agreement might be torn up after the fact by rabble-rousers in congress.

That's a novel use of the words "investment" and "best employees." And the "epic folly" part has already happened.

I'm not saying I approve of such things, just that such things are commonplace.

of course. but they are also extravagant luxuries: the kind which most companies cut back on when money is tight. and what's really not commonplace is having the US govt own 80% of your company. when that happens, you shouldn't be operating under normal business rules. to avoid this kind of outrage, they really should be wearing sackcloth and working in the dark with the heat turned down. they should also kiss the feet of every taxpayer they see, when they leave work every night.

"tin-eared" indeed. add this to the "bonus"* and you've got yourself public outrage.

* the description is the big problem. call it "deferred compensation" and nobody would care. but "bonus", to normal people, is what you get when the company is doing well enough to share profits, or when you've done so well that you deserve a little something extra.

the company i work for isn't in danger of going under, but there are no bonuses and no raises for anyone i work with, this year. and when the employees found out that senior management had a big meeting at an Orlando resort this year, they were forced to grovel and beg our forgiveness and understanding on the 1/4ly conference call.

the kind which most companies cut back on when money is tight.

Cite? What happens at companies, first, when money is tight? Top execs take a pay and benefits cut, or middle management gets decimated? I'm guessing that the people with most influence on staffing decisions are going to protect their own cash flow as priority one.

they should also kiss the feet of every taxpayer they see, when they leave work every night.

What I've noticed over the years is that the use of "should" almost never results in anything different happening. You should stop using it.

and when the employees found out that senior management had a big meeting at an Orlando resort this year, they were forced to grovel and beg our forgiveness and understanding on the 1/4ly conference call

Probably next year they'll meet somewhere more secret, like Captiva Island, and keep the details under wraps.

I'm not saying any of this to be a smartass; I'm saying it because I really, really don't think it's going to change all by itself. For the most part, because the people making these kinds of decisions (compensation, bonus, offsite meetings, what have you) are the people benefiting from them, or were picked by those people.

Having invested hundreds of billions of dollars in AIG and other companies, it would be epic folly to run those companies even further into the ground by scaring away their best employees and by making it impossible for them to do business with other companies afraid that any agreement might be torn up after the fact by rabble-rousers in congress.

You make a good point byrmingham, but I, like many others, will need some convincing that the employees of AIG, particularly those of the Financial Products division who are slated to receive a disproportionate share of these bonuses, are just too valuable to let go. I am not saying its out of the realm of possibility but I am highly skeptical that this is the case.

Fwiw, I did not say in this piece, or (I hope) elsewhere, that I think that contracts should not be honored. My main point here was just: people are very angry; if I were an investment banker I would be trying desperately to think of a way to get out ahead of this anger, or at least not to provoke it; they aren't; I am torn between my gut, which says "ha ha, make my day", and my head, which says: "this is no way to make policy." If the past is any guide, my head will win.

I think that we should bring whatever legal means we have available to get those contracts renegotiated. If they can't be renegotiated, we should pay them. The comparison to the UAW is inapt, I think: we got those contracts renegotiated (we did not abrogate them), and we did so using the threat of not bailing out the auto companies as leverage. Imho, Paulsen et al should have used the threat of letting AIG go bankrupt similarly (whether or not we were prepared to follow through), but they didn't, so here we are.

I also see the point about retention bonuses. I hate it, but I do see it. In my rage-y moments, I think: look, there has to be some way of just letting this unit go (by all accounts, the rest of AIG is fine), letting these derivatives default, and letting the people who bought them eat the results. Then we wouldn't have to "retain" these clowns. The rest of the time, though, I think that this might be disastrous. I don't know what to do.

What I do know, however, is that the Wall Street people are making a serious mistake. I mean, if I am angry -- I, one of the least angry people I know -- how angry must everyone else be?

What I've noticed over the years is that the use of "should" almost never results in anything different happening. You should stop using it.

....

I'm not saying any of this to be a smartass

i'm not sure what it was about that comment that had you think I was serious.


If you've ever wondered what lynch-mob mentality is like, well now you know. You are the mob. It's very cathartic, all of this outrage and having someone to hang who is roundly despised by all is just icing on the cake.

I seem to recall an earlier post where many of the currently outraged were then equally outraged about group punishment. Apparently, outrage on the progressive left is as fungible as progressives believe high-level corporate talent to be. As was noted above, it was a very small part of AIG that got it buried in insuring credit default swaps and the contracts now being honored were fully disclosed over a year ago. The balance of the company is reasonably well run and plays a key role in the rest of the economy as an insurer (of course, a fair question is whether AIG, having essentially insured credit default swaps without the assets to make good on them, has the assets to stand behind all of the other risks it insures--the counter argument is that insuring credit default swaps is an 'all-the-eggs-in-one-basket' deal that, if the market tanks as it did, the claims far exceed the coverage written; the functional equivalent in more traditional insuring terms of a hurricane wiping out every house in the northeast: there simply isn't enough asset-backed insurance to fund that level of destruction). In any event, companies the size and success of AIG aren't run by liberal arts grads who just finished a two year hitch with the Peace Corps or Americorps and, worse news, there isn't a huge stable of financial and insuring experts standing by to step in and replace everyone at AIG, Citi, et al. The business of underwriting, insuring and adjusting for businesses of every size is highly complex. Insurance is as essential to most business operations--try getting a government construction contract without huge amounts of worker's compensation, general liability and builder's risk insurance--as is credit. The people who make companies like this successful demand and get very high salaries and bonuses. Feel free to cap their bonuses, by all means, and watch the best pack their bags and go elsewhere. If we were really interested in getting AIG and the other bailouts turned around, we'd be turning to the the many successful regional banks and allied industries that didn't fall into the mortgage-back securities trap for talent and paying that talent handsomely to turn these other operations around.


