AIG and the "Killed Virus" Theory

by publius

I’ve seen a few comments critiquing the obsessive focus on the AIG bonuses.  The bonuses are, after all, a drop of a drop in the bucket of our overall costs.  Better to focus on the bigger picture – whether to nationalize; etc.

The best response I’ve seen comes from commenter Andrew R. who introduced the “killed virus” theory in my last post:

[N]o matter how necessary it may be to give gobs of money to the folks who caused the problem to begin with, there's a basic moral outrage that comes with it. So as long as congress and Obama present a "killed virus" outrage, they can go about their business of unf***ing the financial sector.

Sounds about right.  Remember that this debate isn’t taking place in a vacuum of abstract policy considerations.  It’s taking place against a highly charged political backdrop with lots of angry, hurting people – in a country with a deeply-embedded “anti-big government” ideology.  It’s an absolute political minefield.

In fact, one of my recurring nightmares is that Obama will ultimately be punished (in 2010 or 2012) for taking necessary but expensive measures on the banking front that will be mercilessly demagogued.  It could potentially be a quite tragic choice for him in that sense – but that’s a post for another day.

Anyhoo, the point is that nothing will ultimately get done if the politics gets too toxic.  People’s outrage simply cannot be ignored.  And there’s more outrage to come.  Straightening out the banks is going to be expensive and infuriating – though ultimately necessary.  If a bit of cathartic AIG demagoguing helps make the larger reforms and stabilizations possible, so be it.  I’m not going to be up at night worrying about the poor mistreated souls in the Financial Products division.

The critique above, then, gets its backwards.  We’re not ignoring the larger issues by focusing on relatively minuscule AIG bonuses.  We’re helping make the larger reforms possible by doing so.  It’s a killed virus of outrage to promote economic health. 

Plus, it promotes my own mental health.  Venting in the defense of sanity is no vice.

Comments

[Johnny Canuck]

"If a bit of cathartic AIG demagoguing helps make the larger reforms and stabilizations possible, so be it. I’m not going to be up at night worrying about the poor mistreated souls in the Financial Products division."

And I suspect you weren't up yesterday afternoon listening to Liddy's testimony. I did. Liddy sounded to me, convincingly, extremely concerned that the quest for scapegoats at AIG, which had already led to death threats, and the demand to return bonuses could lead to resignations, which could lead to damage that would sink his efforts to unwind the AIG Financial Products division.

Unlike the banks, Liddy seemed to have a well developed plan to repay US, which he repeated claimed - unheeded by the Congressmen or media- that the amount currently owed to US taxpayers by AIG was something like 79Billion not the 170 every Congressman and media said.

It is not that I have sympathy for those reaping the rich bonuses- but I think it is comparable to NBA fans of a team, having lost the first three games of an NBA final, and just having squeaked out a win in the fourth game insisting that Kobe Bryant repay some portion of his salary for the past season. Maybe he will but do you think he and his teammates will show up and play well in game 5, 6 and 7?

[Brett Bellmore]

Nah, it the way of diverting the public's outrage away from the government to a convenient patsy. And an incredibly dangerous way of accomplishing that, too; Ramp up the outrage enough, (And it's been brought to a fever pitch.) and people are going to get murdered.

The government KNEW the bonuses were going to go out, in advance. And deliberately did not try to stop it until after the fact. That makes the government morally complicit in the bonuses, and precludes the government having any standing AT ALL to complain about them. Sending them out was as much the government's decision as AIG's.

I suppose you're right in a sense, though, that diverting the public's righteous rage away from them to a convenient patsy gives the players in government a freer hand. Which is a good thing if you assume they'll use that to do the right thing.

I find it quite easy to doubt that they will, given these very same people's complicity in creating this situation in the first place.

[Johnny Canuck]

"The government KNEW the bonuses were going to go out, in advance. And deliberately did not try to stop it until after the fact."

Information doesn't automatically permeate throughout the govt. Liddy testified that the Federal Reserve were present at all meetings and had info for several months. Seems they may not have told Treasury, or at least Geithner wasn't aware until a couple of weeks ago.

Yes, it was in the public domain that bonuses would be paid, but not really setting off alarm bells on any one's radar.

[John Thullen]

Aw, hell, just when my populist outrage gets stoked, I'm told to tamp it down for the greater good.

That "greater good" theme is a little difficult to take, but ....

Well, those counseling caution in regard to punishing AIG executive bonuses are probably correct.

I long for the days when we can pick out a target, albeit a mythical, stereotypical one, say big, fat, black welfare mothers driving big fat black Cadillacs picking up big fat black government checks to buy Maker's Mark and big fat steaks and scapegoat the heck out of them from the bully pulpit and the halls of Congress, and blame all of the ills of society on them and take that anger and craft punishing legislation and maybe hang a bunch of tax cuts on the tree .... for the greater good.

Trickle down outrage seemed so effective.

Trickle-up outrage might ruin the country.

[TJ]

What Thullen said. And italics off.

It's staggering to me that anyone with a shred of sanity wants to let the same guys who got AIG $1.6 trillion in the hole anywhere near the mess, on the theory that they're the ones who can fix it. What's your limit, $3.2 trillion?

[Johnny Canuck]

TJ: THEY ARE NOT THE SAME GUYS. If you listened to Liddy, who only came in to rescue the company in September 2008, the bad deals that brought down the company were made by about 20 people in one division of the AIG FP unit that dealt with credit default swaps. The people who caused the problem aren't there anymore. It is other people, primarily in other division's of the AIG FP unit who received the bonuses, and are tasked with unwinding the $1.6 trillion remaining portfolio, primarily of derivatives (whatever that means). They aren't $1.6 trillion in the hole. Liddy said expected it to take 2-3 years to unwind, probably at additional loss of 2-3 billion. He also anticipates being able to repay the US taxpayer all monies advanced -which he says is less than $100 billion- not the $170 billion being quoted in the media and by Congressmen, within the same period of time.

[TJ]

Liddy said expected it to take 2-3 years to unwind, probably at additional loss of 2-3 billion. He also anticipates being able to repay the US taxpayer all monies advanced -which he says is less than $100 billion- not the $170 billion being quoted in the media and by Congressmen, within the same period of time.

He has to say that, without actual numbers what he says is worthless. Cripes, the man couldn't even name the members of the Treasury and Fed units he was supposed to coordinate with. Extrapolating from their performance during the last year that we know of, I'd say it's more likely they actually save $2-3 billion off the $1.6 trillion. And pay off the taxpayers in three years?

If they're doing that well I would expect they would require no more Fed money. Ever. So I would guess we'll see.

[wj]

The ranting about the AIG bonuses may provide some catharsis. But it also may accomplish a worthwhile long-term end: discouraging bonus structures which reward only the upside of risk-taking behavior.

That will be good for any business which gives bonuses, and for the economy as a whole. Not in the next couple of years, but in the long term (i.e. until the lesson is forgotten in a generation or two).

[Johnny Canuck]

TJ: "Cripes, the man couldn't even name the members of the Treasury and Fed units he was supposed to coordinate with."

Do you have a reference? I listened to most of his testimony yesterday. Didn't hear this. He declined to publicize names of those receiving bonuses or those who in 2005 had screwed up credit default swaps, but not what you say.

He also said that, barring further deterioration in market he didn;'t think they wounld need any more Fed or Tarp money.

I don't think you understand the $1.6 trillion.

[Anarch]

So as long as congress and Obama present a "killed virus" outrage, they can go about their business of unf***ing the financial sector.

There are two other points to consider as well:

1) AIG may not be the only massive clusterf*** we have to unravel. If so, we need to make sure that the notion of these bonuses gets squashed, hard, in the next iteration.

2) More profoundly than that, whatever the immediate outcome of this catastrophe, we need to build into our bones the notion that these sort of financial shenanigans are unacceptable and will be punished. Otherwise, the next time this sort of thing happens -- and there will be a next time -- those responsible will be inadequately fearful of the consequences of their actions.

Also, Johnny, I'll be blunt: I have no idea who are, but you're sounding like an AIG shill. Not saying you shouldn't be saying what you're saying, just that I don't think you're coming across as you intend.

