Super-FDIC
From Fed Chairman Bernanke's speech yesterday in Phoenix ...
Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.
--Josh Marshall
TPMDC Saturday Roundup
It's all about the budget this weekend, as President Obama promotes his proposal in a YouTube message and activists go door to door signing up supporters. That and other political news in today's TPMDC Saturday Roundup.
--Eric Kleefeld
AIG Who?
From The Tennessean ...
The Nashville-based subsidiary of insurer AIG is dropping those tarnished initials, a rebranding that separates it from its troubled parent and, officials say, highlights its individual identity.In coming weeks, a new sign that emphasizes the initials of the unit, American General Life and Accident Insurance, will replace the one outside of its Brentwood-area headquarters that read "AIG American General" until the parent's name was covered up this week.
...
"Moving to a brand that the company built its reputation on and that doesn't immediately bring to mind AIG certainly helps with new business sales," she said.
--Josh Marshall
Should Have Seen This Coming
GOP re-dubs carbon emissions cap-and-trade as "energy tax."
--David Kurtz
Another One Bites The Dust
Jim Tedisco, the GOP candidate in much-watched NY-20 special election was just forced to walk the Rush plank after making ambiguously loyal comments about El Rushbo.
--Josh Marshall
Corzine Chimes In
We've been back and forth on this issue for the last couple days: can we manage the risks involved in letting some of the big banks and other financial institutions go into some sort of managed reorganization?
This afternoon on MSNBC NJ Gov. Jon Corzine -- who, remember, used to be CEO of Goldman Sachs -- says yes, we can and we should. We know much more about the condition of the banks and the implications of their (controlled) failure than we did in the crisis moments last September.
--Josh Marshall
TPMtv: J Street In The Age Of Obama
J Street director Jeremy Ben-Ami sat down with TPM news editor Justin Elliott this week in Manhattan to discuss the group's role now that Barack Obama is President. Among other things, Ben-Ami defends J Street's decision to sit out the battle over the administration's National Intelligence Council pick, Chas Freeman, who withdrew after he was vilified by the right-wing pro-Israel community:
--David Kurtz
Peace in the Valley of Twitter
This is almost too silly for words, but since others have been writing about it today, let me update you, too. I'm pretty new to the world of Twitter, so I was a bit surprised (but mostly amused) when ABC's Jake Tapper blocked me from following his Twitter feed after my post this morning knocking his reaction to the Obama Special Olympics gaffe. Others were blocked, too, although it's not clear to me exactly why. In any event, Tapper, in what I guess is a Twitter equivalent of a peace offering, started following my Twitter feed this afternoon, and I am now able to follow his again. He twittered: "tpm is unblocked. My bad"
Now back to the economy collapsing around us.
--David Kurtz
Not Digging MH ...
From TPM reader JS ...
Nearly everything reader MH writes is, to greater or lesser degrees, incorrect. Might as well have been written by Vikram Pandit.I don't have time to get into this right now, but attached is a very good description of what went down in the fourth quarter of 2008, including a detailed account of exactly what happened after Lehman failed. Note that a lot of the CDS/counterparty issues were resolved over the weekend before they let LEH go, and that since then the Fed has put in place liquidity backstops that prevent many of the post-LEH consequences from recurring even in the event of another major bankruptcy. Taking the big money-center banks into receivership would indeed be an exceedingly complex task requiring considerable preparation, much of it done in secrecy. but it can be done.
--Josh Marshall
Yep, It Was Really That Bad
TPM Reader MH makes the case that Lehman's collapse was really that bad and we can't let it happen again ...
The problem that the Lehman Brother's bankruptcy exposed is that, in these complex derivative investments, it's not always clear where the counterparty risk lies. These transactions are non-traditional in structure and so its often not clear how bankruptcy rules will apply to them. There's very little relevant case law and these transactions just weren't designed with much thought toward this contingency (no one imaged that these large couterparties could ever fail). Things don't fit neatly into statutory boxes, so it's not clear what the bankruptcy court will do and who will end up getting their money back. So when Lehman went bankrupt, everyone had to try to assess the degree to which they were exposed to the potential bankruptcy of other major counterparties. And that's really hard to do with any accuracy. That's why everything froze up. No one could get an accurate assessment of their own exposure.The fear people have now--and justifiably so, I think--is that the only thing keeping the financial system functioning at all right now is the assumption that the major governments of the world will not allow any other major counterparties to default. If even one of them is allowed to fail, that assumption immediately goes out the window and suddenly everyone will have to assume that any major counterparty could fail at any moment. If that happens, everything will grind to a hault again.
--Josh Marshall
Witch Huntery!
A great exchange on CNBC between the anchor and Rep. Brad Sherman (D-CA), one of the few elected voices of reason during the financial crisis:
--David Kurtz
All About Lehman
It's highly technical. And it's really hard even for the experts to figure out, let alone those of us who stick to simple addition and occasional division. But with all the conversation about AIG, it's worth focusing our attention back on just how much of the current debate -- and the approach we're taking -- revolves around what happened to Lehman Brothers.
In short, last September, the Fed & Treasury 'allowed' Lehman to collapse into bankruptcy and global credit markets seized up into a global spasm that kicked the global financial crisis into really high gear. We hovered on the edge of real cataclysm and managed to work our way back to mere global crisis over a period of a couple months.
It's the Lehman experience which is behind the widespread and possibly accurate assumption that we have no choice but to pay back all the creditors and counter-parties of the big -- and probably insolvent -- banks at full dollar value.
But is the assumption correct?
There's one debate about whether it was really Lehman's collapse or the Treasury's reaction to it that caused the crisis. In as much as I'm able to understand the different arguments, this one seems pretty unconvincing.
But that's not the only question.
Lehman went under when there was much less widespread recognition of the extent of the financial crisis. And -- perhaps much more importantly -- it was done in a totally uncontrolled way. There was no effort to engineer some sort of managed receivership.
Now, a number of the smartest economists I know and whose judgments and values I really trust, think that the abyss we were looking into was so deep and vast, that it's just not worth chancing it. But there are very sharp people who make contrary arguments.
I don't have any answers on this one. But for those of us who are spectators and involuntary stakeholders in the drama, it is worth remembering just how many dollars ride on interpretations of the Lehman experience.
--Josh Marshall
Your AIG Primer
Zack Roth takes us through a brief history of AIGFP, the financial products division that brought AIG to its knees.
--David Kurtz
Stick a Fork in Norm
Norm Coleman's own lawyer concedes he isn't going to win the Minnesota election contest. They're pinning their hopes on the appeal.
--David Kurtz
Reaping the Whirlwind
Krugman is not a fan of the bonuses tax bill either -- but he blames Geithner et al. for getting us to the point where we're lamely flailing about trying to get the bonuses back.
--David Kurtz
Article of the Day
Lucian Bebchuk, "AIG Still Isn't Too Big to Fail," from the Journal.
I lack the technical knowledge to evaluate the question fully. But we should be asking the question. Is AIG really too big to fail?