To close this rant out, from what I've been able to gleen from talking to financial types, the vast majority of the money AIG is getting is going to honoring its credit default swap obligations to other financial institutions. When AIG spends a government dollar to satisfy that obligation, it not only wipes a liability off of its books, it adds an asset to the books of the company holding the now (seemingly) valueless mortgage-backed security.

It seems worth rerunning a paragraph or so from my own blog in this discussion:

We don't exist to them. Lawrence Summers is so devoid of empathy he lost the presidency of Harvard by insulting the intelligence and competence of more than half the human race. Their fellow senior bankers, the people they meet at the country club, their friends and social circle--these are real to them, and the men more than the women. (And Jewish boys from Long Island who grew up reading history and science fiction and go on to win Nobel prizes in economics definitely don't exist.) The whole rest of the world just doesn't register. They are like blocks at the top of the pyramid, proclaiming that they are self-supporting. I don't believe these people are in any meaningful sense reachable.

I hate it, but I do see it. In my rage-y moments, I think: look, there has to be some way of just letting this unit go (by all accounts, the rest of AIG is fine), letting these derivatives default, and letting the people who bought them eat the results. Then we wouldn't have to "retain" these clowns. The rest of the time, though, I think that this might be disastrous. I don't know what to do.

False choice. There is no law that says we have to act thru AIG. We could deal directly with DeutchBank or whoever, since we're giving free money away. We'd probably get a better deal while we're at it.

So far at least, the biggest difference between the Great Depression I and this Great Depression II is the threat of social revolution.

Whether or not it was, in fact, a real possibility, a lot of Americans in the 1930s feared that capitalism and liberal democracy themselves were threatened by the crisis. Nothing focuses the mind like a hanging, of course. And even some members of the economic elite were willing to reach a series of social compromises to save capitalism.

Today, in contrast, virtually nobody really sees capitalism itself under threat (whether or not they should), so the grandees of Wall Street feel free to behave as they are doing. If things work out, they get their bonuses. If not, they leave the smoking rubble of AIG and go work for someone else. The prospect of Wall Street itself utterly disappearing (or being abolished) cannot even be imagined.

No, the issue is not bonuses or compensation, it is that the people who caused the problem are still considered indispensable. The Obama administration seems to be committed to preserving the rotten financial structure including the same people who have already demonstrated catastrophic bad judgement.

If you've ever wondered what lynch-mob mentality is like, well now you know. You are the mob.

except for the part where we aren't physically proximate, even loosely coordinated in our actions, let alone acting in any way at all, nor are we carrying the ropes and rifles we'd need, were we actually lynching anyone.

"lynch" - really? that's the word you think describes a bunch of strangers griping on the internet ?

show some respect.

I seem to recall an earlier post where many of the currently outraged were then equally outraged about group punishment. Apparently, outrage on the progressive left is as fungible as progressives believe high-level corporate talent to be.

oh that wicked wicked "left".

Nor should they. What matters is that they accepted leveraged "bets" that they had no way of paying in the event that they lost. There is an awful lot wrong with that financial strategy but "waste" is the least of it.

Why does this sound like a buddy caper flick from the middle of last century? "But Gee, Joe, what if the nag loses?" "Don't worry, Jerry, it's a sure thing. We can't lose."(apologies) While this might be a enough of a premise to hang a movie plot on, it certainly isn't the way to run a business.

The bottom line is that it was compensation already earned – it was owed. The checks were sent out on Friday and much of the money went to non-Americans, who I suspect don’t give a rat’s a** what we think about it. Comparison with auto-workers current or future contracts doesn’t work.

In this context, factually incorrect. The retirees had already fulfilled their obligations to the auto company. By your reasoning, they are owed what they contracted for. In full. Note that these mutual obligations had already been spelled out in a previous contract entered into years before any bailout.

This is the kind of excess that creates social and economic revolutions. What we're witnessing is the final, unmistakable breach of the social contract between Corporate America and the rest of us.

I think this is where the idea of free-wheeling capitalism as the best of all possible worlds is finally put to rest (well, for at least the next fifty years or so. Read about Galbraith's dismay about formerly discredited economic theories rising up to take control of the decision making process again in Richard Parker's biography.)

The public is finally seeing that the labor markets are not only broken; they are unfixable as long as the current power structure is not systematically opposed at every juncture by a countervailing force. So, yes, the rage is a good thing.

I'll say it again: What really needs to happen is that these former masters of the universe - and I mean everyone, not just in the financial sector - should have to go on live TV and admit that they made terrible mistakes, and apologize for them. This is not, per Hilzoy's earlier post, an attempt to shame these executives. This is to force an acknowledgment that the system that rewarded one small class of people so much while denying the vast majority of what is, after all, only their due under supposed free market principles is fundamentally unworkable.

You get the sense time and again that this is not being admitted, and that these same people are going to do everything they can to keep this system in place. Starting by not admitting in the slightest by one jot or tittle that 'the system' or themselves are to blame.

But the real issue isn't bonuses. It's your compensation, period. It's the fact that, after doing your very best to wreck the world economy, you regard yourselves as entitled to levels of compensation that people who actually make things can only fantasize about. The bonus part is just the icing on the cake.

Does this mean that the folks on Wall Street deserve credit when the system works smoothly? Because that would be worth a great deal in compensation, given the importance of the job. (An importance that is now underscored by the claim that they "wrecked" the economy.)

I don't think that you can have it both ways: Admit that "Wall Street types" are so important to the economy taht they can wreck it, but then decry their salaries as being too much in general. The salaries are probably fine -- perhaps even low -- for competent work that serves the public interest. What everyone should object to is incompetent work and, more fundamentally, the mix of rules and regulations that rewarded incompetent work that was not in the public interest.

von: I don't get this. It's easy to wreck things without being competent enough to keep them running, or to deserve tens of millions of dollars on any grounds other than extortion (e.g., payoff for not wrecking the economy.)

