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March 19, 2009

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Liddy dropped a number during his testimony. $1.6 trillion of derivatives they're trying to unwind. I'm thinking new rule: when you write contracts that exceed 10% of GDP they're automatically void, on the grounds of national security. And the perpetrators don't get bonuses, they get a trip to Gitmo as terrorists.

Hilzoy: I usually find your posts thoughtful, (maybe because I usually agree with them). I listened to Liddy's testimony yesterday. I was amazed at how frequently Liddy would answer a question -correcting some factual misstatement- and then throughout the course of the afternoon other Congressmen would ask questions including the same misinformation.
there was one point where Liddy corrected Frank. CNN's news clip was of the uncorrected Frank without context. To my mind it was as if they had no interest in truth or fairness (something like Fox quoting Biden from September to imply the opposite of what he actually was saying).

I think it would be good if you informed your opinion by actually listening to Liddy's testimony.

Yes, because the CEO of a company whose fraud helped crash the global economy has no reason to exaggerate or outright lie to Congress about the extent of the fraud, even if he did take over after the crimes.

Well, glad that's settled, onward and upward for the financial wizards!

Yes, because the CEO of a company whose fraud helped crash the global economy has no reason to exaggerate or outright lie to Congress about the extent of the fraud, even if he did take over after the crimes.

Why bother having them testify if you are automatically going to dismiss what they say?

I'm thinking new rule: when you write contracts that exceed 10% of GDP they're automatically void, on the grounds of national security.

So, all those life insurance policies with AIG are declared void? Or is your position that, if you write too many contracts, the government can pick and choose which ones are void?

Nate: Liddy is a retired executive who at the request of Bush administration took over AIG for $1.00 per year, no bonus. I assume you didn't watch him testify. He said the problems were credit default swaps entered into in 2005 and 2006. The bad management stopped doing that kind of business in 2006.
Greedy yes, big mistake yes, fraud no.
Seems to me Liddy is behaving just as a receiver would in winding up a business and selling off the assets for the benefit of the creditors.

I think you are very unfair in putting him in the same box as the bank executives and mortgage brokers.

Why bother having them testify if you are automatically going to dismiss what they say?

Why bother having any oversight if you are automatically going to accept every word that comes out of Liddy's mouth without question? Just declare him Financial Dictator and hand over the checkbook.

So, all those life insurance policies with AIG are declared void? Or is your position that, if you write too many contracts, the government can pick and choose which ones are void?

AIG has $1.6 trillion in liabilities in regular insurance? Doesn't look too good for them.

Pick and choose? No, realistically you'd just declare everything AIG did as contrary to national security (like shoe bombers, only more effective) and then cover the regular insurance buyers. Hell, the states do it for hurricane insurance.

Well, for one, if they testify and lie, we can bust them for perjury. And second, okay, so he's a "retired" insurance head, who's been on the board of a "global equity" group, and apparently involved with Goldman, too. (http://marketplace.publicradio.org/display/web/2008/10/22/corner_office_liddy_bio/) He was also part of Bush-Cheney '04's election team, and McCain's '08 team. And worked at G.D. Searle & Co, while Donald Rumsfeld was the CEO.
(http://en.wikipedia.org/wiki/Edward_M._Liddy) His pay is "As CEO of AIG, Liddy receives a salary of $1 and equity grants."

(http://www.usnews.com/articles/news/national/2009/03/18/10-things-you-didnt-know-about-aig-ceo-edward-liddy.html)

So he was one of Hank Paulson's buddies he asked to come in and take over AIG. Where he's in line for a "special bonus" in 2010, "depending on performance". And depending on the taxpayer dollars keeping the company afloat.

So, yeah, maybe he's not been directly involved in the probably fraud and racketeering at AIG, but he's certainly run in those circles for years. He can be judged on his performance, which hasn't been too stellar, or too transparent, so far.

I'm going to hold off on the "fraud no" conclusions, and the veracity of an executive brought in from the same class of people that broke the economy until such time as, say, AIG's books are gone over by auditors who weren't involved in the company or its probable fraud.