That's the big question: because that, unlike the bonus drama, is where the real money is. AIGFP's potential derivative exposure stands at $1.6 trillion. And unlike the case with the big banks we're backstopping, the obligations we're covering are not what was supposed to be super-safe corporate debt.
These are derivatives, in many cases high-stakes bets on underlying assets the purchasers did not themselves own. So, you insure your house for fire damage. And I insure it too, even though it's not my house. Your house burns down and you get the policy payout to rebuild your house. But I just want my money because a deal's a deal. I have no problem with old-fashioned gambling. And if people want to play with their money this way, I've got no problem with that. But if the casino itself goes bust, don't come to me and talk about having moral claim on your winnings that I need to cover.
The policy question is whether not paying off these obligations will upend banks or other financial institutions we have an interest in keeping afloat. But perhaps there's a way to evaluate the different claimants through some sort of organized process or possibly pay off the money in the form of TARP infusions that at least get the taxpayer some equity in the company.
I'm not saying it's a simple issue. It's not. But under the current framework we could still end up giving AIG tens, even hundreds more billions of dollars.
--Josh Marshall
TPMDC Morning Roundup
In new video, President Obama makes a direct pitch to the Iranians for reconciliation. That and the day's other political news in the TPMDC Morning Roundup.
--David Kurtz
The Bonuses Scam Ain't New
Longtime reader checks in:
There are all sorts of accounting reasons that firms hand out much of their compensation in the form of bonuses, but those incentives, like the bonuses themselves, stem from historic practice. Most Wall Street firms began as partnerships, not as publicly-owned corporations. Partnerships apportion their profits at the end of their fiscal year; that practice has remained the norm, even though shareholders (or, in the case of AIG, taxpayers) now own these corporations.And that's really the nub of the problem. Most Wall Street firms have gone public; at the same time, many public banks have entered the Wall Street game. But corporate governance, compensation, and accountability haven't kept pace. In essence, these firms offloaded most of their risk to shareholders, but continued to be run in an insular fashion, and to divert the great bulk of their surplus revenues to their workers and executives. In the bubble years, enough cash rolled in that the complaints were muted - executives and traders took it home in wheelbarrows, and the share prices still went up.
But those working on Wall Street have come to regard their bonuses - their traditional share of the profits - as guaranteed compensation. They want the rewards of ownership with the security of employment. And that's just unsustainable.
When it comes time to sort through the wreckage, and to erect a more sustainable model, I hope we pay a little more attention to corporate governance. That those who own the corporation - shareholders - have long had little say in its operation is a scandal. It's been driven home this week by the realization that simply substituting 'taxpayer' for 'shareholder' does nothing to change the locus of corporate power - in either case, it rests less with the owners than with the board and executive suite. And, all too often, those groups pursue interests divergent from those of the ownership. Levying a tax on undeserved compensation is a bromide - it makes us feel better, but neither solves the problem nor prevents its recurrence. The real solution lies in ensuring that corporations are run in the long-term interests of their owners, not to line the pockets of their executives.
--David Kurtz
Not a Mentality But a Disease
Everything you need to know about the DC journo establishment, from ABC News White House correspondent Jake Tapper's Twitter feed:
Breaking- PrezObama on Leno jokes about being a bad bowler- says it's "like the Special Olympics or something" http://tinyurl.com/bholeno about 12 hours ago from TwitterBerry
Am trying to imagine the reaction if President Bush joked that his bowling skills recalled the Special Olympics. 3 am- we just landed in dc about 6 hours ago from TwitterBerry
Preparing for day of hypocrisy: conservs who would normally defend the SpecOlymp joke acting offended, liberals saying lighten up. Sigh about 3 hours ago from TwitterBerry
Late Update: Tapper gets his revenge: He has "blocked" me from following him on Twitter.
Later Update: Seems to be a trend.
Later Update: In an apparent peace offering, Tapper started following my Twitter feed this afternoon. And I have been unblocked from following his. Peace is at hand -- although I'm unsure about the others who were blocked.
--David Kurtz
Rebirth?
Ex-Rocky Mountain News reporters prepare to launch web-only 'Denver Times'. More here.
--Josh Marshall
Just What Is A Bonus?
TPM Reader TR points to one of the key issues in the whole 'bonus' debate.
I'm certainly no expert on the financial wheelings and dealings of Wall Street (how many times have you heard THAT caveat the last few days?), and I actually think that contributes to the overall problem so many people are having with this whole bonus issue. For much of the middle class, the term "bonus" is something you earn at the end of the fiscal year when you've done particularly well and/or your business division has turned a nice profit for the company overall. It's a reward for out-producing expectations; it's a thank-you from the bosses for doing your job so well that the executives and the shareholders get more in their pockets, too. These AIG execs aren't getting bonuses; they're getting guaranteed income called something else for tax purposes. Everyone who is flipping out (and I was certainly one of those) is reacting so strongly because it feels like these bozos are getting rewarded. To us working stiffs, it's a message of "great job!" when in fact we want to beat them all with rubber hoses. We're incensed not just because of the money going back into their pockets, but because it feels like we're being forced to congratulate them with our own tax money while our own bonuses flew the coop (along, quite often, with their associated jobs).
I know a number of people who work or in a few cases worked at the big investment banks here in the New York. And while the size of the bonuses would float to some degree with how well the bank did in a given year, and presumably how well they performed, to a great degree it was locked in income. And the great bulk of these people's incomes came from their bonuses.
So in some respects, the people getting nicked here can say, hey, I'm losing two-thirds of my salary. In other ways, though, it's just a trap of the industry's own making since over the years they've increasingly used this redefinition as a tax avoidance mechanism -- only now it's coming back to bite them.
--Josh Marshall
Another Take on Geithner
From TPM Reader JM ...
With regards to Geithner, I have been thinking a lot about this whole AIG mess and one of the things I keep coming back to is that Geithner is basically a one man band right now because neither the Dep Secy nor key Asst Secy positions at Treasury have been filled. That is not highly unusual at this point in an Admin and most Secys just struggle along until they can fill the positions. The problem Geithner has is he is dealing with multiple crises while not having a core team in place. At my day job I run large projects for my company and when you get stretched for time and resources you end up prioritizing what seems most important. 90+% of the time you get it right but when you don't it is usually bad. The Obama Admin will never say this publicly but I would not be surprised if what happened here is that Geithner saw the AIG bonuses as a secondary issue and prioritized the bank stress tests, TARP money, the auto bailout, etc. Having no key team members in place he didn't delegate it to the staff in his office or to the careers who are filling in temporarily while the subcabinet positions are confirmed. And now you have a mess.I know a lot of people are calling for Geithner's head but I think you have to give him a chance to get staffed up and see what he can do. If he is still struggling 9 mos from now, get rid of him.
In the meantime, I think Obama needs to lean on Paul Volker more. He is the only person in his Admin who has dealt with anything close to this kind of crisis and he has a ton of credibility.
--Josh Marshall
Frankenstein
I had heard this AIG bonus bill described as being more or less narrowly tailored to claw back AIG's bonuses. That in fact was why some people were saying it might amount to some sort of unconstitutional action since it focused on a narrow class of individuals. But that's not what this is about at all. Unless I'm misunderstanding this, it applies to the entirety of the concentrated financial sector -- all TARP recipients talking over $5 billion.