For instance: if you get high enough up in a big enough institution, you could probably do things that would break that institution. You could, for instance, rerout all the payment on its debt to UNICEF. Being able to do that would not show that you were so marvelously competent that you deserve to be paid an exorbitant salary. It would just show that someone was fool enough to put you in a position of power.

My main point here was just: people are very angry; if I were an investment banker I would be trying desperately to think of a way to get out ahead of this anger, or at least not to provoke it; they aren't; I am torn between my gut, which says "ha ha, make my day", and my head, which says: "this is no way to make policy."

OT, but: The type of disconnect you describe is a common feature in economic and game theory. You've basically outlined pareto optimal and Nash equilibriums. The theory suggests that Nash will rule, and, here, it does.

Shorter me: AIG was systemically important, enough so that its financial products division should have been much more heavily regulated to prevent the kinds of concentrations of risk we now see. Anyone who is capable of destroying AIG is thus, in a sense, systemically important. But not necessarily because of competence: destroying things is a whole lot easier than making them run well, in general.

//Obama's adaptive skills are impressive enough that he can quickly clean house, learn the necessary lessons and move on to a more populist model for economic recovery//

Hmmph. We'll see if this myth the true believers pass amongst themselves is true. Let's suppose he adapts and moves on efficiently, he's still heading in the wrong direction.

//I just wonder which of these you believe//

Points 1 & 2: Sever AIG's financial products division from AIG and let the Financial Products division fail. The rest of AIG can survive.

Point 3: If the taxpayers own 80% of a company they should be able to seat a proportional number of directors and exert influence GOING FORWARD. They shouldn't be able to abrogate contracts that are already in place.

2. , and I note that neither of these options really addresses Hilzoy's contention that, having accepted taxpayer money, the employees and decision-makers of AIG should accept strictures on their incomes.

IMAO the 'Govt Will Save You' crowd rush in throwing money before they take time to evaluate the situation. They're trying to prevent voter pain but all they end up doing is swirling the pain around a bit.

The biggest lesson to learn from all this is that Obama and his people are in over their heads.

Uh, ignore "2., and I note...their incomes." in the last comment. I forgot to delete it.

The biggest lesson to learn from all this is that Obama and his people are in over their heads.

oh no, there's an ever bigger lesson here: we are all in over our heads.

i'm not sure what it was about that comment that had you think I was serious.

I suppose I really need to be using emoticons to set my smart-ass comments aside from the serious ones.

;p

IMAO the 'Govt Will Save You' crowd rush in throwing money before they take time to evaluate the situation. They're trying to prevent voter pain but all they end up doing is swirling the pain around a bit.

Ah yes, as opposed to the 'Govt Is the Problem' crowd's (aka the Bush administration) approach - which involved no money thrown in prior to evaluation.

d'd'd: the people who rushed in in this case were Paulsen et al, not the Obama administration.

OT, because I think OCSteve reads Malkin: I'm on the "secret liberal journalist cabal" she's talking about here:

"Liberals used to accuse Fox News of being part of a right-wing conspiracy to float blog items into the news. It turns out that they have their own conduit for doing the same thing. Politico reports, apparently for the first time, on JournoList, a listserv comprising hundreds of news reporters, opinion journalists, and bloggers, that generates a significant amount of content. (...)

For years, writers on the Right have heard the accusations from our counterparts that Fox News manipulates news by coordinating with bloggers, something that in my entire five-plus years of blogging I have never seen, and I think I’d have been in a position to see it. Now it seems like those accusations were more like projection."

There is no coordination. There is no deciding what items to float in the news. It's just a listserv with a lot of knowledgeable people talking about stuff, in a wholly uncoordinated way. It's useful, for instance, to be able to ask: is this a completely nutty idea? and have someone who is a genuine expert on whatever it is say: yes, and give you a link to the relevant literature. It saves a lot of time. Likewise, if you write: sheesh, can you believe *this*?, and someone else comes back and says: yes, actually; here (link) is why it actually makes sense. Then, if someone else comes back and says: no, that actually overlooks crucial factor X (more links), which means that it makes no sense at all, and if the people having this argument are actual policy experts (which many are), it can be incredibly informative. -- As with blogs, the links mean you don't just have to take anyone's word for it.

It's like that.

Um, is anyone going to even make noises about the idea of rule of law? You can't really say, "The rule of law should apply to the rights of terrorism suspects, but not to the contracts of evil and greedy businessmen." Well, you can say it, but it makes any future (and past) talk about sanctity of law ring a bit hollow.

If you've ever wondered what lynch-mob mentality is like, well now you know. You are the mob.

Who's the "you" being addressed, here? Me? You do realize that my POV is quite different than ScentOfViolet's, which is in turn rather different than that of hilzoy, which in turn is...

There's no mob, here.

Andrew R: I have, I hope. I really don't believe in violating contracts. Renegotiating them, yes. Using pressure of various legal kinds to get them renegotiated, yes. Abrogating them, no.

there has to be some way of just letting this unit go (by all accounts, the rest of AIG is fine), letting these derivatives default, and letting the people who bought them eat the results.

What TJ said. Deal directly with the counterparties and cut these folks loose.

Look, I know people in the insurance and underwriting business, and I know people in the 'quant' side of the investment business. Good folks don't grow on trees, but they're also not indispensable.

If the company is insolvent, wrap it up and take it into government-managed bankruptcy.

These guys have a contract? Great. Take a number and after we pay all the counterparties, who we are legally obligated to pay first, we'll see what's left for them.

If they're really good girls and boys, and leave quietly and don't make a mess on their way out, we won't go after their prior earnings as illegally excessive compensation.

If not, we'll go after everything they have, and then we'll give that to the counterparties.