[KCinDC]

Johnny, I'm worried about the outrage as well, but you're amazingly trusting of Liddy's figures and explanation, considering he's representing an industry that's apparently been living in a fantasy world (and bringing the rest of us along with it) for at least a decade. I don't believe that the only problem with our financial system is 20 bad apples who brought everything crashing down. Anybody who's "succeeded" on Wall Street in necessarily complicit in a corrupt and flawed system and should be viewed with suspicion. Not that I have any good alternatives.

[byrningman]

I'm just going to say this once, because I know I'm screaming in the wind, but what Obama and the rest of them don't have the guts to tell the American people is that securing the services of the key people at AIG by way of airtight bonuses was A VERY SENSIBLE THING TO DO, and if their services had not been secured, we would all likely be standing in the ruins of AIG and many other firms, in a far worse situation than we already find ourselves.

Has anyone here read a genuinely deep investigation and explanation of what went wrong at AIG? I don't believe any such investigation exists, I certainly have not seen it, because AIG's operations were especially complex. No one here has any idea who merits condemnation and who was actually doing there job well. No one can take over from the people already running AIG without dealing with a big learning curve. All the gauges were redlining, smoke was coming out of the machine -- and that is still by and large the case -- and it was a very sensible decision to secure the services of the existing crew for the immediate future. No conspiracy, the rational explanation usually is the right one. Why would the bonuses have been performance-related when the entire point of issuing the bonuses was to retain vital staff during a catastrophic period?

It's extremely intellectually and morally lazy to tar every person in finance or in a bailed-out company as a scumbag whose greed is only exceeded by their incompetence. It's nice to tell yourself that perhaps, implying that they are only more successful financially than most of us because of some moral deficiency, but it has very little relation to reality and it's certainly counter-productive to addressing the problems we now face.

[gregspolitics]

As someone who has posted that I think that the outrage has been counterproductive, I want to say that I understand and agree with what Publius is saying here, but my concern has been that all of this outrage has gotten misdirected at the Obama Administration for not having stopped the bonuses, and that is what I consider to be counterproductive and in fact outrageous itself. As I understand it, these bonuses were earned as of last Dec 31 before Obama even became president and the idea that the executive branch can just arbitrarily stop the bonuses is not, and should not, be legal. The solution from the taxpayer protection standpoint was always quite simple and I understand is being done-to deduct the bonuses from the funds being given to AIG for $30B of preferred shares. Although I think the administration was caught a little flat-footed, I think Obama is now getting the anger shifted in the right direction which is laws to give the govt resolution authority that actually could allow them to legally prevent these bonuses in future situations of this sort. I was also concerned that all of the wrongly focused outrage was going to make it difficult to solve the real problem-which is to prevent AIG's failure from making economic recovery more difficult. I also must note for those who favor "nationalization" of the big banks, I think this situation shows why the administration is very leery of that-any decision made while running these banks which may make business sense but be unpopular will generate all of this populist outrage and I am sure the administration thinks why should we ask for that unless there is absolutely no alternative.

[byrningman]

All good points, gregspolitics. I half agree with Publius' original interpretation, in the sense that I think Obama's response is one of two possible ones, and it's not clear to me yet whether he intends to channel the anger productively or indulge it.

i suppose he has no choice though.

[publius]

byr - don't you think every person at a failing firm throughout history has over-emphasized how crucial they are to the process? i'm sure they'll say they have to be there to wind things down. but it's still hard for me to believe that

[Johnny Canuck]

"Also, Johnny, I'll be blunt: I have no idea who are, but you're sounding like an AIG shill."
"Johnny, I'm worried about the outrage as well, but you're amazingly trusting of Liddy's figures and explanation, considering he's representing an industry that's apparently been living in a fantasy world (and bringing the rest of us along with it) for at least a decade. I don't believe that the only problem with our financial system is 20 bad apples who brought everything crashing down"

I'm a slightly to the right of centre Canadian with degrees in political science and law. That means in US terms I would be far to the left. I concluded Nixon was Watergate guilty on February 3, 1973.

I actually watched Liddy's testimony yesterday. I feel like I was the only one who watched the movie. everyone else relied on reviews by media.
I found Liddy a credible and impressive witness. I was profoundly unimpressed by the questioners. I knew nothing about Liddy prior to his testimony. He was a retired insurance executive. What I got out of his testimony was that AIG had been a very successful insurance company. It saw other companies making big bucks in financial markets. The executives thought they were
very clever, could get into credit default swap business in big way. They didn't understand the level of risk they were undertaking. They got burned. I see Liddy as the good guy saving US taxpayers money. The script you are reading has him as a bad guy, someone you should be suspicious of.

Canada never got caught up in McCarthyism in the 1950's. I never understood why US did. After watching the hearing yesterday, media and blog reaction, I think I understand how it happened. Media tells you AIG bad (as opposed to stupid) you all get out the pitchforks.

[byrningman]

Pub: given the growing panic over the fact that Obama hasn't managed to staff the economic departments of his own administration yet, it's simply wild-eyed optimism to think that he's going to snap his fingers and make phalanxes of talented financiers appear, ready and willing to take over a company on life support that is rapidly degenerating into a political circus and circular firing squad.

Yes, the AIG honchos got a nice deal for themselves, but that's because they had a strong hand to play. They literally *are* the company: if you let them walk out the door, what did the government pay for when it bailed AIG out in the first place?

It's a shame they're not willing to work for pittance, but they see the value of their services and charge accordingly. That's why they're bankers. You don't have to love 'em, you just have to accept that they are a necessary evil if we don't want to go back to a mud-eating economy.

[El Cid]

Ordinary people can somewhat put up with -- however unhappily -- the notion that the government is putting up money to keep a 'corporation' from failing, i.e., thinking that the money is somehow connected with things related directly to the financial system's survival.

When it seems that that money, even just a small percentage of it, though with large numbers, is going to *personally* enrich the already-wealthy *individuals* running & operating these companies...

...well, not only does this seem disconnected from perhaps necessary but unfortunate system support, it makes ordinary people think the ENTIRE process is a game to give taxpayer money to rich people.

People will begin to see the executive bonuses as a SAMPLE which to them represents the WHOLE.

This is a real danger. It isn't simply some form of demented 'populism'. This is about public trust in something they already don't like.

[KCinDC]

Johnny, while it's important sometimes to distinguish between bad and stupid, why would AIG being stupid rather than bad make trusting AIG folks a good idea?

I'm not suggesting pitchforks, just an extremely high level of skepticism.

[ThatLeftTurnInABQ]

Also, Johnny, I'll be blunt: I have no idea who are, but you're sounding like an AIG shill. Not saying you shouldn't be saying what you're saying, just that I don't think you're coming across as you intend.

Speak for yourself.

I don't agree with Johnny on everything, but he comes across to me as somebody who is struggling to understand a very complex issue without giving in to the temptation to use an excessively simplified view of what is going on, or fall back on metaphors which obfusticate important details as a sort of mental crutch, but instead is putting in the work of actually paying attention to the details (e.g. by watching testimony on TV rather than relying upon summaries in the news media). I think this is a very good idea - I've been paying extremely close attention to this issue for years now and I'm not impressed by the quality of the summaries which are in the news media.

This is an extremely complex issue. The temptation to simplify is one we should resist IMHO. This is not to say that anger and outrage are not justified, but I'm pleading with anybody who is willing to listen to stay calm and pay attention to the details. There are no easy answers or painless solutions, which means that we have some very hard choices to make going forward. We need as many people as possible to be as well informed as possible if we are going to make wise choices and have them grounded in a broad social consensus. Anger is a powerful motivational tool and we need that, but we also need clear thinking. I'm concerned that the rage over this story has crossed a line dividing constructive anger from rage which is not going to contribute to good decisions for all of us.

[Johnny Canuck]

"why would AIG being stupid rather than bad make trusting AIG folks a good idea?"

The two CEOs who made the stupid decisions gone. Liddy getting them out of the business in which hubris demonstrated.

[TJ]

I'm concerned that the rage over this story has crossed a line dividing constructive anger from rage which is not going to contribute to good decisions for all of us.

I'd respectfully submit you're talking to the wrong people.

Citi

You want clear reason you probably want to begin by stopping the banksters from using the equivalent of cattle prods on the public. They're really not acting like anything is amiss at all.

[Sapient]

There are several people in the comments making a huge amount of sense. Like this from byrningman:

It's extremely intellectually and morally lazy to tar every person in finance or in a bailed-out company as a scumbag whose greed is only exceeded by their incompetence.