If you have a household income over $250,000, and you receive a bonus, 90% of that bonus would be taken back in taxes -- through a mix of income and excise taxes.
This strikes me as pretty ill-advised on a couple levels.
First, what's to stop the companies from just folding the 'bonuses' into straight salary income? In which case, the whole thing goes out the window?
Second, this cuts a pretty broad swathe. You don't want CEOs who drove their companies into the ground pulling down multi-million dollar bonuses from companies that wouldn't even exist any more without big taxpayer handouts. And the folks at AIGFP who played a big part in driving the whole economy into the ditch with their reckless and possibly criminal behavior shouldn't big reaping big rewards of taxpayer money.
But it's not clear to me why a couple, both of whom work in the financial services industry, and make $150,000 each should essentially have their entire bonuses taken back in taxes.
This seems like just another example of perverse outcomes from the 'worst of both worlds' approach we're taking to the whole finance industry bailout -- keep the same people in charge of the institutions, keep effectively insolvent institutions afloat, but throw a lot of federal dollars in their direction and put in place fairly draconian tax provisions for money that's spent in ways we find either wasteful or offensive.
Late Update: A number of readers have written in to say they're not shedding any tears for a couple making a combined income of $250,000 who face a huge tax hit on the income they make over that amount. But I'm not either. It's not a fairness issue in my mind. I think it's too broad a brush, probably too destabilizing to a financial sector we're already trying to stabilize. Of course, I was figuring we should have ushered a lot of these companies through some sort of managed restructuring or bankruptcy, in which case a lot of this would simply be moot. But as long as we're doing it this way, as I said, this just seems like the worst of both worlds.
Late Accountancy Update: One reader points out that there are big tax benefits to the companies to paying compensation in the form of bonuses as opposed to ordinary salary income, which is no doubt the reason why, for many in the finance industry, the bonuses totally dwarf the base salaries.
Even Later Accountancy Update: Tax attorney TPM Reader JN adds the following: "This is only correct with respect to the CEO and the other 4 most highly paid officers of a company (there is a limitation on deductibility of compensation over $1,000,000 paid to these people except for certain incentive-based compensation - the TARP bill has additional limitations that aren't relevant here). For ordinary employees of a company there is no tax difference to the company between paying straight salary and a bonus (although I imagine there could very well be accounting benefits of which I am not aware)."
--Josh Marshall
Turtles All the Way Down
From the Daily Beast ...
An employee who worked in Madoff's legitimate brokerage operations, described by the fraudster in his plea agreement as being "successful and profitable," has told The Daily Beast that they were in fact money losers that acted as a front for his Ponzi scheme.He said that the legitimate businesses, the proprietary and market making arms on the eighteenth and nineteenth floors of Madoff Securities were designed to lure investors in, especially highly-placed figures in society and to fool the SEC into thinking that he had a large and impressive galaxy of businesses.
--Josh Marshall
328-93
The bill to tax back those AIG bonuses passed overwhelmingly in the House, but the GOP leadership split. As it turns out, Rep. Eric Cantor (R-VA), the minority whip, ended up voting for the bill, despite all his hedging this morning on MSNBC.
--David Kurtz
Bigger Than the Both of Us
There's no end of puffed up outrage and opportunistic posturing over the on-going revelation of the AIG bonus scandal. But some line has been crossed. And it's worth thinking really clearly about just what that line is.
What is so damaging about this isn't the money -- which is almost trivially small compared to the many hundreds of billions we've already committed. The problem is what appears to be the president's mortifying impotence in the face of bankers and financiers who created the problem. The president speaks and acts for the federal government, which is to say, the American people, who have mobilized more than a trillion dollars and all powers of the state to repair the damage emerging out of the financial sector. And with all that, he's jacked up on a employment agreement between a company the government now owns and derivatives traders who sank the world economy and may quite likely be looking at criminal charges for their activities in the not too distant future?
Anyone can look at that and see that the equation of power and accountability is all screwed up.
I think the American people have demonstrated over the last six months that they're willing to expand vast sums of money and endure great economic hardship without holding the damage against their political leaders. Effectiveness, in the sense of how long it takes to turn the economy around, is something they seem willing to be flexible on. But not on who's in charge. And that's what's at stake here. As a matter of transparency and truth-telling, what Geithner knew about the bonuses may be significant. But it's really all fine print that is largely beside the point. From Geithner and Summers, and indirectly from Obama, we keeping hearing financial-legal versions of 'It's bigger than the both of us'. Like we're along for the ride, still taking dictates from the people who got us into the mess we're in.
There are various specific points you can drill down on. Atrios grabs this deliciously obnoxious passage from a piece in the Post today ...
"Nobody is going to give it back and then stay," said one of the firm's employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG's counterparties."
So, give us our money or we'll go to the counter-parties and help them really suck you dry. Even though this ignores the fact that the counter-parties have no actual right to the money. They placed bets with a company that did not have the money to pay off the bets. There's a old-fashioned business solution to that kind of problem -- due diligence.
We're paying them off, either in full or in part, out of fear that pulling the plug on these contracts would so destabilize the global economy that paying it is a better solution than not. But we're doing it for us. Not them. They are, at best, collateral beneficiaries. So all the talk of whatever self-serving or legally dubious contracts they penned for themselves two or three years ago are beside the point.
Or at least that's the idea. Unless we're actually just chumps and Obama -- via Geithner and Summers -- have simply ceded the running of the whole thing to the people who caused all the problems in the first place. And we are just along for the ride even though we're paying the bill.
In this sense, this isn't a distraction. Yes, the dollar amounts are small. And pols across the spectrum are demagoguing the thing for all its worth. But the real issue of who's in control, and whose interests are being served, cuts through every dollar we've dedicated to this project. And when you look closely at the much bigger AIG counter-party issue, the same disconnect is there every bit as much as it is with the bonuses.
Whether Geithner and Summers are too close to the people on Wall Street, either through interest or affinity, is an interesting and possibly important question. But fundamentally Obama needs to start showing that he's in charge, that he's operating as the American people's advocate and that he has the power to do it -- which these stories of getting jacked up by some Gordon Gecko wannabes in London just terribly undermines. But to do that, to show that, it has to be true. And that might require some real changes in policy and possibly in personnel too.
--Josh Marshall
Hit a Nerve
We've gotten a lot of really thoughtful (and agitated) reader responses to my earlier post on whether David Axelrod and Rahm Emanuel are tone deaf politically on the AIG bonuses mess (my question was narrower: what's the political up-side for the White House of downplaying the bonuses -- but readers took that question and ran with it). We've posted the best ones.
--David Kurtz
Six Years
We've got new crises to worry about, it seems. But today is the sixth anniversary of the Iraq War. And we're commemorating the day with a photographic timeline of the war, from day one until today. Take a look. The images will bring you back.