This isn't a matter of revenge, it's a matter of not pissing money away. Your money and mine.

If that ends up being a disincentive for greedy, irresponsible people to go into the financial sector, mission accomplished.

I think that we should bring whatever legal means we have available to get those contracts renegotiated. If they can't be renegotiated, we should pay them.

I agree.

I would add one more thing: then we should wrap up the financial products division and fire the folks who work there. If the management won't do that, we should replace them.

We own 80% of the company.

It's very cathartic, all of this outrage

You have no idea how far short of a satisfying catharsis writing posts on a blog is.

I want these people fired. I want them fired because they are *demonstrably incompetent*. And they're pissing my money away.

Does this mean that the folks on Wall Street deserve credit when the system works smoothly? Because that would be worth a great deal in compensation, given the importance of the job.

Unless I'm mistaken, these folks are rewarded very handsomely.

The problem is that they continue to be rewarded handsomely when they fail to do their job.

These folks invented 'financial products' that basically amount to a wager. And they didn't have the resources to pay if they lost.

Scent of Violets compares this to a race track 'buddy film'. The difference is that if you do this with the ponies, somebody comes and breaks your legs.

If you do it with investor's money, you get millions.

They should be fired. 600K people a week are losing their jobs. I'm sure some of those folks have the chops to step in and wrap up the loose ends in AIG's financial products division.

Make it a full-employment public works project.

Just get rid of these clowns.

Um, is anyone going to even make noises about the idea of rule of law?

You mean like this? Or perhaps this is more to your liking, it actually says, outright:

Fwiw: I don't like solutions of the form: do X, which is probably not legal, and dare the would-be bonus recipients to claim their money in court. I like the rule of law.

Also there's this, and a number of other similar comments I've made on that thread, some of which might have made sense.

Probably others have mentioned things relevant to what legal recourse is available; I can't do all of your reading for you.

"To close this rant out, from what I've been able to gleen from talking to financial types degenerate gamblers, the vast majority of the money AIG their bookie is getting is going to honoring its credit default swap book-making obligations to other financial institutions degenerate gamblers. When AIG the bookie spends a government dollar to satisfy that obligation, it not only wipes a liability off of its books keeps the bookie in business and alive, it adds an asset to the books of the company holding the now (seemingly) valueless mortgage-backed security puts money in the pockets of degenerate gamblers."

I fixed the end your rant for you, mckinneytexas.

Does this mean that the folks on Wall Street deserve credit when the system works smoothly? Because that would be worth a great deal in compensation, given the importance of the job. (An importance that is now underscored by the claim that they "wrecked" the economy.)

Two points: have we established that the system worked smoothly? If I'm shoveling too much coal into the boiler, can you say that I'm doing my job because the train is running faster . . . right up until the boiler explodes?

The second point: the problem, von, is the hypocrisy, and the abandonment of supposedly science-based theories as soon as they are no longer convenient. Worse, an unreserved willingness to use those same theories again, when it becomes convenient again.

You get downsized, your pay is stagnant? Well, that's sad, but that's just the free market in action, scientifically proven to be the real deal; the fault lies with you for not being competitive enough. And if we were to cut you some slack, that would be rewarding failure, which everyone knows would sap America's vital juices.

The Masters of the Universe screw up?

Well, that's different.

And that's what has the American citizen upset.

I see that I've neglected to mention hilzoy by name as author of the more clear rule-of-law comments I've noticed; hers were the first two that I linked.

Hopefully this will serve to fix any problem with giving credit where due.

Crap, I agree with hilzoy on something!

Thanks for making that clear, Hilzoy. I'm somewhat nervous about the pressure on the Obama administration to say that a contract is just a scrap of paper. Which is understandable since they've kind of got the government by the short and curlies and should be showing some humility. But then, the desire to say that the bill of rights is a quaint scrap of paper that shouldn't protect someone like Kalid Sheikh Mohammed is also understandable.

And I just read a post on Yglesias's weblog where he said that the government should just not pay them and then let it go to court, which leads me to assume that even among some bright, center-left folk, the whole "law is a quaint scrap of paper" idea is taking hold.

Um, is anyone going to even make noises about the idea of rule of law?

I am infamous for my grunts and gestures in that direction.

There's no mob, here.

More's the pity.

The futility, the absurdity, the pathetic impotence of those who expect the lawyers to go against the bankers using the laws that they have written in collusion to protect and empower each other is almost the definition of liberal anti-politics.

Process liberalism is to politics as derivatives are to drillpresses. Both are fictitious narratives specifically designed to exsanguinate capitalism.

Feel free to cap their bonuses, by all means, and watch the best pack their bags and go elsewhere. If we were really interested in getting AIG and the other bailouts turned around, we'd be turning to the the many successful regional banks and allied industries that didn't fall into the mortgage-back securities trap for talent and paying that talent handsomely to turn these other operations around.

But what we're complaining about is paying the exact same people that got us into this mess huge packages so...they don't leave AIG. And take all their wondrous skillz with them.

Yeah, that makes sense.

Besides, pack their bags and go where exactly?

Who's hiring?

"The rule of law should apply to the rights of terrorism suspects, but not to the contracts of evil and greedy businessmen."

oh yes, i'm all in favor of having these people argue in a public court that they are entitled to their bonuses. please, set the date. let's see it.

Looks like I may be one of the lucky few to participate in an economic blog with lots of supercompetent, documented people speaking economic language that I have a hard time understanding, but even I am aware of the fact that the stock exchange is NOT capitalism, and that it has been abolished at different reprises in the history of the United States (don't ask me for dates, go looking, they are there, and I am no good at keeping numbers in my head...)
As far as insurance in concerned, and the entire insurance business, it is suffocating capitalism at this point in time.
It needs to go. Period.
I know this may sound rather long-toothed to many, but how can social solidarity thrive when insurance is there to take its place ?