As opposed to this from KC in DC:

Anybody who's "succeeded" on Wall Street in necessarily complicit in a corrupt and flawed system...

While the latter point may be true, it's also true that the rest of us in the U.S. are complicit in a corrupt and flawed system by 1) dealing with banks, 2) owning stocks, 3) working for corporations, 4) etc.

Now Atrios blogs stirring resentment of Geithner for owning an expensive house. As one who supports taxing the rich, redistributing wealth, putting caps on executive pay, etc., I think this stuff is ridiculous and unnecessary class warfare.

[Model 62]

What TLTIABQ said about what Johnny Canuck said.

And what Ugh said about this in another thread ("Schiavoesque"). Populist fervor and righteous indignation are fun, but they're lousy ways to make decisions.

[Johnny Canuck]

ThatLeftTurnInABQ :"struggling to understand a very complex issue without giving in to the temptation to use an excessively simplified view of what is going on,"

Actually, I confess I tuned in with a simplistic expectation of enjoying Liddy being grilled. And was surprised to warm up to him, and gradually wonder whether he was the one protecting the taxpayers, and finding the Congressmen ignorant, obnoxious and misguided. Why I wonder if others actually watched Liddy they might not come to the same general conclusions.

[TJ]

Now Atrios blogs stirring resentment of Geithner for owning an expensive house. As one who supports taxing the rich, redistributing wealth, putting caps on executive pay, etc., I think this stuff is ridiculous and unnecessary class warfare.

Blogging is now class war? Boy, where's Madame DeFarge when you need her?

[ThatLeftTurnInABQ]

I'd respectfully submit you're talking to the wrong people.

Citi

You want clear reason you probably want to begin by stopping the banksters from using the equivalent of cattle prods on the public. They're really not acting like anything is amiss at all.

I'm afraid my time machine is in the shop for repairs this week, so I'll have to pass on going back and changing construction designs which Citi begun planning last June and submitted in September. Bad luck, that. Also, I'm afraid that Vikram stopped returning my phone calls some time back - probably fallout from that nasty email I sent him with links to Lolfed with the comments "HAHAHAHA LMAO!!!, d00d u r so pwnd!". With benefit of hindsight perhaps that wasn't such a good idea, but it sure was fun at the time.

So now all I'm left with is trying to influence the few remaining people who are willing to listen to me. Not sure if there are any of them left in these parts or not, but hey at least I'm trying. Il faut cultiver notre jardin and all that.

[byrningman]

I'd trust a banker over a politician any day, at least the banker's motives are transparent and pretty predictable. Which is why ultimate the whole mess seems like the fault of politicians and regulators to me -- by and large bankers seem to have gotten into this mess by pursuing short-term profit, but they did seem to play by the rules, generally speaking. they behaved as regulators should have expected them to behave, and it's the regulators who are responsible for monitoring the whole system, not any given division of a firm.

Now the same Clinton- and Bush-era guys are back in charge...

[russell]

securing the services of the key people at AIG by way of airtight bonuses was A VERY SENSIBLE THING TO DO, and if their services had not been secured, we would all likely be standing in the ruins of AIG and many other firms, in a far worse situation than we already find ourselves.

It may well have been a sensible thing to do, but allow me to point out that we are, in fact, standing in the ruins of AIG as we speak.

Allow me to also point out that we don't yet know exactly how bad a situation we are in. We may already be in a far worse situation than we think we are.

Some of the folks we're signing up to pay millions of dollars to were, in fact, reckless and greedy, and their actions will cost every single one of us a lot of money. Actually, if money is all it costs us we'll be getting out of it cheaply.

These people aren't all good guys. Some of them are, in fact, bad guys. It *should* piss us off to have to pay them to stick around.

It's extremely intellectually and morally lazy to tar every person in finance or in a bailed-out company as a scumbag whose greed is only exceeded by their incompetence.

Very few folks here are tarring 'every person in finance' as anything. Most folks here are angry at people in AIGFP who bankrupted their company and then insisted on being paid bonuses for staying around to sort out the mess.

It puzzles me why that anger is hard to understand.

I found Liddy a credible and impressive witness.

As did I, from the small amount of his testimony that I saw.

And I thought most of the people grilling him were taking their opportunity to kick him while he was down for the benefit of the folks at home.

I'm glad Liddy's there, he appears to be doing his best to make a bad situation as not-bad as it can be.

[Bernard Yomtov]

I think TTL has it right.

Reluctantly, I think the outrage is justified, but killing the bonuses probably isn't. Let's get the mess unwound, take the loss, and learn our lessons, which are many.

BTW, what is a "killed virus" outrage?

[KCinDC]

Johnny, I don't understand how, if it's impossibly difficult to find competent people to take over positions at AIG, you're so confident that Liddy has been able to replace all the bad/stupid apples.

[Slartibartfast]

I'm afraid my time machine is in the shop for repairs this week, so I'll have to pass on going back and changing construction designs which Citi begun planning last June and submitted in September. Bad luck, that.

Fortunately, you can travel back to the exact same moment in time next week, or next month, or even next year, when your time machine comes out of the shop.

[TJ]

So now all I'm left with is trying to influence the few remaining people who are willing to listen to me. Not sure if there are any of them left in these parts or not, but hey at least I'm trying. Il faut cultiver notre jardin and all that.

Hell, you're influencing me. So there. But while this bonus thing is inconsequential numerically, politically it's big. I'd guess that it has rendered it impossible for AIG to come back and get any more money if they need it, so they better be as good as they think they are.

[TJ]

BTW, what is a "killed virus" outrage?

I understood it as analogous to a vaccine. You vaccinate people with killed flu virus. They only get a little sick. Then when the real live virus comes around it doesn't kill them.

In other words, let's get everyone angry at a limited number of idiot AIG executives so the miilion man marches on Wall Street don't start.

[wonkie]

The outrage would be helpful it it meant greater scrutimy and more oversight for bailouts in the future. However, I think it is more likely that the outrage will be used by Republicans and moderate Dems to vote against bailouts at all. And to vote against money for health reform and the infrastructure changes necessary to shift the eoconomy so that we can deal with the effects of global warming.

Obama is looking down the road. Repbulicans, as usual, are looking at their own wallets and not thinking any farther than "What's in it for me right now?" Dems like Ben Nelson and Evan Bayh are either cashing in on the flow of lobbyist money or are misunderstanding the needs of their own districts--thinking that they can stay in office by being Republican lite when Repubican ideas are as worthless in kansas and Indiana as they are in blue states.

So ...

This is why I've started reading and writing fantasy literature.

[A.J.]

Speaking of the idea that the media's shrieking over bonuses could provide cover for unpopular but economically useful maneuvers, did anyone notice yesterday that the Federal Reserve was buying up $750B in toxic assets?

[ScentOfViolets]

It's extremely intellectually and morally lazy to tar every person in finance or in a bailed-out company as a scumbag whose greed is only exceeded by their incompetence. It's nice to tell yourself that perhaps, implying that they are only more successful financially than most of us because of some moral deficiency, but it has very little relation to reality and it's certainly counter-productive to addressing the problems we now face.

Posted by: byrningman

Funny that, but it seems that those high wages were justified prior to this current mess as being only the correct due to talented, hardworking people. In the aftermath, there is a substantial amount of evidence that this is not so. Evidence that even you cannot ignore. You also seem to mischaracterize the common view: the people you inaccurately depict are what most would more properly call 'skeptical'.

And - this is where you get it completely wrong - you have to justify your position, not vice versa. Where is your evidence, as opposed to your flat, Heinleinesque assertions that these people really were just that good. Bear in mind it's got to be more convincing than what we've seen play out over the last couple of years.

[ScentOfViolets]

So now all I'm left with is trying to influence the few remaining people who are willing to listen to me. Not sure if there are any of them left in these parts or not, but hey at least I'm trying. Il faut cultiver notre jardin and all that.

Posted by: ThatLeftTurnInABQ

It seems to me that most people are willing to listen. It's just that you're not trying very hard.

[Johnny Canuck]

KCinDC "Johnny, I don't understand how, if it's impossibly difficult to find competent people to take over positions at AIG, you're so confident that Liddy has been able to replace all the bad/stupid apples."