And it probably wouldn't hurt to have auditors go over the personal books and taxes of the people who were involved in betting more money than exists in the world, either.

Why bother having any oversight if you are automatically going to accept every word that comes out of Liddy's mouth without question? Just declare him Financial Dictator and hand over the checkbook.

When did anyone say that they accept every word out of his mouth? What I object to is the continuing insistence that people know exactly what happened, and who cares what anyone involved says.

AIG has $1.6 trillion in liabilities in regular insurance? Doesn't look too good for them.

AIG has liabilities. Some of them are derivatives. Some of them are life insurance policies. All of them are liabilities. You can't legally separate one from another.

Pick and choose? No, realistically you'd just declare everything AIG did as contrary to national security (like shoe bombers, only more effective) and then cover the regular insurance buyers. Hell, the states do it for hurricane insurance.

No, they don't. They may help pay off the policies, but they don't do so, and then tell other creditors that they get nothing. You can not make some creditors good, but do nothing for others.

Johnny C: I did listen to a couple of hours of Liddy's testimony, and read coverage of the rest. As I said in another thread, I did not take his responses to imply that no one who had any responsibility for AIG's meltdown was still there and getting bonuses; only that those most responsible were gone.

Hilzoy: which hours: before or after the break?

It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith?

Welcome to the real world, professor, where a minimum wage fry cook at McDonalds is more accountable than a million dollar financial executive. Kinda hurts to learn that, eh?

One huge thing I thing that is being overlooked by the Davidoff piece hilzoy quoted is "who negotiated this and why?"

Somebody -- or somebodies -- just didn't give AIG a blank check, as much as it seems that way.

Liddy mentioned that in everything that was outlined regarding money that was given to AIG was disussed with the Fed/Treasury.

Seems they should be up there testifying next.

Johnny C: about an hour and a half before the break. (That was when I stopped.)

I wrote you a comment on another thread, btw.

btfb: as I understand it, it was like this:

(a) the contract was negotiated well before AIG's collapse, and thus well before the government was involved.

(b) when AIG collapsed, the government put together a rescue plan very, very quickly. I think (I'll check if anyone wants) it was in a day. It seems to me completely comprehensible that this issue would not have arisen. To my mind, that just underscores one big lesson of all of this: we need to have procedures in place for this sort of thing, so that we aren't making things up on the fly.

(c) I don't know that the NY Fed had any involvement in the rescue plan -- AIG is not a bank. It did get involved later, but I think that was after Geithner had recused himself b/c he was being considered, or had been nominated, for Treasury. But certainly someone at the Fed knew, and probably so did people at Treasury (I'm still talking about Bush's Treasury here.) On the one hand, I find it completely bizarre that no one flagged this as a huge political issue that needed to be dealt with, if at all possible.

On the other, if Davidoff is right to say that the contract is very, very solid, then the obvious ways of dealing with it -- finding some reason to say that the AIG-FP people had not met its terms, for instance -- didn't exist. And I can easily believe that lawsuits over this could eat as much money as was in the bonuses (or thereabouts.) So if no one saw this as a huge political issue -- which, as I said, astonishes me -- then I can also see why people would have thought: oh well, it's a done deal. (The thought being: dealing with this in some way other than by finding a loophole in the contract, challenging it, etc., would have required a lot of work and attention, and that work and attention would have been forthcoming only if someone had thought: gee, people are going to be outraged by this, and brought it to the attention of whoever needed to be informed.)

I suggest Nate Silver's post on this over at fivethirtyeight. (Sorry for no link--I've not got an iota of html.) He has a good analysis of why the contracts were written that way, and he makes the point that the money at issue really is salary--no matter what it was called--since it was guaranteed.

Nate Silver on AIG

... I find it completely bizarre that no one flagged this as a huge political issue that needed to be dealt with, if at all possible.