I have thoughts all over the place on this.

I'm not very excited about AIG from extensive insurance dealings with them.

The Wall Street people are CRAZY if they think that regular rhetoric is going to fly right now.

Substantively I have a couple of thoughts/questions about the bonuses.

First, AIG is an enormous company with many different divisions. My understanding is that the insurance division is still doing really well.

My question is: how many of these bonuses are contract compensation from actually successful divisions?

Because it strikes me that you shouldn't avoid paying those bonuses.

How many are from unsuccessful divisions? You should probably avoid paying those bonuses.

Next point is about retention bonuses. I understand the need for them in normal times. Say GM went into bankruptcy reorganization two years ago. You would need to pay retention bonuses to some of the good employees to keep them from fleeing with their talents to a better company--dooming the reorganization to failure. It can make a lot of sense to pay those types of bonuses to help the reorganization succeed.

But you don’t do it because you want to, you do it because you have to.

In this case, I’m not totally convinced that they are necessary. These are not normal times. There aren’t lots of companies in the financial sector who are waiting in the wings to cannibalize AIG for its finance-mind talent. And to the extent that successful non-financial sector companies want these people, maybe we should let them—the financial sector was clearly overstaffed in the past 10-15 years, and we need these people to get into something more productive.

My basic point is, where are these people going if they don’t get a retention bonus? Most of them aren’t going anywhere I suspect. So identify the really key people who really could go elsewhere (in these times) and pay them retention bonuses. But the more normal retention bonuses just aren’t necessary right now.

My question is: how many of these bonuses are contract compensation from actually successful divisions?

The present outrage is to bonuses given to the exact division within AIG that created this mess. To the exact executives in charge.

Seb: in one of my earlier posts, I linked AIG's explanation of this. Basically: after the head of the financial products division left in the spring of '08 (I think), the company decided it needed to retain people in that division, and so it wrote this contract guaranteeing all of them big retention bonuses. That's why the bonuses to the very division that torpedoed the company are roughly the same size as those to the rest of the company, despite the Fin. Products Division having only 370 employees, and the rest of the company having, I assume, considerably more than that.

I have no problem with paying retention bonuses to other people at AIG (except for those who are senior enough to have some responsibility for not having reined in the Fin. Products group.) Like you, everything I've heard suggests that the other parts of AIG are good.

But nearly half a billion dollars to the group that sank the company, and came closer than any company should be able to to sinking the world financial system? I see the case for paying them, but it's a lot like the case for paying the people who kidnapped your child.

Who's hiring?

Ah. Could it be that we have a financial-institution-executive bubble, bursting right before our eyes?

The people who make companies like this successful demand and get very high salaries and bonuses. Feel free to cap their bonuses, by all means, and watch the best pack their bags and go elsewhere.

This is a rather empty argument, given that

a) these "very best" got us into this mess; perhaps the next best won't be quite so financially stupid.

b) where are these "very best" going to go?

c) that these "very best" are as obviously superior to other people in their field as, say, a pro athlete superstar is, compared to other pro athletes. Given the fuzzy, non quantifiable, non numeric and subjective standards in this field as compared to pro sports, I think these "very best" are nothing of the sort and are, within a narrow range (but much wider than you seem to think), interchangeable.

Oh, for crap's sake. The issue here is not one of "the rule of law" or "honoring contracts". The issue here is that this group of idiots brought down a giant insurance company by making the most complicated and obscure bets they could. And we saved their asses by giving them lots of money. These idiots may know what they did, and how to unwind it, but they're not super-brilliant indespensible anybodys. Why would they need "retention" bonuses? Who else is going to hire somebody who spent years helping wreck a company like AIG? Seriously.

The problem here is the whole setup of the TARP bailout, which was "give lots of money to banks and financial companies, and don't actually require anything in return" which is stupid. We could have bought these companies with the money we've given them, and then we'd have had control, and these people wouldn't be gloating about needing to be paid extra to keep them on, they'd be thankful they weren't thrown out in the street and tried for fraud yet.

Points 1 & 2: Sever AIG's financial products division from AIG and let the Financial Products division fail. The rest of AIG can survive.

I don't see how this is possible. When you have a company that is bankrupt, you can't just take the assets, and put them in one pile, which you set up as a new company, and the liabilities in another pile, that you leave in the old company. The creditors for those liabilities will sue you, they will win, and they should win. This idea makes a mockery of bankruptcy law.

Kevin Drum has a piece pointing out something that I should have realized at the start of this mess: contra what I said yesterday, it really is that these guys are crazy enough to kill us all. They know AIG's book. Cut them loose, and they know how to trade against it.

This is the problem, or at least one of them, with the idea of cutting out the middle men and just paying the counter-parties off directly. The middle men you just cut out know what the positions are better than you do, and it's going to take you time to figure out what those positions are. While you do, they're merrily throwing more bombs, because they know which way to bet given the positions that exist.

That's not the only problem with dealing directly with the counter-parties. A larger one is that there's no point in doing so. What's the upside? The best you can say about it is that you stop paying some people at AIG who really shouldn't be getting paid. That's a good thing, but you have some problems off-setting it. Who do you pay? How much do you pay them? When do you pay them? If AIG stops paying out, does that constitute a default event on their part, accelerating the whole mess, even though the government is paying out? What has already been reserved as collateral by the counter-parties, which they can grab?

I absolutely agree that, morally, this is similar to the autoworkers, and that, if they can be forced to renegotiate, then the AIG folks should be forced to. The problem is that the auto workers didn't manage to do enough damage that they can hold a metaphorical gun to our heads. At the same time, I was opposed to making them renegotiate, because I do think that a valid contract is a valid contract.