It wasn't that it was difficult to find competent people, but there would be a learning curve. The concern he expressed was that during the days/weeks new people move up learn curve bad things could happen. Risks need to be assessed each day. Why take the risk, said Liddy. I think that makes sense. The real problem in this whole mess is people who have taken excessive risk. I'd prefer to go with someone I thought was going to minimize risk.

Liddy said the division of AIG FP that had the bad/stupid apples has virtually wound down that business-(in fact the mistakes were cds contracts entered into in 2005/6;no new cds contracts entered since that time. no more credit default swaps, no more chance to screw up. the derivatives division -which he said would take 2-3 years to wind down was apparently not the problem- not where the losses occurred. So keep on the people he has faith in- if they screw up blame Liddy. If you throw all these people out and start over, great chance to mess up and then who is to blame?

[TJ]

I'm afraid my time machine is in the shop for repairs this week, so I'll have to pass on going back and changing construction designs which Citi begun planning last June and submitted in September. Bad luck, that.

How do I know you aren't planning to travel back in time and become Pandit??

[efgoldman]

@ John Thullen 837 am

I long for the days when we can pick out a target, albeit a mythical, stereotypical one, say big, fat, black welfare mothers driving big fat black Cadillacs picking up big fat black government checks to buy Maker's Mark and big fat steaks and scapegoat the heck out of them...

I'm not sure - it was after all 25+ years ago - but weren't the mythical cadillacs always pink, or white?

[Nate]

What I'm not clear on is why we should trust the people who were involved in creating the mess to act in good faith and help unwind the mess they made. They've already made their F-you money, the only reason they have to stay is the public good (yeah right), the corporate good (yeah, right), or that they figure they can extort more massive bonuses if they make it seem they're "indespensible".

And I'm not sure why we should take the CEO's word, or anybody in the company's word, about what kind of shape the company is in and who was responsible for what went wrong. Everyone in the company has a vested interest in blaming "those other guys", who already left. And they all have the same interest in making the company seem healthier. Have independent auditors been over AIG's books? If not, why not? We own them now, one of the standard things new owners do is bring in outside auditors to check the books.

[hilzoy]

Johnny C: I said earlier that despite having watched Liddy's testimony, it was not clear to me that what he said implied that all the people who were responsible had left, just that the top people had. Here's an article from the WSJ that suggests that even that is not true:

"Some top employees of American International Group Inc.'s disgraced Financial Products group have agreed to return hefty retention bonuses under mounting public outrage over $165 million in payouts to a unit that brought the insurer to its knees.

Among them was Douglas Poling, who received the richest payment of more than $6.4 million, according to a person familiar with the matter. Mr. Poling, the 48-year-old son of a former chief executive of Ford Motor Co., is an executive vice president with responsibility for energy and infrastructure investments. (...)

Among executives who served under Mr. Cassano and retain high-profile roles at the financial-products company are Mr. Poling, Mr. Cassano's former top deputy, as well as James Haas and Jon Liebergall, former employees say. The offices of Messrs. Poling, Haas and Liebergall referred calls to AIG's press office."

Joseph Cassano was the guy who ran AIG-FP and was more responsible than anyone for what happened, as best I can tell. He left early on. But his top deputy is the person who got the largest bonus. I find it hard to imagine that that guy was not in any way responsible.

For what it's worth, I liked Liddy. I think he's been put in a really bad situation by the actions of others, and I thought he acquitted himself very well. But I don't think this means that I have to take what seemed to me to be fairly vague statements and construe them in the most expansive possible way.

[KCinDC]

The real problem in this whole mess is people who have taken excessive risk. I'd prefer to go with someone I thought was going to minimize risk.

My problem is that it seems to me that Wall Street has for ages been a place that rewards people for taking excessive risk, so everyone involved has been ingrained with that and accepts that as the way the system is supposed to work. It's therefore hard to trust that any of these guys are going to minimize risk.

Your argument seems to be that everything was fine on Wall Street until this handful of people came along with their bad/stupid CDSs, and if we just get rid of them we can go back to things as they were and it'll all be booming again. I don't buy that.

[russell]

But I don't think this means that I have to take what seemed to me to be fairly vague statements and construe them in the most expansive possible way.

"Trust but verify" seems appropriate.

[Model 62]

But I don't think this means that I have to take what seemed to me to be fairly vague statements and construe them in the most expansive possible way.

Sensible.

Joseph Cassano was the guy who ran AIG-FP and was more responsible than anyone for what happened, as best I can tell. He left early on. But his top deputy is the person who got the largest bonus. I find it hard to imagine that that guy was not in any way responsible.

But it's okay to take the vaguest understanding of a firm's organizational structure and construe them in the most restrictive way.

[Johnny Canuck]

Hilzoy: thank you for the WSJ cite, but with respect, it does not support your contention. In the 4th last paragraph it says, speaking of the 3 top holdovers "Like Mr. Poling, they didn't work in the credit-derivatives unit."

You are assuming AIG FP equals bad apples
As I understood Mr. Liddy, bad apples confined to credit default swap unit, as distinct from derivative unit, and a third unit which name I don't remember.

These people gone. The names cited by WSJ not in credit default swap unit. I'm not saying there might not be, but the people named in the article not in that unit.

[ScentOfViolets]

The problem with this formulation is that the only way AIG executives get a pass is not if we fail to construe the organizational structures in the restrictive way, but only if we construe them in the most expansive possible way.

Iow, by excluding the middle ground (deliberately?), you're making it look like a he said/she said sort of dispute. In point of fact, by including the middle ground, one party, the folks promoting AIG, look a lot worse. The other party, the people critical of AIG, look a lot better.

[hilzoy]

Johnny C: no, I'm assuming that the top deputy for the person most responsible for the crisis also bears some responsibility for it. This does not seem like a very odd assumption to me.

[bedtimeforbonzo]

Johnny C: You are not alone. I watched the whole testimony (it coincided on my day off) and I also found Liddy credible and impressive.

After a while, I was on his side -- after all, he is trying to fix a mess that was none of his doing, along the lines of a public servant.

If the Congress folk wanted sober and thorough answers, it seemed like they had the right guy to gleam some wisdom on this whole mess.

If they wanted to put on a show of outrage for the voters back home, they needed to question Cassano. Come to think of it, why aren't they questioning Cassano?

And yet, with all that said, Johnny, I still don't think we can take everything Liddy said as gospel until all the layers of this thing are peeled away.

Also, I think the Fed and Treasury have some explaining to do after Liddy's testimony -- either to confirm it, or give their version. Let's hear it.

[Anarch]

I'm a slightly to the right of centre Canadian with degrees in political science and law. That means in US terms I would be far to the left. I concluded Nixon was Watergate guilty on February 3, 1973.

And I'm an American who was considered to be left-wing in the Commonwealth (Australia and Hong Kong, primarily) -- which means that I sometimes have troubling explaining why I'm not an actual socialist here in the US. What's your point?

Or, if you'd prefer to be less snarkily combative: I explicitly said that I didn't necessarily have an issue with your substance, just that your style was making you sound like a shill. Personally I, like many others here, think you're only guilty (if "guilt" be the right word at all) of being too ready to believe Liddy at face value, and too willing to credit those retained at AIG with the sort of acumen that can't be replaced at half the cost with people of twice the integrity. I could well be wrong in this -- god knows I've been wrong about this stuff before -- but you're not doing a terribly good job of convincing me, or anyone else it seems, that's the case.

[And TLTIA: I try never to speak for anyone else. Why burden them with my sins? :)]

[Johnny Canuck]

KCinDC: "Your argument seems to be that everything was fine on Wall Street until this handful of people came along with their bad/stupid CDSs",

I'm sorry I haven't made myself clear. I am not trying to defend Wall Street, but only AIG which, as I understand, it was a reputable insurance company apart from playing financial games. Liddy is getting AIG out of risky financial products and back to insurance.

My impression, perhaps incorrect is that Liddy was Government's man - quasi receiver- sent in last September to clean up mess- and sell off whatever assets necessary to pay off Treasury and Federal Reserve.

Rather than focusing on the big banks and mortgage lenders who are the real scum, attention has been diverted to the one entity that sounds as if it has a plan in place to get taxpayers their money back.