My guess is that no one who wasn't stuck in the Wall Street mindset saw the provision, and those in the mindset didn't give it a second thought. The "bonuses" are really just like salary, so all it amounts to is some people getting paid millions whether they do a good job or not -- something that seems to be absolutely standard procedure among Wall Streeters and corporate executives. Why would it catch the eye of any of those people?

Thanks, ral.

hilzoy: OT -- But did you see President Obama's town hall meeting? I thought he was especially impressive and could see this developing as his version of FDR's fireside chats.

Also, to hilzoy or anyone who feels like responding:

Will all of the votes of confidence Obama is giving Geithner be a kind of reverse-whammy? (Of all the things Obama talked about yesterday, I thought he sounded least convincing on Geithner. But that's just me.)

Hilzoy: "about an hour and a half before the break. (That was when I stopped.)"

Perhaps my perspective was affected by listening to the same questions and misstatements of facts being made over and over. Incredibly repetitive. One incredibly obnoxious NY congressman late in proceedings.

I think Liddy was aware that the bonuses would be a political issue (but not to this extent). Fed Reserve reps had been involved throughout. I suspect Liddy incorrectly assumed Fed was communicating with Treasury. He testified something to the effect he had been instructed to communicate with the Fed.

Liddy would have no interest in stopping the bonuses apart from political backlash. He wants to do the job. Rich employees probably happier employees. When Fed signed off on the bonuses, he probably assumed issue over. It will be interesting to see how the communication links turn out.

Geithner either blindsided by Fed; or overloaded; or clueless or combination thereof.

My pleasure, jdkbrown.

"This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking."

It's only shocking (in the surprising rather than moral sense) if you're unfamiliar with pay in financial services. Guaranteed bonuses are pretty widespread for high flyers. They're the banking equivalent of a wiseguy becoming a made man. In a banker's market, ie when firms are competing for "talent", guaranteed bonuses (and within that class large guaranteed bonuses) are one of the main perks used to attract executives.

Clearly it makes a mockery of the idea of performance related pay. That's not my point. My point is that it doesn't suggest that AIG FP expected significant losses when they signed the contracts. Every large financial institution was offering guaranteed bonuses to attract and keep senior people at the peak of the market. It was often a make or break thing for the person involved. If they didn't get the guarantee, they walked.

Ginger Yellow,

If Nate Silver is right (see link above), prior to 2008 the AIG FP employees did not have significant guaranteed bonuses and were instead compensated primarily through a profit sharing arrangement. The bonuses were only guaranteed after the fourth quarter of 2007, once the bottom fell out of the CDO market and the division was looking at losses rather than profits. So these don't seem to be the "standard" guaranteed bonuses you describe.

AIG has $1.6 trillion in liabilities in regular insurance

Uh...where'd that come from? Liddy said that the Financial Products division of AIG has $1.6 trillion in portfolio, which doesn't mean anything, by itself, in terms of solvency. What Liddy is up to, or at least what he says he's up to, is (apparently) divesting the FP division of all its portfolio assets and paying back the US government.

Some of that portfolio is undoubtedly risky investment that's going to show a loss. How much of it that is, I don't know, and I'm not sure that it's public knowledge.

It'd be interesting to know if Liddy was asked specifics on this point, and if so what his response was.

Slartibartfast: "It'd be interesting to know if Liddy was asked specifics on this point, and if so what his response was."

I understood him to testify that the AIG FP portfolio had already been reduced from $2.6 trillion to $1.6 trillion. That all of the credit default swaps had been cleared out, and that the remaining portfolio was mainly derivative instruments. He anticipated that a loss of $2 billion was likely and the process would take 2 to three years. He based this on the experience of Warren Buffet liquidating a portfolio - i think he said about 1/4 the size.

Independent of the liquidation of the AIG FP portfolio, and dependent upon there being buyers, Liddy plans to package healthy parts of AIG insurance businesses and sell them - if there are willing buyers with money. This the source of proceeds to repay Treasury and Federal Reserve.

He also kept repeating that the amount AIG is indebted to Tr and Fed was, if I remember correctly 79 Billion- not the 170 billion congressmen and media kept repeating.

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