Sure, the easy way to void a contract is to declare bankruptcy. I still think that the negative consequences of that are so large that it's not a very good idea.

c) that these "very best" are as obviously superior to other people in their field as, say, a pro athlete superstar is, compared to other pro athletes. Given the fuzzy, non quantifiable, non numeric and subjective standards in this field as compared to pro sports, I think these "very best" are nothing of the sort and are, within a narrow range (but much wider than you seem to think), interchangeable.


I think the quatifiable part for the masters of the universe is much like pro sports: we measure the amount of money someone brings in, or the number of homeruns they hit.

Then, 5 years later we realize that the money they made was based on "cheating" and unreasonable risk or the home runs they hit was due to steroids, or the Superbowl they won was due to illegal filming of other team practices.

The difference is that pro sports don't matter to the rest of us, so when they cheat, we don't lose retirements.

Gee, it seems the auto union contracts weren't a barrier to change.

Ahh, I see somewhat better now.

AIG made that choice earlier when retention contracts would have made more sense.

This is exactly why I feel these bailouts should be characterized as something more akin to government assisted bankruptcies. In a bankruptcy those bonuses and other compensation would be subject to renegotiation (same is also true of union contracts for GM).

I think this problem is caused by the fact that the government wanted to help more of the banking system than those that were going to outright fail. Which is probably a wise decision.

Argh. I don't know what makes sense.

I don't see how this is possible. When you have a company that is bankrupt, you can't just take the assets, and put them in one pile, which you set up as a new company, and the liabilities in another pile, that you leave in the old company.

Hmmm...I thought that a division of a company could file bankruptcy without it affecting the rest of the business. I'm going to have to search through NPR archives to see what their example was.

Ah. It was these guys. I'm not sure that there's any kind of structural similarity between them and AIG, though.

von: I don't get this. It's easy to wreck things without being competent enough to keep them running, or to deserve tens of millions of dollars on any grounds other than extortion (e.g., payoff for not wrecking the economy.)

For instance: if you get high enough up in a big enough institution, you could probably do things that would break that institution. You could, for instance, rerout all the payment on its debt to UNICEF. Being able to do that would not show that you were so marvelously competent that you deserve to be paid an exorbitant salary. It would just show that someone was fool enough to put you in a position of power.

We're talking past each other. Of course it's "It's easy to wreck things without being competent enough to keep them running." And recent experience has shown that a great number of people were not competent to keep these organizations running. Moreover, because of the importance of these organizations to the economy, the incompetence of these folks resulted in an economic disaster.

So, given that these jobs are apparently both important and quite difficult, I don't see the objection to paying a competent manager a great deal of money. They will understandably be in very high demand and, given their importance, probably deserve every cent.

In other words, the objection isn't to the salary levels for these jobs, but some of the people receiving these salaries.

In my view, a legitimate objection is that we're now paying incompetent managers a great deal of money. This, at bottom, may also be your objection.

its bull that AIG employees got a million dollar bonous and while the economy is soo wewak that dose not mean that they should take the money the president should take the money back and he should have montierd where and wha the money was being used for and we all are REALLY PISSED about it and its not no fair for the other compines.

I think the quatifiable part for the masters of the universe is much like pro sports: we measure the amount of money someone brings in, or the number of homeruns they hit.

The problem is that in measuring the amount of money someone brings in in a financial operation you absolutely have to adjust for risk for the measure to make sense. This is fundamental. You don't compare the performance of a money market fund manager to that of a small-cap fund manager based solely on their return.

That's a good thing, but you have some problems off-setting it. Who do you pay? How much do you pay them? When do you pay them?

Actually, I regard those as opportunities rather than problems. The guys who made these bets probably do not deserve 100% payoffs, as AIG has been doing. Renegotiation would be a good thing.

The middle men you just cut out know what the positions are better than you do, and it's going to take you time to figure out what those positions are. While you do, they're merrily throwing more bombs, because they know which way to bet given the positions that exist.

And who exactly is going to give these people the money to make these bets?

If everyone is nuts and the entire basis of high finance has devolved into extortion, then we better find it out now before we blow a couple of trillion trying to avoid it.

This is the problem, or at least one of them, with the idea of cutting out the middle men and just paying the counter-parties off directly. The middle men you just cut out know what the positions are better than you do, and it's going to take you time to figure out what those positions are. While you do, they're merrily throwing more bombs, because they know which way to bet given the positions that exist.

Which is certainly true. Additionally though, and contrary to the various calls above to just write off AIG's liabilities or financial products division, the value of these positions is a function of time. The value of these positions is so low right now, perhaps zero, because there are no customers for these liabilities. Given time, assuming the general economic situation improves, the underlying value of these positions will rise and more potential customers will return to the market.

Thus though the financial firms are running up huge losses right now, in reality in 5, 10, 15 years many of the same assets they are writing off will come good. So it would be a mad folly for the US government, having spent hundreds of billions to buy these companies, to throw away something they've already paid for whose value ought to grow in time. Which is why you need to keep the people around who know these assets best.

This is also why right-wingers railing against Obama's Keynesian policies are totally misguided: it makes a huge difference to all these existing assets if you make an effort to minimise unemployment and limit the downtown. More employed people mean more mortgages paid -- getting right to the heart of this crisis.

Quite apart from caring about social destruction of course, which any party (hello Republicans) who claim to care about social values ought to. "We care about social values, just not society!"

The best you can say about it is that you stop paying some people at AIG who really shouldn't be getting paid.

Yeah. And just to complete that thought, tack 'millions of dollars' on after 'getting paid'.

If we can't void the contract without doing a greater degree of harm in other ways, pay them. Then get them the hell out as soon as we can.

If we can find a way to void the contract, void it and give them nothing. Nothing is far, far more than what they have earned.

What these folks did was sell something akin to insurance. Pay them a fee, if something bad happens they pay you back a lot more money.