Liddy was not defending size of bonuses- they were in place before he took office; He testified Federal Reserve reps have been involved in all the decisions. His focus is on winding up the AIG FP business with the least risk. Now blind (and I think misguided) rage is making his job much more difficult. If AIG put into bankruptcy a receiver appointed to realize the asset would probably be paying out big bucks to get employees to stick around until assets realized. Probably amount less but not that much less. What sets everyone off - me initially- is the word bonus- which says good performance. Of course they don't deserve bonuses, but if someone is going to wind up $1.6 trillion of anything, I bet they are going to want big compensation for doing it.

[TJ]

I watched the whole testimony (it coincided on my day off) and I also found Liddy credible and impressive.

Some actual numbers would have been nice. Like, since you say that you have a $1.6 trillion book that is going to be reduced in the next 3 years to a paltry $3 billion, would you mind explaining how the first $100 billion you spent worked out? What did that start out as, that you worked it down to $100 billion? Let's have some past performance, please.

Not the the Congressmen's questions were worth much, either.

[bedtimeforbonzo]

"Not the the Congressmen's questions were worth much, either."

Glad you followed up with that last part, TJ.

For all we know, Liddy may have had some of these numbers. But the Representatives seemed more intent on pontificating and fueling outrage than truly getting to the bottom of things.

Perhaps, as someone said here or on one of the related posts, it's time to get Eric Holder on the job.

[Tony P.]

So here we are: serious, articulate commenters are telling us that since AIG paid millions to people who dug a very deep hole, it has no choice but to pay millions to other people to fill it up again. Okay, I get that.

Hell, I'd even endorse the Saturday Night Live solution: Tim Geithner announces that his plan to solve the financial crisis is to put $460 billion into a special fund, to be paid to the first person who comes up with a solution to the financial crisis.

But I do hope the current popular rage will leave a residue in the national psyche. The prevailing "wisdom" for decades has been that the Masters of the Universe deserve a percentage of the wealth they "create" -- and marginal tax rates no higher than those paid by your typical anesthesiologist. We need to build up resistance to this mental virus. The "killed virus" of outrage towards the AIG bonuses might, possibly, promote the growth of anti-bodies to the real virus.

For instance, the idea of taxing the bonuses of individuals at taxpayer-supported companies up to 90% could prove to be a tiny, timid first step toward a tax structure that is progressive all the way up. Such an outcome would be fine by me.

--TP

[Anarch]

byrningman: It's extremely intellectually and morally lazy to tar every person in finance or in a bailed-out company as a scumbag whose greed is only exceeded by their incompetence.

Speaking only for myself -- see? (: -- I don't believe that every such person is a scumbag. I do believe, because I knew such people before they disappeared into the belly of the beast, that many such people at AIG and other key institutions -- Merrill, in particular, hired a number of my classmates IIRC -- were criminally incautious at best in their deploying of financial and mathematical arcana in pursuit of, for lack of a better word, greed.

That AIG employed good, honest people is, to me, not in question. That they employed a mercenary group of assholes who found a way to game the system is also not in question. That they were part of a much, much larger panoply of corruption and rot that spread through government, banking, finance and whatever the hell it was that AIGFP actually did is also not in question. I don't think it's lazy to say that the system itself was corrupted and corruptive -- especially when you watch it corrupt your friends in real time, thank you very much -- and that anyone involved in those dealings was likely compromised.

Which brings me to my larger point, and the one thing that has me truly worried about these bonuses. We have an alarming tendency in this country to let certain classes of criminals go scot-free, untrammeled by any punishment or even meaningful rebuke. I typically rail against the sickeningly dysfunctional notion of "justice" we Americans have when it comes to foreign affairs, but I'm equally disgusted, and terrified, by our cheery disregard for white collar criminals as well.* Unless we start stanching the flow by imposing real, material sanctions against the people who got us into this mess -- against the people who profited from this mess, while the rest of the world lost -- it's going to happen again. Why not? What does the next generation of assholes have to lose? So they're going to receive harsh words in editorials and Sternly Worded Letters from Congress. Who gives a f***? You think any of them are really hurting right now, the way that everyone else is?

And if you happened to be in the next division over, fully aware that something queer had to be going on behind those doors, but keeping your head down like a good corporate drone... well hell, you can not only keep your job, we'll give you a massive bonus and beg you to stay on just in case you happen to know anything about that which you clearly know nothing -- because if you did, why, you'd be so morally compromised that we couldn't give you that bonus! So the fact that you receive the bonus is proof that you're both ignorant and worthy, which is, to quote Spike, ...neat.

This may yet be the right thing to do for the country and the world. That doesn't make it taste any better, and it does nothing to prevent it from happening in future.

* To be completely clear about this, since I know that J Michael Neal will understandably object: there are certain spheres where I do not consider the fact that something had a legal gloss as mitigating the criminality of the actions, especially if those committing the crimes suborn the lawmakers into legalizing the act. Torture is one; the kind of financial rape that we witnessed, and continue to witness, is another.

[Yet another reason I could never make it as a lawyer...]

[ScentOfViolets]

Right, TJ. I think that certain people are refusing to recognize that the burden-of-proof arguments are not equal. Anybody taking up the cudgels for AIG has a long uphill battle, wherein they must extensively cite, document and annotate every assertion they make. Those who dislike what's happening at AIG?

Not so much.

Some people may not like this, whine that it's not fair, obfuscate, accuse, etc. But that's too bad. It's just the way it is. If you want to say that Liddy eats puppies for breakfast, I'm inclined not to question you. If Liddy says he's going to reduce $1.3 trillion to just $3 billion in three years, well, he's better come armed with reams of corroboration.

[Anarch]

If Liddy says he's going to reduce $1.3 trillion to just $3 billion in three years, well, he's better come armed with reams of corroboration.

Or we could go the other way entirely...

[TJ]

For all we know, Liddy may have had some of these numbers. But the Representatives seemed more intent on pontificating and fueling outrage than truly getting to the bottom of things.

What I'm afraid of is that he did have those numbers, and they were something like $200 billion worked down to $100 billion. Which means we all are well and truly screwed, and everybody up in DC already knows it.

[ThatLeftTurnInABQ]

It seems to me that most people are willing to listen. It's just that you're not trying very hard.

What is it that you are looking for, which would be "trying harder"?

My free time for posting on blogs is not unlimited, but I'm willing to make a good faith effort if you are looking for something specific in the way of either evidence supporting unverified statements (e.g. I can post more links to what IMHO is fairly high quality analysis and informed opinion elsewhere in blogistan), or I can attempt to flesh out a more detailed chain of logic in support of a prior argument. Without knowing which specific statements of mine you object to or find inadequate it is kind of hard to know where to start.

What I don't have to offer is easy or simple answers and I'm deeply skeptical of anybody who claims to have them. This is because the folks whose analysis and opinion I've been reading on this topic (since roughly 2004/2005) who stand out as making the most sense to me, being the most accurate in their evidentiary claims, and having been the most prescient in speculating on what might happen, for the most part those folks emphasize the complexity of our financial system, the degree to which its parts are tightly coupled to one another, the difficulty of trying to deal with any one part of it in isolation, and the sensitivity of this system to small changes.

To me, from a systems analysis viewpoint all that paints a picture of a potentially chaotic system which from the standpoint of public policy making needs to be treated with great caution and with particular care to pay attention to all the little details, until such time as we can dismantle some of the architectural features in it which produce the characteristics I just mentioned.

I seldom go into great detail in my comments here because these factors have been extensively discussed and summarized by better thinkers and writers than I, on the econ blogs and elsewhere. I’ve posted links to some of them in many of my prior comments. If my brief comments here aren’t good enough, my first line of defense is to say: go read the econ blogs, because I can’t really do justice to all of the wealth of information which is out there, nor would it be appropriate to dump all of that into what is more of a political blog here – a certain amount of shorthand and assumption of shared knowledge is needed to keep my arguments here concise enough to be readable (a necessary but not sufficient condition for the latter, I’m afraid).

[ThatLeftTurnInABQ]

My problem is that it seems to me that Wall Street has for ages been a place that rewards people for taking excessive risk, so everyone involved has been ingrained with that and accepts that as the way the system is supposed to work. It's therefore hard to trust that any of these guys are going to minimize risk.

This is an important point, and one that's been hashed over at Yves's blog extensively. The culture within the investment banks and hedge funds has to be rebuilt, not only with regard to ethics, empathy and moral values, but also on a broader intellectual basis. Systemic risk came in part from the fact that the quants and their managers had an extremely narrow mindset and were blind to anything outside of their very small world. Giving that much power to people who were so narrow was a disaster waiting to happen. It is as if nuclear power plants were designed by people who neither knew nor cared about anything other than the thermodynamics of pressurized steam boilers.