--Josh Marshall
TPMTV: Holding the Regulators Accountable
Looming on the horizon is a complete rewrite of the financial regulatory system, the kind of fundamental change that comes along only once every few generations. How that shapes up will depend in part on how quickly the economy emerges from the acute phase of this crisis -- and to a large extent will be shaped by the "lessons" we supposedly learn from this train wreck. Oftentimes, we learn the wrong lessons, at least initially, and (no surprise here) the conventional wisdom about what those lessons are is heavily influenced by those with a stake in the outcome. So I talked this week with Jerry Caprio, professor of economics at Williams College and co-author most recently of Rethinking Bank Regulation: Till Angels Govern, about how the debate over regulatory reform should be framed:
--David Kurtz
Tone Deaf?
Yesterday, Rahm Emanuel called the AIG bonuses a "big distraction." Today, David Axelrod says: "People are not sitting around their kitchen tables thinking about AIG," Axelrod said. "They are thinking about their own jobs."
I honestly don't get what up-side they see politically in taking this tack. Thoughts?
Late Update: Some of the responses, starting with TPM Reader MM:
Well, how about with the people that don't follow all of this as closely as you guys do? I talk with my co-workers in the lunch room and THEY aren't babbling about AIG or What-ever. We are talking about Sally's husband that was laid off and Jane's forclosed house and Pete's daughter that needs a kidney and the insurance might not be adequate to even attempt a transplant if a donor is found. And then EVERYONE is worriedly talking about our hours cut to 31 hours a week from the usual 40 and how are we going to pay our bills. You have to step away from the rarified air of the news bubble you are in, David, to see the big picture, here. I am glad Rahm and Barack are KEEPING THEIR EYES ON THE BIGGER PICTURE!
TPM Reader RM:
David Axelrod's political radar is on the fritz and he better get it fixed in a hurry or Obama is going to lose the credibility he needs to continue leading us out of this abyss. There is no political up-side to this tack. Not one. Period.
TPM Reader AB:
Yeah, I read that Axelrod quote and thought he'd got it exactly wrong. People are sitting around their kitchen tables talking about AIG. It's not an either/or situation where they discuss AIG or their jobs. The two are related. And the reason people are so mad about AIG is because their jobs and savings are insecure while AIG screw-ups are getting bonuses with taxpayer money.Same thing goes for all the people who say we should be worrying about the counterparty payments. Yes we should, but the bonuses and counterparty payments are also related. Both are examples of AIG doing pretty much what it wants with government money while the people who should be in charge throw up their hands and say, "We didn't know" or there's nothing "We could do."
The screwed-up oversight processes that allowed the bonuses is the same screwed-up process that allowed the counterparty payments. Either someone's asleep at the wheel or their priorities are very, very wrong when it comes to addressing both these issues. In fact, the bonus issue is serving to focus attention on the bigger issues not draw it away. It's the proverbial straw that broke the camel's back.
Tons more reader responses here.
--David Kurtz
No Ideas, No Plan, No Nothing
Larry O'Donnell went to town this morning on Rep. Eric Cantor (R-VA). The ostensible issue was whether Cantor was going to support Rep. Charlie Rangel's bill to tax the heck out the AIG bonuses when it comes up for a vote later today. He couldn't get an answer out of Cantor, though to my ears it sounded like a no. But the larger issue this exchange exposes is just how bereft of solutions the Republicans are right now. The only thing they have managed to muster is a faux populism over the AIG bonuses -- a passing fancy they hope will score some short-term political points:
See more at MSNBC.com.
--David Kurtz
TPMDC Morning Roundup
The House is expected to pass legislation later today to stiffly tax those AIG bonuses. That and the other political news in the TPMDC Morning Roundup.
--David Kurtz
Sweetheart Deals
Over at DealBook, Steven Davidoff has a run-down of just what those newly-released AIGFP bonus contracts tell us.
Here's the key take away ...
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. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?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? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.
Meanwhile, Daniel Gross points to the big question ...
Congress should also hear from the many AIG counterparties who together have received billions of dollars of taxpayer funds so far through AIG. These folks bought insurance from or did business with a company that was unable, as it turned out, to make good on its financial commitments. And yet because the government didn't let AIG file for Chapter 11 bankruptcy protection, these counterparties have been made whole. I'd like to hear Goldman Sachs CEO Lloyd Blankfein tell Congress why it was appropriate for taxpayers to make a payment to Goldman of $5.6 billion in credit-default swaps, and why Goldman shouldn't eat at least a portion of the losses it would have suffered had the taxpayers let AIG fail. It would be nice to hear from the half-dozen German banks, including the state-owned Landesbank Baden-Wuerttemberg, who have benefited from one of the biggest transfers of taxpayer wealth to Europe since the Marshall Plan. Or from executives at Citadel, the beleaguered hedge fund that received $200 million in payments from AIG's securities-lending business. They should be duly sworn in and forced to explain why taxpayers should pay these claims just because their firms bought insurance without determining whether the insurer could pay the claims.
As you know, like many others, we were hitting like crazy on this point long before the story became all bonus all the time. Who are the counter-parties? To a great degree, we now know who they were -- at least the major ones. Deutsche Bank, Goldman Sachs, a bunch of other banks in Europe. But in many respects these big institutions were just pass throughs. Hedge fund X goes to Goldman to place a bet against the US housing market. Goldman outsources a big chunk of the risk to AIG. Hedge fund X wins the bet, collects from Goldman, which in turn collects from AIG. The transactions are obviously much more complicated; but that's the rough trajectory.
The best article I saw on this today was Serena Ng's in the Journal. Many discussions of these credit default swaps have conditioned us to think of them as de facto insurance policies. So I buy a bunch of mortgage debt. But I also buy some CDS insurance to cover myself against the risk of my investments going under. But that's not what was happening in a lot of these cases. A lot of this was smart hedge fund managers who could see the housing meltdown coming three or four years ago and placed bets against it.
Not that there's anything wrong with that, so long as you place your bets with institutions that can cover your winning hand.
But why are we paying off these debts? Like Dan Gross said above, do we really need to cover all of Goldman's exposure dollar for dollar? Maybe we split it fifty-fifty? Remember, Goldman says their balance sheet is strong and it's share price is holding up relatively well. Maybe they can help the taxpayer managed a bit of this heavy lift?
And not just Goldman. I'm picking on them because their exposure to AIG's arrested collapse was especially great. And there were a lot of Goldman alums at least fortuitously involved in saving AIG. But the same logic applies to all the other counterparties.
It's a complex business. And even a lot of right-thinking economists are worried that these hedges and sellings of risk back and forth are so tied up and knotted together that cutting the cord could trigger a chain reaction toward the kind of meltdown we only barely avoided last fall.
Maybe so. But when you look at these payouts up close, that rationale for making these people whole is very questionable. At a minimum it's worth bringing a few of those CEOs up to Capitol Hill and asking them just why they got our money and why we can't have some of it back.
--Josh Marshall
The Big Bucks
Let's go 
back to Joe Cassano, former chieftain of AIG Financial Products.
As noted earlier, there is a good deal of evidence that Cassano was trying to keep his division's book off-limits to AIG's in-house and outside accountants and auditors going back at least several years. Here is our first draft run-down of evidence that points to a systematic effort to keep AIGFP's books under seal and provide misleading or false information about the Financial Products' division's health.