How much did they sell? Last year the Bank for International Settlement valued the value of the commitments represented by credit default swaps at $596 trillion.

In the fall of 2007 the value of all publicly traded equities on world exchanges was $62.5 trillion. A year later, last fall, it was $36.6 trillion.

They sold commitments to pay somewhere between 10 and 20 times the total value of all of the publicly traded equities in the world.

In the whole m****rf***ing world.

Here is a big surprise for everyone: some of the counterparties aren't going to get paid. They aren't going to get paid because there isn't enough money in the *whole damned world* to pay them.

We are going to have a very entertaining couple of years figuring out who is going to get paid and who is not.

If we can't find a legal way to void the contract, pay them their salaries and lock them in a room with no telephone, computer, or any other form of access with the outside world. These people will blow up anything they can touch.

They can stay there until this mess is sorted out. If it takes 10 years, that's where they will be for 10 years. The can spend their millions on deli takeout.

We owe them nothing at all.

I think the quatifiable part for the masters of the universe is much like pro sports: we measure the amount of money someone brings in, or the number of homeruns they hit.

Well, of course how much money they bring in is comparable to how many home runs a ball player hits.

It's just that baseball stat geeks know that the number of home runs they hit measures only a portion of an athlete's worth. Similarly, how much money they bring in is an incomplete and often misleading measure of a manager's worth.

Thus though the financial firms are running up huge losses right now, in reality in 5, 10, 15 years many of the same assets they are writing off will come good. So it would be a mad folly for the US government, having spent hundreds of billions to buy these companies, to throw away something they've already paid for whose value ought to grow in time. Which is why you need to keep the people around who know these assets best.

A very large number of us doubt this. Absent another housing bubble, this is just not going to happen. And you have to show that any possible new bubble would not immediately get killed by high energy costs like the last one. We think the parrot is really dead, just not pining for the fjords.

What JMN said at 11:53am

This is one of those situations where you really don't want policy makers making decisions with long term consequences out of anger and a sense of outrage, despite the fact that both are fully justified. The most constructive outlet for populist anger over the malfeasance on Wall St. is to push through regulatory reform to prevent this sort of situation from happening again, or at least not for say another 70-80 years or so anyway (by which time our grandchildren will have unlearned the lessons that we are learning now).That, and criminal prosecutions where laws have been broken, and new laws to criminalize behavior which should have been against the law but wasn't at the time. If we can claw back recently issued money from those on Wall St. who are malfeasant or undeserving, so much the better.

But all that is dealing with the either the past or the future. In the present, we have the urgent task of trying to keep the global economy from falling apart in a much worse fashion that what has already happened. If you think this is as bad as it gets, that it can't get much, much worse than what we have now, I'm sorry to say that you are sadly misinformed. Think Iceland on a continental scale. What we’ve seen thus far is what the Great Depression 1.0 would have looked like if the Fed and the Hoover admin. had used an expansionary monetary and fiscal policy to try to save things – or roughly about ½ as bad as it actually was back then.

Which is why this is not a good idea:


there has to be some way of just letting this unit go (by all accounts, the rest of AIG is fine), letting these derivatives default, and letting the people who bought them eat the results.

As distasteful as it is, AIG’s derivatives are performing a key role right now in keeping the banking system of Europe from going to pieces, as shown by a quick glance at the list of major banks who thus far have been the counterparties to benefit most heavily from AIG's TARP money. At a macro scale here is what is happening: We (the US taxpayers) are borrowing money from the PBoC and other sources and using it to recapitalize both US and European banks, especially the latter. If we don't do that, at some point there will be a run on deposits similar to what happened in the US in 1933, but on a global scale. And then it really will be just like the Great Depression of the 1930s all over again, not the half-sized version we have now.

Before we can apply triage to the FIRE sector (something which will happen eventually) we have to find a way to cut the Gordian Knot of the various swaps (such as the notorious credit default swaps) which tie together all the major financial firms, because right now they are so tightly coupled to one another that they will fail in a monolithic fashion if even one really big firm is allowed to sink. That was the lesson which came out of the Lehman bankruptcy - no amputations can occur until the tourniquets are in place, or else the entire financial system will bleed out.

And it is going to be very expensive to settle the swaps already in place - as a back of the napkin estimate it looks to me like we will end up spending another 2 trillion dollars in additional bailouts before this is over. People all over the world, not just here in the US, are going to be contributing to that total, in part because the instruments of debt our Treasury is selling to finance these bailouts will in the end be devalued either via inflation or by way of partial default. The US economy can’t cover all of the debt obligations we are issuing in a reasonable time frame and given likely GDP growth scenarios, and in all likelihood everybody in the world of finance with a brain in their head already knows this. What started as a financial crisis is morphing into a geopolitical issue as govt's across the world negotiate with each other to determine how the pain is going to be distributed. That is the real context for the upcoming G20 meeting – how to slice up the sh*t sandwich and pass it around so everybody takes a bite.

You've paid $170 billion to own AIG, are you going to flush that money down the toilet by allowing all the key human talent to walk over a couple hundred million?

This is a false choice. The bonuses in question are the ones owed to employees in AIG's Financial Products department, which as noted upthread is only a small part of AIG, which is otherwise profitable. The only key talent these people demonstrated was the ability to destroy an economy by placing bets collectively worth more money than actually exists in the world. With that kind of talent, not only are they welcome to walk, I'll give them a head start on running.

What I haven't seen seriously discussed is the possibility of treating AIG the way we do monopolies that've gotten too big to fail. Split off Financial Products into its own corporate entity. Firewall it off from the divisions of AIG that deal with insurance or with legitimate, capitalized investment, protect them while forcing FP to stand on fall on its own profitability.

And then, as there is no possible way for FP to be solvent, take it through bankruptcy.