[TJ]

Of course they don't deserve bonuses, but if someone is going to wind up $1.6 trillion of anything, I bet they are going to want big compensation for doing it.

GDP of Canada = $1.564 trillion

How much does the prime Minister make?

[byrningman]

I feel like the non-pitchfork waving posters (I use the term in jest) on this thread are getting a lot of straw men thrown at them, even accusations of being apologists.

I don't think anyone here is arguing that AIG is a wonderfully run company and everybody should get massive bonuses. There are several people, myself at any rate, arguing instead that relying for the most part on AIG's existing personnel is the least bad option, in the immediate term at least.

Arguing out that bankers are scumbags, or that seemingly-undeserving people are doing well out of all this, doesn't address the logical merits of this argument.

This is a crisis, a very big one. A crisis response is inherently flawed, and we're not going to help the big picture if we insist on weeding out all the bad people and wagging our fingers at them, and weeding out all the good people and patting them on the head.

Scumbags will be smiling all the way to the bank - accept it and move on.

[ericblair]

The culture within the investment banks and hedge funds has to be rebuilt, not only with regard to ethics, empathy and moral values, but also on a broader intellectual basis. Systemic risk came in part from the fact that the quants and their managers had an extremely narrow mindset and were blind to anything outside of their very small world.

Politically, what this boils down to is that the financial industry has a systemic problem where it cannot manage risk itself. We've also seen that the major players in it will attempt to use all the tools at their disposal (like armies of lobbyists) to subvert external attempts to manage their risk. This is a pretty big problem.

The first thing you'd want to do in such a situation is get rid of such a dangerous entity. However, we obviously need some sort of financial industry. Therefore, we need to design a very strong, tamper-resistant box to control an industry that will actively resist such control.

This is where the AIG bonus scandal comes in handy. It's been pretty apparent that, politically, the financial industry has gotten far more deference than it has deserved over the last decade or so. Channeling the popular anger over the AIG bonuses to convince the governments and society that this industry cannot be trusted to operate for the public good is a feature, not a bug.

It's these kinds of cases that can lead to reform. Performing the usual American acts of blaming a few bad apples and asking "whocoodanode" won't.

[byrningman]

By the way, I don't see how the bankers who got it wrong are guilty of a different sin than "regular folk" who took out mortgages and loans they couldn't realistically pay back. Shall we insist on meting out punishment to them also? After all, if everybody was able to pay their mortgage, we'd have no bad assets in the financial markets in the first place.

Oh that's right, I remembered. The were FORCED to take the money by those evil predatorial banks, who literally put a gun to their heads and forced them to take money they had not earned.

Just maybe the reality is that lots of people made honest mistakes, home buyers and bankers alike, because everybody else was doing the same thing and it changed everybody's risk-assessment points of reference (and also, of course, there were bankers and home owners who were excessively and recklessly greedy).

Ultimately, home owners who got it wrong should still have homes, and bankers who got it wrong are still probably pretty useful people for running a bank.

[Johnny Canuck]

J:How much does the prime Minister make?
Cdn $300,000.

Our economy is roughly 1/10 US.
there are 5 large Canadian banks.I think all CEOs took a haircut:here is story about the CEO for the largest:
Royal Bank of Canada's chief executive plans to forfeit nearly C$5 million ($4 million) in compensation as the country's biggest bank looks to weather the global financial crisis. Gord Nixon will forgo his 2008 variable compensation package, made up of deferred share units and 10-year stock options, totaling C$4.95 million. It is part of his mid- and long-term compensation package at RBC.Nixon had a base salary of C$1.4 million in 2008. He received a cash bonus of C$2.4 million in December, part of his short-term incentive package and down 40 percent from the prior year. Nixon said he will use the after-tax proceeds to buy Royal shares.

[jrudkis]

By the way, I don't see how the bankers who got it wrong are guilty of a different sin than "regular folk" who took out mortgages and loans they couldn't realistically pay back.

Regular folk are generally not experts in finance or mortgages. Bankers are.

One is a sin of ignorance, the other is a sin of purposeful risk taking for profit, that swamped the boat for the rest of us. The bankers knew this could happen: there were Black Swan Hedge funds just for this type of crisis. There was certainly no lack of warnings (though admittedly no consensus). And the bankers are paid to manage risk, and failed miserably at it.

So homeowners and bankers both may have responsibility, but those with the most responsibility also happen to be those that profited the most.

[byrningman]

And in they're ignorance, regular folk should be even more cautious about engaging in financial commitments. You're right, they ARE even worse than bankers.

[Johnny Canuck]

byrningman: I believe I qualify as one of your non-pitchfork waving posters. I'm trying to figure out what is the best metaphor to capture the AIG scenario. Is it telling the firemen when they are halfway through putting out the fire that you've changed your mind about paying them? And the pitchfork wavers, are they like people on the Titanic wanting to try the captain rather than get into the lifeboats?

[jrudkis]

And in they're ignorance, regular folk should be even more cautious about engaging in financial commitments. You're right, they ARE even worse than bankers.

Haha.

Though the homeowners are not generally fiduciaries for others, nor generally being paid to know how to buy a house: they were consumers of a house, not someone professing special knowledge that they should be paid for.

[russell]

I don't see how the bankers who got it wrong are guilty of a different sin than "regular folk" who took out mortgages and loans they couldn't realistically pay back.

First, I'll confine my reply to folks who actually took out mortgages that were irresponsible given what their income or other financial situation was at the time.

That excludes people who are losing their houses because, frex, they've lost their jobs.

Within that limited context, I note the following distinction:

Regular folks -- put their own, personal money and credit on the line, and will pay for their irresponsibility by going, personally, bankrupt and/or by losing their homes.

Bankers -- put other people's money at risk. Their worst case is having to find another job when their company blows up.

Once upon a time, investment bankers became investment bankers by putting their own capital at risk. If that's your game, do whatever the hell you want to do within the limit of the law.

Nowadays, investment banks are publicly traded companies, and it's other people's money that the cowboys are gambling with.

Different story.

If they have a solid contract, pay the bonuses. Then, put the industry on a leash.

It's. Not. Their. Money.

[Nate]

Isn't the "expertise" of bankers what they're PAID for?

So if someone is looking at buying a house, and their real estate agent, investment guy, bankers, and all the talking heads on the teevee are telling them "Houses will go up forever! Profit profit profit! There's no way this can fail! Buy bigger! It's the American Way! Nothing can go wrong!", human psychology says it's going to be hard for most people to swim against the stream. Especially when all the "geniuses" are telling them this. And when what they're buying is something that a) somewhere to live, and b) their biggest single "investment" in terms of money. Especially when not all of these people are always talking heads on the teevee. Most people have pretty long-standing relationships with their banks, including possibly personally knowing them. And putting enough trust in them to give them their money. Saying "Dude, you're crazy" and not buying the biggest/fanciest/bestest house they could afford is hard to do. It's bubble thinking.

And what made it worse, was it worked for years. So that was one of the things for the bankers in general, they could make lots of money playing this game. So if you don't play the game, you don't make as much money. Even if you know the music's going to stop eventually, the plan became just to not be the one holding the bag.

Which is what (I think) CDSes and such were about (besides the ones that were likely outright fraud), trying to find some other sucker to hold the bag.

Unfortunately, they made a bag ten times bigger than all the suckers that were out there, so EVERYBODY ended up holding it. Even them.

[ThatLeftTurnInABQ]

Politically, what this boils down to is that the financial industry has a systemic problem where it cannot manage risk itself. We've also seen that the major players in it will attempt to use all the tools at their disposal (like armies of lobbyists) to subvert external attempts to manage their risk. This is a pretty big problem.

Bullseye.

That is why we (used to) have regulations and regulators. Perhaps we should call them risk managers rather than regulators, to get the point across.

This costs money, both directly via funding costs, and indirectly by in the short run making the economy less efficient (all those arbitrage opportunities left unused). That is the price we must pay for preventing episodic (and epic) disasters like the GD and today's GD-lite version.

The first thing you'd want to do in such a situation is get rid of such a dangerous entity. However, we obviously need some sort of financial industry. Therefore, we need to design a very strong, tamper-resistant box to control an industry that will actively resist such control.