He was forcibly retired in March of 2008, but kept on a $1 million per month retainer and allowed to keep living in the AIG-paid for apartment in London. It was only in September 2008 that Rep. Henry Waxman flipped out when he heard that the guy who blew up AIG and put taxpayers on the line for tens or hundreds of billions of dollars was still getting a $1 million a month retainer. That's when they killed the retainer too.
But take a look at the 'retirement' agreement Cassano signed with AIG back in March of last year.
--Josh Marshall
Big Fat Red Herring
AIG CEO Edward Liddy has made quite the show of fearing for his employees safety at today's hearing, and congressmen have played right along, tut-tutting over how horrible hate mail is. The exception is Barney Frank, who sees it for the red herring it is:
Let's be clear: AIG is not the victim here. Any suggestion that Congress or the media have incited the usual whackos who send hate mail is offensive, but more to the point, is intended to distract from the real issue here: AIG's own reckless and probably criminal conduct.
Late Update: Another example of how "protecting" the employees of AIG really means not cooperating with investigators:
--David Kurtz
Obama: The Buck Stops With Me on AIG
Before heading to California for some "town hall" meetings, President Obama addressed the AIG mess:
--David Kurtz
That'll Work
AIG CEO Edward Liddy: We'll ask the bonus recipients to give half the money back.
Late Update: If being paid a $1 a year as CEO shields Liddy from serious criticism and being held accountable, then let's pay the guy a real salary. It'd be worth a million a year of taxpayer money not to have to watch congressmen pandering to Liddy's sanctimony.
Later Update: Some more about Liddy. He was on the board of Goldman Sachs before becoming AIG's CEO. Before that, he was CEO of Allstate from 1999-2006. And this I didn't know: He was CFO under Donald Rumsfeld at Searle back in the 1980s when Rummy was CEO.
--David Kurtz
Don't Forget About Shiti
Rep. Dennis Moore (D-KS) is demanding an explanation from Citigroup CEO Vikram Pandit for why he told Congress last month that his compensation for 2008 was $1 million, when Reuters reported this week that his total compensation was more like $11 million. TPMDC obtained the letter Moore has sent to Pandit.
Late Update: Here's the video of Pandit's testimony:
--David Kurtz
Read The Docs
The House Financial Services Committee has released some of the relevant documents pertaining to the AIG bonus fiasco. We've posted them:
Confirmation and Acknowledgement
Schedule to the Master Agreement
--David Kurtz
Looking Further
In a series of posts last night I looked at various pieces of evidence suggesting fraud and criminal activity at AIG's Financial Products division. We're continuing to dig on that front. But for those of you doing your own sleuthing we want to be looking very closely at what happened to AIG's credit default swap portfolio over the course of 2007 -- what the people at AIGFP knew about its value, what they were telling people at AIG corporate, what they were telling shareholders and what they were telling regulators (of whom, of course, there were very few, given the prevailing regulatory structure).
To give a little more background, a mix of congressional testimony, SEC filings and news reports suggest that there were concerns and suspicions going back at least to 2005 that Joe Cassano wasn't letting AIG corporate or anyone else look at his divisions books. Remember, this is the divisions where the CDSs were written, the ones that played substantial role in triggering the global financial crisis. The auditor they installed to find out what was going on was shut out. Their accountancy, PricewaterhouseCoopers, was disturbed by what it saw and felt obliged to note what was happening in SEC filings. Employment and compensation contracts aren't the issue here. That is a distraction. Think more in terms of RICO. Let us know more about the on-going criminal probe.
--Josh Marshall
You Know It's Bad When ...
Insurance companies say they have no choice but to honor contracts, and banks are pleading that their assets will be worth more if you just give them a little time.
For anyone, especially in business, who has tried to make those same arguments to insurers and bankers, to no avail, it's painfully rich.
--David Kurtz
TPMDC Morning Roundup
AIG is so far gone -- and so much taxpayer money went with it -- that watching CEO Edward Liddy get grilled today on the Hill won't carry with it the usual schadenfreude. But we'll be covering it closely. That and the day's other political news in the TPMDC Morning Roundup.
--David Kurtz
Must Read
Lawrence Wilkerson, on what the American people still don't understand about the travesty of Gitmo.
--David Kurtz
Heil Bush-isms!
George W. Bush, on his yet-to-be written memoir: "I'm going to put people in my place, so when the history of this administration is written at least there's an authoritarian voice saying exactly what happened."
--David Kurtz
And Still More
In the post below, I referenced the statements of Joseph St. Denis, the former chief accountant at AIG Financial Products, who said that AIGFP President Joseph Cassano had barred him from efforts to value AIGFP's credit default swap portfolio because he feared St. Denis would "pollute the process." Remember, this is the accountant, who wants to review the books to see whether the accounting is right. And Cassano doesn't want him looking.
It turns out the statement comes from this letter (.pdf) St. Denis provided last year to the House Committee on Oversight and Government Reform in lieu of a deposition. It's definitely worth your time to read the letter all the way through.
Some of the discussion you probably need to be an accountant to fully absorb. But the basic outlines are clear. In June 2006, St. Denis was brought in to provide AIG corporate with a clearer window into the accounting practices at AIGFP and make sure they were operating under industry standard accounting protocols.
All was going well into the first rumblings of the credit crisis began in in 2007. At this point the valuations and the risks associated with AIGFP CDS portfolio began to move to the fore. And that basically led to a rapid deterioration of St. Denis's relationship with Cassano.
There's a lot that's very suggestive in that letter about where this is likely going.
Late Update: TPM Reader XX doesn't think it looks good for Mr. Cassano ...
I read the St Denis letter. I am no securities or derivatives expert, but I have worked on some pretty complex cases involving securities fraud and structured investment vehicles (which were miserable cases to work on, but that's neither here nor there). Suffice it to say that based on my experience, it sounds like Cassano has a lot to hide and a lot to be worried about. His behavior and outbursts are consistent with the actions of people and companies that I have reviewed in the past - and those cases ended very badly for the defendants, whether monetarily or criminally.In the unlikely event that you post any of this to the site, I would ask that you not use my initials. Sensitive stuff, as you can imagine.
--Josh Marshall
Still More
Back when AIG operated on its own funds, it seems they had a different approach to employees who demanded their bonuses: fire them.
--Josh Marshall
A Closer Look, Please
Over the last couple weeks we learned that after Joseph Cassano, head of AIG Financial Products, got a $1 million a month consulting contract after being canned for destroying the company. He was eventually completely, finally fired last fall after AIG exploded and the government had to take it over.
Michael Daly, at the NY Daily News, has put together the numbers. And as AIGFP was collapsing into hundreds of billion dollars of losses that the US taxpayer had to pick up, he managed to walk away with a cool $315 million.
Now, I knew that Cassano started out at Drexel Burnham Lambert under Michael Milken, which I believe is that major investment house to go under, at least in the last generation prior to the current crisis (someone tell me, am I forgetting one?). He apparently got hired away from the rubble of Drexel to start AIGFP.
