Tuesday, March 17, 2009

AIG: Owner Rage

The bonuses AIG wants to pay its employees are a pittance compared with the $170 billion it has received in government bailouts, a trifling .097 percent. But nothing so angers the gods of populism as the word “bonus” (surely some genius is formulating a suitable euphemism even as we speak). Pres. Barack Obama wants to try to block the bonuses, and other administration officials talk of making AIG pay back the government for the amount of the bonuses. Fine, but where do we go to get the other $169.835 billion back?...AIG Shame, Rich Lowry, 3/17/2009

In Parkinson's Law, a wonderful satire written by C. Northcote Parkinson in 1955, one law is that "the time spent on an agenda item is inversely proportional to the amount of money involved." As Rich Lowry makes vividly clear in this sane article about an insane policy, there have been few better examples than the populist hysteria about bonuses that AIG just happens to be contracted to pay.

Contract law doesn't stipulate that bonuses included in a contract must reflect good performance. If that were true, half the overpaid ballplayers in major league baseball would be earning about 40% of their current salaries. Contract, however, once agreed upon and signed, is a lawful arrangement between consenting parties, and held as being as strong as a law passed by Congress. Scorn for a contract is no different than scorn for a law. Doing so yields economic, political and cultural chaos.

Would that the Obamastration would pay attention to restructuring the law surrounding credit default swaps, an outlandish financial instrument (see other entries below) that is currently neither regulated by any agency, nor comprehensible to buyers or brokers. Exposure to these instruments, made vastly worse by the bizarre mark-to-market rules that force daily valuation of assets which may be unsaleable at a given time, while still generating income, is what sank AIG (indirectly) and may yet sink Citibank. $167 million in bonuses for officers and employees who've wrecked a company is a scandal, but this mess is about hundreds of billions of American taxpayers' money, not ill-gotten gains in the millions. And we've been lied to about those.

AIG has been the bailout from hell, dysfunctional and opaque. The government has had to restructure its rescue over and over, throwing billions more into its maw. Only now have we learned the identity of the true recipients of the bailout, the so-called counterparties to AIG’s credit default swaps, financial firms strewn around Wall Street and the globe, from Goldman Sachs to Deutsche Bank and France’s Société Générale...(AIG Shame, cont'd)

That's right. The "bailout" of AIG is about paying holders of credit default swaps, themselves a barely legal and totally unregulated instrument. There is virtually no bottom to this mess; these securities are measured in the tens of trillions! AIG wants another hundred billion for the same purpose. And the asset sale promised by new CEO Edward Liddy back in October of 2008 has been a complete bust.

American International Group Inc may scrap a plan to repay a $60 billion US government loan by selling businesses, after failing to find enough promising bidders, Bloomberg said, citing people with knowledge of the matter...AIG Chief Executive Edward Liddy, who took charge in September and unveiled the strategy the following month, has concluded it will not work...AIG May Abandon Asset Sales Plan, Reuters, 2/25/2009

You want reason for outrage. There are two. It's bad enough to give these losers bonuses, but that's not even a crime compared to putting the entire United States, and world, economy at risk to make some 25-year-old MBAs a few million bucks.

As to why these credit default swaps were invented, they were designed to help ease the risk of the trash mortgages forced upon Fannie Mae, Freddie Mac and most of the other mortgage brokers by the expansion of the Community Reinvestment Act -- a political intervention in what used to be a free market in mortgages.

The list of people who should be arrested and jailed for this robbery of the American taxpayer goes right to the top slot in AIG, to the economic advisors in the White House (Robert Rubin, Larry Summers, who promoted credit default swaps), to the Secretary of the Treasury, Tim Geithner, who arranged (with Ben Bernanke) the original bailout of AIG.

The further the country dives into this abyss, the more it seems that these columns should be written in French.


1 comment:

toronto realtor said...

On one hand I agree that a contract is a contract. But then I'm thinking - is that a reason good enough to actually pay them? If a company is performing badly a closes down, some people might not get paid at all. And what? Nothing.. AIG was surely performing badly. If it wasn't for the state, it would have closed down already. So why paying the bonuses out? Just thinking 'aloud'...

Take care,