There are 2 parts to a solution here.

1 - Limit size. Too big too fail = too big. Sheila Blair gets it.

2 - Limit coupling. Build regulatory firewalls between functional sectors (like Glass-Steagall) so as to chop the FIRE economy up into smaller pieces and do not allow firms to create counterparty relationships with each other which cross those boundaries. This is really important because without it you don't get any real benefits from step 1 (limiting firm size).

The effective mass of a financial entity which we need to worry about is a firm and all of its counterparties, as a collective entity (which is why AIG is such a nightmare today). That is what we have to limit the size of, and that means restricting the scale and scope of counterparty relationship which are permitted.

One of the scary things about the CDS mess we have now is that since these are private contracts (and neither party is required to own the insured asset), they are potentially invisible until such time as we get them brokered on a public exchange and made a matter of record. This means that policy makers literally have no way of knowing for certain how broad or deep the connections are between a failing firm and others which may have hedged against it via CDS (and the issuers of those CDS), until they start coming out of the woodwork at the time of failure.

That is a recipe for a profoundly unstable system, and one of the aims of regulatory reform should be banning these invisible relationships that tie multiple firms together into one big knot without anybody in a position of public responsibility even knowing about it.

[publius]

byr - I think the blame on housing buyers depends to some extent on your position on information asymmetries as market failures. Having at least gone through the motions of putting in an offer (we ultimately withdrew b/c of undisclosed rottenness), it's a complicated scary world.

Plus, you're a one-time player pitted against institutional players that don't necessarily have your best intereests at heart (eg, mortgage brokers).

This is sort of a different issue -- but I think the information asymmetry is one reason I tend to be less mad at buyers and more mad at the institutional players.

[byrningman]

Russell, I'm sorry but your argument seems to me like it just boils down to condemning bankers because they earn lots of money. As I've stated before, I don't remotely believe that the poor have some kind of innate moral high ground, as a general principle.

Nate, it's certainly true that people who took out mortgages were exposed to lots of bad advice, my point is that bankers faced similar pressures. You forget that there were a great many esteemed economists promising that the new financial mechanisms were inherently less risky, that China's growth changed the underlying economic paradigms, that greater interdependence made the system more stable, not less stable etc. More pressingly, if all your competitors are doing it, you're going to be out of a job soon if you can't match their returns -- it's a competitive industry. It's not a nice feeling being the only one not buying a big house with a big mortgage; it's also not nice p*ssing in the wind as the only banker taking a principled stand on CDSes, watching the system go to pot anyway and making a lot less money in the process.

Gee, who'd have thought it, bankers are people too, and economic behaviour is strongly influenced by social factors.

[gwangung]

That is a recipe for a profoundly unstable system, and one of the aims of regulatory reform should be banning these invisible relationships that tie multiple firms together into one big knot without anybody in a position of public responsibility even knowing about it.

And wouldn't that improve transactions in the market as well?

[ThatLeftTurnInABQ]

BTW, if you haven't seen the "Shock and Awe" post by Yves Smith, go read it. This is an example of what I meant by keeping our eyes on the prize.

The short version: the Fed is going to have to crank up the printing press, because from a close look at the upcoming calendar of Treasury auctions and recent changes in the balance of trade (China's export surplus is shrinking), it looks like Geithner and co. may not be able to raise all of the money we're already committed to spending.

Back in January during the debates over the size of the stimulus bill, I predicted that something like this might happen, that we might soon bump up against limits on our ability to decifit finance our macro-economic policy. If this proves out, we will either have to raise taxes or ride it out as best we can with what has already been funded.

[byrningman]

Mr Canuck - I too have been trying to come up with a useful metaphor. I've been thinking of something along the lines of a mad scientist's fusion reactor: for a while it seems great, and we plug out cities in, but then it goes wonky, and in danger of blowing up. Sure, it's kinda the mad scientist's fault for getting it wrong in the first place, but you still need the crazy loon to help you fix it, because no one else understands it as intimately. You certainly don't have time to break in a bunch of new scientists while the dials redline and everything starts to glow.

[byrningman]

I feel like this is a fairly typical article on Liddy's hearing, and one which indicates how valuable the existing staff really are if we have any hope of salvaging something from AIG.

He's come in as an outside to right the ship, working for $1 salary, yet even so some of the highest politicians in the land are barging past each other to grandstand dressing him down and humiliating him.

Secondly, in his testimony, in which he went out of his way to condemn the way the bonuses were handled, he does make clear that he can't run the bank if you deprive him of its key staff.

Thirdly, many people think he's not up to the job, a judgment lent some weight by the fact that AIG's gone back to government well what, twice now I think, despite his prognostications to the contrary.

So we've shown the whole world that the last place you'd want to work is AIG, and the one major new hire we've brought in might not be up to the job and admits he depends on the existing crew. Does anyone still not think $168 million is money well spent if it helps secure hundreds of billions of dollars?

[ericblair]

Is it telling the firemen when they are halfway through putting out the fire that you've changed your mind about paying them? And the pitchfork wavers, are they like people on the Titanic wanting to try the captain rather than get into the lifeboats?

Perhaps it's like telling the arsonist that we don't want him putting out the fire, we'll get someone else. And maybe we'll fire the captain who turned off the sonar and sent us ahead full into the icebergs and get another officer to manage the rescue.

And what happens to a firefighter or ship captain who is involved in a serious accident? They're relieved of duty pending an investigation. The benefit of their knowledge of the situation isn't worth the risk of more incompetence or coverup of malfeasance.

These people were not innocent, honest managers who got caught in an unpredictable crisis. These were people who stripped all the safety equipment off the financial machinery, drove it at full speed and smashed it into heavy traffic. I don't want them around machinery for a while.

[Sapient]

If they have a solid contract, pay the bonuses. Then, put the industry on a leash.

Absolutely. In the future, the industry needs to be put on a leash with tight regulation. For now, the real people who are to blame are those (voters?) who supported the Republican Enron Free Market Deregulation culture. Corporations are set up for one purpose and one purpose only: to make money. They'll do anything apparently lawful to do that. Some will test the boundaries of the law or break it. That's why it's essential that they be held to legal and regulatory standards that benefit society, because they're not going to do it on their own. It's not that they're evil - they're amoral. Public policy has to be done by government in the form of laws and regulations (and oversight and enforcement).

[Nate]

byrningman:

Yes, I'm sure it was difficult for the bankers doing this, and the mortgage agents, and the real estate agents, and all the other institutional operators. I said as much.

BUT. They are involved in this EVERY DAY. They are paid to know these things. Many of them were paid ABSURD amounts of money because they were supposed to be so good at it. They were paid to manage risk, to consider these things, short-term and long term.

They weren't. They didn't. They got caught up in the bubble and sold it to the rest of us, instead of doing their jobs. There was nobody around to be the adult. The entire system is broken, which is why we need outside regulators, with power, who aren't pciked or paid by the bankers. Because while the for-profit traded institutions are required to get the most moolah for their shareholders (which they didn't), we can set up incentives for the outside force to look longer term.

But none of that excuses the people who were PAID to know better from the way they behaved.

[byrningman]

They are paid to know these things. Many of them were paid ABSURD amounts of money because they were supposed to be so good at it. They were paid to manage risk, to consider these things, short-term and long term.

Not true. Nearly every in finance is paid simply to make money, and they did, lots and lots and lots of it. The risk assessment people, in contrast, are paid to consider long-term risk, and it seems like many have been ignored.

But to think that the vast majority of bankers have any incentive other than to make money is terribly misguided, and that's why I feel like the regulators and the Clinton and Bush 2 administrations have a lot to answer for.

[Johnny Canuck]

byrningman:" Does anyone still not think $168 million is money well spent if it helps secure hundreds of billions of dollars?"

I think i would be more nuanced. I don't think even Liddy thought it was money well spent, but fighting to reduce or eliminate it, jeopardizes the effort to wind down the portfolio at minimum cost.

[Nate]

The regulators have plenty to answer for. And the political movement that said "the Magic of the Free Market will make ponies for everybody if we get out of its way!"

But when you're paid to make money, and spectacularly lose money, that's not doing what you're paid to do. When you're paid to make money, and push fancy mortgage "products" on people because you get a fatter bonus, but the rate will spike higher than they can pay? You're not doing what you were paid to do.