But here's an interesting little nugget I'd like to hear more about ...
Company auditor Joseph St. Denis became concerned about the Financial Products unit, but Cassano barred him from checking.St. Denis later quoted Cassano as saying, "I have deliberately excluded you ... because I was concerned that you would pollute the process."
Kept the auditor from reviewing the books? If that's even close to true, that's a real problem.
Now, let's add to that. Zack Roth dug up an investor suit from January claiming that Cassano had committed fraud by misleading investors and investigators. And then there were those criminal charges the DOJ brought against Cassano's AIGFP for helping PNC Financial Services conceal assets from off its books.
You really don't think there's anything in what happened at AIGFP that we're not going to find out fell seriously afoul of a lot criminal statutes? And we're still paying out these bonuses? I suspect we need to get this conversation out of Treasury and over to DOJ.
--Josh Marshall
Best Practices
I've noted several times that some of AIG Financial Products' practices were not just deceptive and reckless but seem to meet traditional definitions of fraud. But it seems there's a track record too. Back in 2004 the DOJ criminally charged Joe Cassano's unit with helping another firm hide assets from its books. As part of the settlement they had to pay an $80 million fine.
--Josh Marshall
Lateral Transfer?
Citigroup chief economist Lewis Alexander to take job (sub.req) as counselor to Tim Geithner.
--Josh Marshall
Profiles in Chutzpah
In our slideshow of shame, behold the senators and representatives who voted against the omnibus spending bill because it contained too many earmarks, but who made sure they tucked their own earmarks into the bill.
--David Kurtz
TPMtv: Lords of Finance
I recently spoke with Liaquat Ahamed, an investment manager and author of Lords of Finance: The Bankers Who Broke the World, about three key central bank figures during the Great Depression. In our interview, he compares the current regulatory environment to the one in place in the 1920s-30s and reveals the things about the current downturn that keep him up at night:
--David Kurtz
Retroactive Retention!
Remember, one of the big reasons to give those retention bonuses to the executives at AIG Financial Products division was to keep them and their brain power and experience at the company. But it turns out that a bunch of them who just got the retention bonuses had already left the company.
--Josh Marshall
Time to Buy!
On CNBC just now, Larry Kudlow just predicting the coming historic rally in bank and financial stocks now that the "jack boot" of regulatory oversight was being lifted.
--Josh Marshall
The Big Money
Steal a little and they throw you in jail, Steal a lot and they make you king ...
--Josh Marshall
Che!
I was reading this very dispiriting article in the Times about how folks in the administration have known about the AIG bonuses for months, how the folks at AIG are now saying they'd never have done any of it without the go-ahead from the Treasury and -- best of all -- how the plan to 
get AIG to pay the bonus money back appears to involve giving AIG still more taxpayer money which they can then hand back to us as 'repayment', while the new bonused execs (bonees?) get to keep the money anyway.
But all was not lost. Because I found out a little more about AIG Financial Products, my new obsession.
We've already told you about Joseph Cassano, former head of AIGFP, the guy who ran the operation as they were busy making tons of money blowing up AIG and the global economy.
Inter alia, the Times article reports the division is now run by Gerry Pasciucco, a former vice chairman of Morgan Stanley. On the left, you can see a recent photograph of Mr. Pasciucco from a party in Belle Haven, sporting a Che Guevara t-shirt, blue blazer and handkerchief, with some sort of sporting drink I'm unable to identify (possibly a mojito?).
Given how AIGFP helped bring global capitalism to its knees, the choice of t-shirt might suggest a role for internal subversion few have yet considered. But it is important to note that AIG CEO Edward Liddy brought Pascuicco in last November, after the collapse, "with instructions to wind down the unit." So it seems that Pascuicco's role has been to sort through the rubble rather than build the bomb.
But I digress. There's an issue I've been meaning to raise with AIGFP that may be relevant to various of the questions we've been discussing today. First, it's located in London. What that means for what law governs the different questions about the bonuses? I'm not sure. Second, as the Times notes, this is a derivatives trading shop located in London. How many of the people working there are US citizens? Not that there's anything wrong with that. It's a global economy. It's a company (a division of AIG) operating in the UK. But I suspect it may play some role in the resistance to identifying who the bonees are.
--Josh Marshall
A Favor?
First, for those of you who've already taken our reader survey today, a very heartfelt thank you. We've already logged more than 15,000 completed surveys since this morning. So that's a lot of thank yous. But seriously, it's really appreciated. If you haven't already, could you take just a few minutes to fill out our survey? Here's the quick version of why it's important: We are collecting no personally identifiable information whatsoever about you. It's all anonymous. And giving us a few minutes of your time helps a lot to keep us well-funded and growing. If you're ready to take the survey, click here. If you still want more details, see this post I did this morning. Many thanks in advance.
--Josh Marshall
Timebomb
I don't think this changes the larger issue. But I'd be very curious to hear more about this, from TPM Reader EC ...
You're missing the point on AIGFP's bonuses. The reason the government has no bargaining power is that failure to pay the bonuses -- which, like it or not, AIG is contractually obligated to pay -- would constitute a "cross-default" under AIG's derivative contracts. Cross-default is considered an "event of default" under the standard ISDA Master Agreement (see sec. (5)(a)(vi)), which means that failure to pay the bonuses would allow AIG's counterparties to terminate the CDS contracts and demand a full payout from AIG. With a derivatives portfolio of over $1.5 trillion, this is no small deal. Venting over AIGFP's bonuses is fine, but urging the government to take an action which would result in hundreds of billions in losses to AIG (and thus the taxpayer) just because it would make you feel better is bad policy. Don't let cheap populism become expensive populism.
If that's the case, I cannot think of a business rationale for having the whole thing wired to explode if the CDS seller doesn't get his bonus other than a time bomb set by the sellers.
Late Update: TPM Reader KJ, who's a knowledgeable player in the industry, ain't buying it ...
I'm by no means an expert on the ISDA Master Agreement, but I think EC overstates the risk. The cross-default provision is not about employment agreements or other non-material contracts, it's about derivative transactions and other funding arrangements. So if for example, AIG defaulted on repaying its loan under a credit agreement, that would likely trigger a cross-default under its ISDA Master Agreement. The idea that an alleged breach of its bonus plan or an employment agreement could trigger its default under its swap arrangements is, well, laughable. The link below gives a nice summary of the cross default features.
And TPM Reader BK, who has even more on-point industry expertise, is even more sure ...
This is simply not true. The bonuses are owed to AIG's employees, not its counterparties. AIG's employees are not parties to its ISDA agreements.Furthermore conditions such as the payment of bonuses are not anywhere near what a "cross default" is. A "cross-default" would be if AIG failed to satisfy its obligations to Counterparty A, then Counterparty B could claim it was in default even if technically it wasn't.
The contractual obligations that AIG are under are employee contracts...not ISDAs.
There's no doomsday scenario here. The worst that can happen to AIG is that its
employees could sue it to obtain their promised bonuses.