Ouch:

Although some suspect pressure may be growing for those employees who received bonuses to return them on their own free will, many of the employees who received bonuses are not American and may not care that American taxpayers are outraged over the incident.

Elvis has left the building.

OT again: one more comment on Journolist:

Ezra, who started the whole thing, has posted on it here. What he says is accurate.

The funny bit: Erick Erickson claims to have informed sources: "I’m told such luminaries as David Shuster at MSNBC, Keith Olbermann, Rachel Maddow, a host of New York Times magazine writers, Frank Rich, and others all collaborate on this list."

I would not myself have commented on this, since it's supposed to be off the record, but here's Ezra:

"I'm not sure who told him that. Not one of those people is on Journolist. If they were, I imagine I'd get booked for more spots on Maddow. It is true that the list is center to left. That's not about fostering ideology but preventing a collapse into flame war. The emphasis is on empiricism, not ideology."

That might be a bit sweeping: after all, among the people Erick says are on JournoList are "others", and I don't think I'm divulging any deep secrets when I say that there are, indeed, "others" on the list. In fact, *the entire list* is composed of people other than the ones Erick names.

In fact, *the entire list* is composed of people other than the ones Erick names.

Oh, that one is going to leave a mark.

Maybe. It has to be understood, first.

Before we can apply triage to the FIRE sector (something which will happen eventually) we have to find a way to cut the Gordian Knot of the various swaps (such as the notorious credit default swaps) which tie together all the major financial firms, because right now they are so tightly coupled to one another that they will fail in a monolithic fashion if even one really big firm is allowed to sink.

The only way to cut a Gordian knot is to actually cut it; declare all CDS invalid and start from there.

The only way to cut a Gordian knot is to actually cut it; declare all CDS invalid and start from there.

Do we know what will happen if that occurs?

this just in: Erick Erickson is a soulless shill for Republicanism. he has the intellectual honesty of a sewer pipe, and the same basic job as one.

Can we pay the bonuses in CDS?

Do we know what will happen if that occurs?

Beats me. I agree with russell though, trying to unwind $500 trillion of derivatives is a fool's errand. And TLTABQ has a good point, but if we spend trillions of dollars in a successful defense of the international banking system we're probably still screwed, because we really ought to be using that money for productive investment to get the GDP up.

If we are on the edge of a cataclysm though, it would be nice if the financial types would act like it, instead of "Women, children, and financiers to the lifeboats."

Can we pay the bonuses in CDS?

Good idea...I'm thinking Kajagoogoo or similar '80s trash.

or unused and discarded AOL installation disks

They have to take it in pennies. And carry it all themselves.

Why don't we pay them by sending them to jail for fraud, racketeering, extortion, financial terrorism, and fraud?

The only way to cut a Gordian knot is to actually cut it; declare all CDS invalid and start from there.

Agreed, with the major caveat that the timing matters very much. Right now we are still in the process of recapitalizing the banks. The banks in Europe worry me even more than those in the US, because they (at least the problematic ones anyway) are more highly leveraged. When we get the US and European banks down to a leverage of say 15 or so (from 30 to 60), then we can proceed with nullification of the remaining swaps contracts and banning them so this doesn't happen again. But we have a long way to go before we get to that point.

Right now our policy makers are stuck in the nasty position where the banks have to be recapitalized back to managable levels of leverage before drastic action can be taken to dismantle the old financial system and replace it with something sustainable. There are political limits on how quickly this process can proceed, because the faster new money flows into the banks the more outrageous it looks and the greater the public anger in response, so policy makers are trading off speed vs. popular outrage, trying to find the fastest route to getting the problem under control which is politically feasible. Any measures which can help defuse and redirect public anger, such as criminal prosecutions of malefactors, high-profile reform of the banking system, and increasingly steep progressive taxation policies, will help this process. If we can claw back some of the outrageous compensation already given out on Wall St. (by some means other than confiscatory taxation of existing wealth) that would be great, but I'm not very hopeful on that score from a legal standpoint.

Here's another point - this outrageous situation where taxpayers (via the govt) effectively own 79 percent of AIG yet have no say in compensation policy highlights a much broader scandal with regard to corporate governance. The really outrageous thing is that we the taxpayers are no different from the shareholders of any other large firm. Shareholders in general have little or no say with regard to compensation policy. Top execs have been looting large corp's with little regard for shareholders for some time, but this scandal over the AIG bonuses is bringing it to the fore in such a way that many people are only now noticing this for the first time.

Sebastian, Slartibartfast, et al.

Yes, let's go the UBS route (IIRC); all bonuses for the Financial Products division are hereby changed into certificates based on the book values of the CDS they wrote. This should also resolve mckinneytexas' assertion that these things have value (eventually).

They should have no problem with that, based on the values they have assigned to these products.

If they choose not to take up such largesse, they should then be required to explain why they did not pick up this option.

And as to the CDS themselves, all naked CDS should be cancelled, with the purchase fees refunded less a handling discount. People who got that greedy should have their haircut.

Re: JournoList ....

Fine, I'll say it: The fact that Erickson makes stupid claims doesn't have anything to do with the objections to JournoList. By Ezra's own telling, it's a "center to left" list that provides information from selected center to left policy experts to journalists -- including journalists purportedly doing "straight" news. It's the dissemination to "straight" news journalists that is the problem, not the existence of the list itself. If that doesn't sound problematic to you, you need to think harder about the issue.

Or: Consider how you'd feel if there was a secret right-wing list channeling policy views from N-Pod or J-Pod to AP reporters who cover the Middle East. Are you going to have confidence in those reporter? In the AP?

Finally, it's ironic that Erickson (mistakenly) claims that Maddow is on the list. This list would not be problematic if it were limited to overt partisans. It becomes problematic only because its purpose is to extend to straight-news journalists.

The comments to this entry are closed.

Blog powered by Typepad