When you're paid to make money, but you do it by stripping out all the safety gear (to borrow the metaphor), you're not doing what you're paid to do. When you're paid to make money, and sacrifice your company's long-term future and profits, you're not doing what you are paid to do.

These people did not do what they were paid to do, except in the most short-term sense. And that's where the problem was. And that's where the ridonkulous compensation comes into play. Who cares how the company's going to do in five years, when you can make $30 million in one? You don't care, you can cash out and go home.

So no, these people didn't do what they were paid to do, which was to make money and improve the position of the company. That much is obvious now. But it's not enough to just say these people sucked, we need to set things up so not being greedy short-term spleenweasels is the more rewarding way to act.

Which includes things like prosecuting the people who did this, and taking away the money they "earned" setting things up so it'd all explode. And keeping it from happening again.

[Johnny Canuck]

ericblair: "Perhaps it's like telling the arsonist that we don't want him putting out the fire, we'll get someone else. And maybe we'll fire the captain who turned off the sonar and sent us ahead full into the icebergs and get another officer to manage the rescue."

If you are talking about AIG, your comments are unfair the arsonists- CEO and credit swap default instruments set the fire in 2005. It smoldered for years until blazing up. The arsonists are gone. Liddy arrived september 2008. You did fire the captain; and the next captain; this is a new guy who wasn't aboard when the ship headed towards and hit the iceberg.

[ThatLeftTurnInABQ]

What Nate said.

Even if (at best) the quants don't bear a strong burden of responsibility (on the grounds that they were too narrow minded and ignorant to realise the consequences of their actions), their managers do. Especially at the highest level. At bare minimum they were grossly negligent in their fiduciary duties to shareholders, and that isn't even taking into account their broader responsibilities simply as human beings and members of society. You don't get to play with matches in the fireworks factory and then say: all the kids were doing it, and anyway hoocoodanode?

But I favor sorting this out in the courts. Let the DOJ and shareholder lawsuits give the malefactors what they have coming, and leave Treasury to the business of trying to rescue the economy.

And that's where the ridonkulous compensation comes into play

I am so stealing that word!

[ericblair]

If you are talking about AIG, your comments are unfair the arsonists- CEO and credit swap default instruments set the fire in 2005. It smoldered for years until blazing up. The arsonists are gone. Liddy arrived september 2008. You did fire the captain; and the next captain; this is a new guy who wasn't aboard when the ship headed towards and hit the iceberg.

I didn't say one word about Liddy. AIG the corporation is still there. Most of AIGFP staff are still there. No external investigations have been completed. The institution and staff still have quite an interest in avoiding civil and criminal penalties for AIG's activites from the last couple of years. The captain isn't the CEO here, it's AIGFP.

As far as I saw, Liddy went up the Hill and got yelled at. It's part of the job, he's a big boy. Asking AIGFP employees to give up their bonuses means he's ready to hang them out to dry. But you need a new broom to sweep clean, and just throwing up your hands and trusting AIGFP to fix the problem they had a big part in causing isn't going to cut it.

[Nell]

I was told years ago, and assume it's true, that bootlegging-gangster-turned-stock-swindler Joseph Kennedy was given the job of writing up the regulations for the newly created SEC in the 1930s.

Who should be the one(s) to write up the regulations that should have been put in place on CDSs and many other kinds of derivatives fifteen or twenty years ago?

Something that a dull clod member of the rabble like myself can see is that reserve requirements need to be raised and tightly enforced, with no fancy insurance or other instruments allowed to serving as a proxy for the actual M-O-N-E-Y held in reserve to meet obligations.

[russell]

Russell, I'm sorry but your argument seems to me like it just boils down to condemning bankers because they earn lots of money.

Then you need to read more closely.

I have no problem with wealthy people or with bankers. None whatsoever.

There is an obvious difference between folks who took on a greater mortgage obligation than they could afford, and folks who sold liabilities that their company could not cover.

The folks in trouble with their mortgages got in trouble with their *own credit*. They will themselves be *personally* bankrupt, and will lose their *own* houses.

The folks selling too much liability exposure were playing with *other people's money*. Not their money. Other people's money.

Do you know the old joke about the chicken, the pig, and a bacon and egg breakfast? The chicken is involved, but the pig is committed.

Folks selling too much liability are involved. Folks buying too much house are committed.

This is a simple, easy to understand difference. You said you didn't see one, so I pointed it out to you.

You can respond to it or not. I don't care. But don't try pinning class warfare BS on me because it ain't mine.

[russell]

The arsonists are gone.

Whether this is true or not is very, very unclear to me.

[Sapient]

Nate: "But when you're paid to make money, and spectacularly lose money, that's not doing what you're paid to do."

It really depends upon the time frame. If x is paid to make money in year 1 and does so, he's doing his job. Especially if money is made in year 1 and year 2. Then, if in year 3 something "unforeseeable" happens (even if it's reasonable to assume that it would happen eventually) is x to blame? If money was being accountant for properly, and risk was being assessed properly, and compensation was awarded properly, you might be able to figure out who was "doing their job". But when the system is broken, people think they're doing their job if on their quarterly report, they can say their deals were worth $XXX. It doesn't matter what the reports say in year 2010. Nobody cares about that in 2006. If you've ever worked for a corporation during budget time, this is instinctive. This is what has to be changed, not one guy's comp package.

[bedtimeforbonzo]

"Sheila Bair gets it."

Thanks for the Bair link, LeftTurn. She was the lone voice in the Bush Administration who got it, and she seems to be occupying that role in the Obama Admin as well.

Fwiw, I threw her name out there the other day as a replacement for Geithner, if he goes: It would be nice to have somebody in his position who "gets it."

Anarch: Thanks for the cheery news your link provided.

Just when you thought things couldn't get any worse . . .

[Bernard Yomtov]

Not true. Nearly every in finance is paid simply to make money, and they did, lots and lots and lots of it.

Sort of.

But the idea was that the social benefit of all that money-making, the justification, was risk-reduction, which translates into cheaper capital, etc. So the whole thing was supposed to, for example, reduce mortgage rates by reducing the risk to mortgage lenders.

It didn't work out so well.

[russell]

Nearly every in finance is paid simply to make money, and they did, lots and lots and lots of it.

Then the financial sector has lost sight of its reason for being, and requires a reminder.

[Guest]

So, do most of us have to be manipulated like this because we don't know or care about anything, or do we not know or care about anything because we're so relentlessly manipulated?

[OCSteve]

I’ve seen a few comments critiquing the obsessive focus on the AIG bonuses. The bonuses are, after all, a drop of a drop in the bucket of our overall costs. Better to focus on the bigger picture – whether to nationalize; etc.

Rush played out. This is the new distraction. It’s the old Clinton team at its best. When I b*tch about earmarks, what do you guys tell me? Drop in the bucket – not a big deal. Yet it empowers much of the corruption in the capital.

This is a legal and minor thing – approved by the President’s highly vetted (Ha!) team. The money is owed. Not paying it could cost a lot more. It should have had a 2 day news-cycle, but Obama and the Democrats are making it their focus.

OK then – get those folks to give it back or tax it at 90% and our economy will be just fine. Pweh! That was close!

[Tony P.]

Rush played out. This is the new distraction.

Distraction from what?

--TP

[byrningman]

From today's NYTimes:

The largest single bonus check, for $6.4 million, went to Douglas L. Poling, an executive vice president for energy and infrastructure investments. Mark Herr, an A.I.G. spokesman, said Mr. Poling had told him he was returning the bonus “because he thought it was the correct thing to do.”

Gerry Pasciucco, a former vice chairman of Morgan Stanley who was brought in by Mr. Liddy in November to wind down the financial products unit, said Mr. Poling had sold off roughly 80 percent of the unit’s assets. Mr. Pasciucco said the money from the sales would go to the government, which has handed more than $170 billion in bailout money to A.I.G. in the last six months.

“He’s done an outstanding job in winding down his investment books,” Mr. Pasciucco said. "He did it at the right time, and we’ve made money. We would be losing money today if we waited to sell some of these assets."

[Brett Bellmore]

"The arsonists are gone.

Whether this is true or not is very, very unclear to me."

The arsonists not only aren't gone, they're in charge of Congress and the White house. But they did a pretty good job of sending the angry mob after the guys cleaning up the ashes.