Late Finance Scammers Bleeding Us Dry Update: Whether it's true or not is one thing. But Marcy Wheeler posted the white paper AIG used to convince Geithner that the bonuses had to be paid. And I think she's right, that this is what AIG is arguing -- that refusing to pay these bonuses could constitute a "default event" that would leave the US taxpayer on the line for as much as hundreds of billions of dollars. (Here's the actual white paper.) Whether that's true or not is another matter. But that does seem to be what they're telling us: pay us a billion or our counter-parties a trillion. You decide.
Further Clarifying Update: As TPM Reader JG points out, there's an extra step in there. AIG isn't arguing that refusing to pay the bonuses will constitute a 'default event' but that failing to pay the bonuses will lead to the AIGFP worthies quitting and that will amount to a 'default event'. JG picks up the thread in mid-nonsense ...
So, in short, we're being told that if AIG doesn't pay these bonuses the AIGFP personnel are going to bolt and that the whole firm is going to collapse because these people are, in fact, irreplaceable. Second, the firm is going to collapse because without these brilliant minds, nobody will trade with AIGFP and thus its risky positions will remain risky and become even riskier. Finally, they trot out a really unlikely scenario of the French appointing some kind of administrator and that constituting some kind of cross-default for AIG France. What counter party, in their right mind, would claim a cross-default and file a lawsuit seeking full payment simply because AIG failed to pay bonuses to some of its employees? It's absurd.
--Josh Marshall
Trash Talk
Gibbs on Cheney's appearance on CNN: I guess Rush wasn't available.
--Josh Marshall
Squeeze
The Journal is now reporting that the Treasury is perhaps going to hold up that new $30 billion infusion until AIG rescinds those bonuses.
Quoting the Journal ...
Monday afternoon, a White House official said the Treasury Department will use a planned $30 billion infusion into AIG to compel the company to repay the bonuses promised to employees of its financial-products group, which is responsible for selling the exotic financial instruments that brought the company to near-collapse.The infusion, announced March 2, won't be finalized until the company and the Treasury work up repayment options, the official said.
--Josh Marshall
Josh: We Need Your Help
As I mentioned earlier, I need to ask you for your help. It's not money we're asking for. We just need a few minutes of your time. We're conducting a reader survey. And if you can give us a few minutes to fill it out, it will make a big difference in keeping TPM well-funded and expanding. If I've already convinced you, just click here.
If not, let me cover a few more details. We're not collecting any personally identifiable information about you. You're not going to go on any list or in any database. This is purely to assemble an accurate picture of our audience as a whole. You remain completely anonymous.
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So a few minutes of your time will help us keep improving and expanding TPM. If you're game, click here to do the survey. And please accept my sincere thanks in advance.
--Josh Marshall
Bringing in the Feds (the other kind)
Speaking of bringing in prosecutors, TPM Reader RM reminds us that the UK's Serious Fraud Office has already opened a "preliminary inquiry" into activities at AIG's London-based Financial Products division.
--Josh Marshall
Where's Labor?
From TPM Reader RH in Michigan ...
The issue of the bonuses to AIGFP is tailor made for Ron Gettelfinger to contrast the treatment of Labor and Capital in this crisis. He should be out front and center explaining how many UAW households had to give back wages to make up that $165,000,000 that went to AIGFP in bonuses. This is a battle for workers that I long to see but Labor just doesn't seem to be able to bring it. Humanize this issue to win it.
--Josh Marshall
The Liddy Letter
We've referred several times to the letter AIG CEO Edward Liddy sent over the weekend to Secretary Geithner -- in which he tells Geithner, with great courtesy and heaviness of heart, to go screw himself. Here's the letter itself for reading pleasure, or displeasure, as the case may be.
--Josh Marshall
Going After AIG
President Obama just delivered remarks on the AIG bonus fiasco. We'll have the vid for you shortly. Meanwhile, top Obama economic adviser Austin Goolsbee is saying the Administration will do everything in its power to get those bonuses back and reiterating their outrage:
See more at MSNBC.com.
I guess their outrage is a little hard for me to swallow at this stage of the game. They just got schooled by AIG. Their initial outrage should have been about the bonuses, but their outrage now ought to be about AIG's fundamental misapprehension of what the post-bailout relationship between the company and Treasury is all about. AIG doesn't seem to get it -- and I'm not convinced yet that the Administration gets it either.
Late Update: The President himself addresses AIG:
--David Kurtz
Our Final Offer Is This: Nothing
Whatever else you can say about AIG CEO Edward Libby, he ain't much for irony. In his letter to Secretary Geithner he said that AIG "cannot attract and retain the best and brightest talent ... if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
As noted yesterday, the bonuses are overwhelmingly weighted toward AIG's Financial Products division (AIGFP), the relatively small division responsible for the company's de facto bankruptcy and no little part of the world financial crisis.
With respect to AIGFP, there's no little snarking to be had about whether these folks are really the "best and the brightest." But it actually goes beyond that. It's not just the people. The whole division is
toxic and should be shut down, probably the building should be razed and the ground salted. AIG is a ward of the federal government. Our only financial interest in it is in chopping it up and getting the best prices for the valuable parts of it. I don't think AIGFP is going to have a lot of takers. And as a matter of policy I think we probably want to close it down.
More generally, the idea that there are a lot of jobs on offer at the moment for credit default swap writers strikes me as dubious.
The other argument -- real, as far as it goes -- is that what we're trying to do is untangle a massive ball of twine these guys created. And as much as we might revile these characters we can't do without their help trying to get it unwound. Again, true as far as it goes. The problem, though, is that we're even entertaining the question on the retention/compensation front. The government has more options.
As noted previously, the scale and nature of a lot of the losses at AIGFP go well beyond reckless and folly. A lot of it looks like fraud. And go-go operations like AIGFP don't tend to fare too well in general when subjected to searching legal scrutiny. The government should be making it clear that criminal investigators are reviewing the entire matter. Contracts don't easily withstand credible allegations of illegal behavior. And the executives in question need to have their attention focused on the calculus of levels of cooperation and legal vulnerability rather than compensation packages.
--Josh Marshall
A Special Request From Josh
Over the years, I've come to you many times asking for your help. And I'm doing it again today, for something really important. It's not your money we need. I need a few minutes of your time to take our reader survey. If my ask is enough, just click here. It'll just take a few minutes of your time.
If not, let me explain why we're doing this and why it's important. First, a key point: we're not collecting or keeping any information about you specifically. You won't get on some list or into any database. We're only collecting data about our readership as a whole. You will be totally anonymous.
Our ability to keep hiring new reporters is based on our ability to sell ads. And our ability to sell ads is based on having good information about who our readers are. It's as simple as that. Just a few minutes of your time will make a big difference in keeping TPM well-funded and growing.
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And please accept my sincere thanks in advance.
--Josh Marshall
Dick is Still Dick
Not feeling angry enough today? Want a jolt of rage? For you, we have highlights of Dick Cheney's CNN interview yesterday:
More at CNN.com.
--David Kurtz
TPMtv: Sunday Show Roundup: Whatcha Gonna Do?
National Economic Council Director Larry Summers, White House Council of Economic Advisers Chair Christina Romer, and Representative Barney Frank (D-MA) all feel the same anger and outrage over the fact that insurance giant AIG has payed out hundreds of millions in employee bonuses after receiving some $170 billion in taxpayer bailout money. But can the government actually do anything about it? We find out in today's Sunday Show Roundup ...
Full-size video at TPMtv.com.
--Ben Craw
TPMDC Morning Roundup
Obama set to tap his campaign's ginormous email list to mobilize support for his budget. That and the day's other political news in the TPMDC Morning Roundup.
--David Kurtz
Required Some Redacting, But ...
DH makes a decent point ...
As Liddy surely knows, when a company wants to get out of a contract that is questionable or troubling, it can generally find some legal theory to justify disavowing the contract. Here, given what has happened at AIG, it would be shocking if there were not a plausible argument that the AIGFP ******* breached whatever contracts allegedly entitle them to bonuses. Assume that AIG refuses the bonuses, and the ****bags sue to collect them. AIG gets a jury trial. What jury in the USA would award bonuses? It's damn near inconceivable. Liddy is paying the bonuses because he wants to pay them and could give a **** about honor, decency, taxpayers, responsibility, whatever.
I was going to write this up tonight; hopefully I'll be able to tomorrow. But the real issue for these people at AIGFP is criminal jeopardy. As noted earlier, a lot of the stuff these folks were doing looks like fraud. It would be helpful to make that clear. It might lead to more constructive decisions on stuff like these bonuses.
--Josh Marshall
Why It's Cutting
Like you, I've been watching this AIG bonus story unfold over the weekend. And though I did not see it at first, I think it may prove to be a turning point, both for AIG and the government.
I don't believe the bonuses themselves are the heart of the matter, nor the fact that they're going to the very executives who caused AIG's implosion or even the galling reality that, since all money is fungible, they're being paid with taxpayer dollars. What's really driving this forward -- and what makes it such a dangerous moment for the White House -- is the jarring image of the administration's impotence.
Secretary Geithner found out about the bonuses. He told AIG CEO Edward Liddy it wouldn't fly. And Liddy, in a curiously imperial letter, tells Geithner that much as he is pained by the situation -- to blow it out his ass. Which he apparently proceeded to do.
There's really no other way to describe it. From the Journal ...
Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit -- whose woes caused massive losses at the giant insurer -- are due on Sunday, and added "quite frankly, AIG's hands are tied."...
Mr. Liddy wrote in the letter to Mr. Geithner that it followed a conversation between the two men on Wednesday about "compensation arrangements" at the financial products unit and AIG in general. "I admit that the conversation was a difficult one for me," Mr. Liddy wrote.
In the letter, Mr. Liddy wrote that "outside counsel" had advised that the previously agreed to payments to employees at the financial products unit are "legal, binding obligations of AIG." He wrote that there are "serious legal, as well as business, consequences for not paying."
"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Mr. Liddy wrote, but added, "Honoring contractual commitments is at the heart of what we do in the insurance business."
Few exchanges have so captured the disconnect that makes this situation so politically explosive. We're collectively taking our country's future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we're receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us -- dictates we promptly accede to. There's a beggars can't be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we've been told, that in addition to picking up the tab we're being played for fools.
--Josh Marshall
The Real Scandal
Robert Reich on the real scandal of AIG.
And Jon Taplin has more about how one lucky hedge fund that got bailed out by the AIG bailout.
--Josh Marshall
Golden(man)
Right there in that AIG press release, with some really simple addition, is the amount of taxpayer money that went to Goldman Sachs via the AIG: $12.9 B.
--Josh Marshall
A Glimpse into AIG
AIG has released limited information on who its biggest counter-parties were.
Here's the broken out list. And here's their general press release announcing the list.
The 'toplines' don't seem terribly different from what had been assumed. European banks show up disproportionately among the highest payouts. Barklays $7B in payments to counterparties by US Securities Lending, $.6B through Maiden Lane III, $.9B in collateral postings under AIGFP CDS.
The biggest recipient seems to be France's Societe Generale for about $12B. Deustche Bank got slightly less.
The one thing I had not heard of previously was $12.1B that went to municipalities in twenty states.
--Josh Marshall
Just Gets Worse
The first reports said either $100 million or $170 million in bonus payments. But there was a lot of unclarity about what kind of bonuses they were and how many were going to the folks at AIG 'financial products' division, where they wrote those credit default swaps that blew up the company and will likely cost taxpayers hundreds of billions of dollars.
But the Journal says the number is actually $450 million to execs at the financial products division and a $1.2 billion spread across the whole company.
As you can see, despite the fact that this relatively small division of the company created almost all the loses, it's still drawing in a vastly disproportionate share of the cash bonuses.
--Josh Marshall
Interesting
DARPA (the deep R&D outfit at the Pentagon, which 'invented' the internet) is starting to explore 'geoengineering'.
What does that mean? In this case, it basically means way out things you could do to the earth to slow down, arrest or perhaps even reverse global warming.
--Josh Marshall
TPMDC Sunday Roundup
Former VP Dick Cheney says that President Obama is putting America at risk of another terrorist attack. That and other political news in today's TPMDC Sunday Roundup.
--Eric Kleefeld
On Chase Being on the Line for Madoff
From TPM Reader MM ...
Granted they were different banks (North Fork vs. Chase), but you gotta love that Eliot Spitzer's transactions of a few thousands of dollars here and there raised alarms, led the bank to report them to the Feds, and resulted in wiretaps of Spitzer. Bernie Madoff's transactions of billions of dollars back and forth? Nah, nothing to see here; perfectly normal!
Not that it's a defense of Spitzer. But it does raise very serious questions about JP Morgan/Chase's behavior with Madoff. More on that here.
--Josh Marshall
Bogus Bonuses
As noted last night, I don't think contractual bonus obligations have much standing in bankruptcy proceedings. But this article from CFO.com, sent along by TPM Reader JM, suggests that that's only the start of it. The article is about the follow-on to the Lehman bankruptcy. But what it argues is that if creditors can show the the bankrupt institution was actually insolvent at the time the payments were made they can force the execs to cough up earlier bonuses as well. And remember AIG was in dire straights long before the US government stepped in and provided the lifeline last fall.
Late Update: As we know, AIG isn't legally in bankruptcy, though it's only been saved from that fate by a government bailout. But TPM Reader CW raises what is in many ways a more spot-on point: "Have Richard Shelby and Bob Corker held their press event demanding that AIG break their contracts with their overpaid Financial Products workers for their shoddy work?"
Good point.
As noted in other contexts, beggars can't be choosers. It's really too rich for AIG to continually come back to the government asking for billions of dollars and tell us it's tough luck when we ask for revisions that should be no brainers. The folks running AIG's financial products division should be happy to escape this mess without criminal indictments. And that's not hyperbole. When you look at what they were doing, foolish or high-risk behavior are inadequate descriptors. It really amounts to fraud.
--Josh Marshall
Where He Kept the Money
Could Chase be on the line (financially, not criminally) for some of Madoff's fraud?
--Josh Marshall
