The Bonus Agony
Michael Lewis has an incredible column today on the AIG bonus scandal. The author of “Moneyball” points out that the insanity over the $165 million in bonuses to AIG executives is just that: insanity. The government has already agreed to pay out $173 billion. The bonuses make up approximately less than .1% –that is they constitute barely one one thousandth of the total. There is (regrettably) a solid consensus in the political class that the bailout of AIG is necessary for a recovery. But instead of complaining about the bucket, we’ve gone mad about a few droplets:
But when AIG itself pays out $165 million in bonuses — money it is contractually obliged to pay — the entire political system goes insane. President Barack Obama says he’s going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.
Every recriminatory bone in the political body is aroused; the one thing you can do right now in Washington without getting an argument is to rail against the ethics of AIG’s bonus payment.
Apart from Andrew Ross Sorkin at the New York Times, it occurs to no one to say that a) the vast majority of the employees at AIG had as little as you or I to do with its quasi- criminal risk taking and catastrophic losses; b) that the most- valuable of those employees can easily find work at AIG’s competitors; and c) that if the government insists on punishing those valuable employees they will understandably leave, and leave behind a company even less viable than it is, and less likely to give the taxpayer back his money.
And also — oh, yes — that if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.
Indeed. Lewis even points out that most people have a difficult time separating millions from billions.
To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)
Lewis is absolutely right: we’re innumerate. Read the whole thing, please. And check out Lewis’ excellent piece on the financial madness in Iceland from Vanity Fair.
All true, yet… there is something about inflicting some sort of disapproval or penalty – essentially public shame – that makes the effort worth while.
It tells both AIG people and the government people overseeing this mess just how mad the public is at them, as they should be.
People should have gone to jail for these actions, and yet no one has even apologized or lost their job.
AIG should have been left to die and the fact that they are still in business is the real scandal.
Ah, a whiff of the thoughtless old pro-corporatist “conservative” instinct. Sure, that’ll play well with the public now, go to bat for AIG execs with their bonuses ranging as I understand it from just below $100 grand up to several millions. Cry about how many had nothing to do with AIG’s insolvency and “can easily find work at AIG’s competitors” instead of being a real conservative and saying “good, let them, because that’s exactly what should happen in a free market.”
Has anyone noticed what strikes me at least as the mammoth inconsistency in so much of what seems to be happening with these bailouts in that while the government says that they need to perform them because otherwise the collapse of this or that institution’s *function* would have chain-reaction-type effects, the government doesn’t seem interested in preserving just that “function.” Instead it’s trying to preserve the failed entities *themselves.* As if … Hank Paulson and Tim Geithner and indeed Congresspeople (who have gotten so many donations from those entities) just can’t conceive of a cosmos without a CitiBank, or an AIG, even if that someone else were doing the same thing they do, only profitably.
For (minor) instance, why is it that so much of the money given to AIG ultimately went to banks and etc. who had claims of insurance losses on AIG? Why not just give the freaking money *directly* to those insureds if same was so important?
Or, for perhaps the largest instance, when all this started and the government *firstly* said that we simply had a frozen credit problem why go and give zillions to banks without even requiring that they then lend same out, instead of the government merely saying it would be the lender of last resort?
So here I predict will be the second beyond-corrupt shoe that will eventually drop in all this after the first instance of taxpayer rapine that is the initial giving of bailout money to these institutions passes: Eventually the government will try to get out of owning portions of these losers it is propping up and will be selling its shares. And at that point, at fire-sale prices, the buyers will be the same executives that ran the places into the ground in the first place and who kept their jobs because of the bailouts, and who will then be gaining actual cheap ownership of the entities they so nearly destroyed.
Cheers,
People who understand numbers, engineers, teachers, computer people, accountants, small busnesspersons, scientists, the list is nearly endless.
It brings a chuckle to hear a member of the press explain that a dollar is 6 inches long, so take 5,280 times 2, and that’s a mile, 250,000 miles to the moon… etc. Painful to see a fresh mind struggling with new concepts, and trying to explain this to what is perceived as an easily led and easily duped public.
We know about the 170-something billion passed through AIG, so far. We know that 165 million is 1/8 of ONE BILLION. We know that 30 or 40 billion of that has been shipped overseas, so far. We know that AIG is acting as a “mule”, passing these funds to financial institutions who were supposed to receive government payouts, sans all the scrutiny.
We have all heard Treasury Secretary Timothy F. Geithner explain to an angry congressperson on MARCH 3RD, why it would be necessary to pay the bonuses, and the similar bonuses which will be due to the same people next year.
We watched Geithner and Obama stare into the camera and sincerely claim that before March 10th, this was a mystery to the Treasury Secretary, and before March 12th, the President was clueless.
Senator Dodd, who authored the SPECIFIC WORDING that authorized these payments with public money, will tell stories about the computers that printed out the bill, and the panic under which the votes were taken so as to prevent humans from knowing the mistakes those awful computers made. Those mistakes that coincidently paid hundreds of thousands to him and a few of his buddies last year.
Next time somebody says, “Can’t we just give Obama a chance?”, then we will reply, “Why do you think we haven’t tried to impeach him yet?” What else can this be, except charity and patience?
You certainly don’t think crooked Republicans are complicit, do you?
No one here is going to bat for the bonuses.
I’m sorry but I think the whole concept that we shouldn’t get upset over the bonuses because they represent only a fraction of the bailout is a strawman.
The outrage isn’t over the amount of waste. The outrage is over the perverse incentive structure that apparently permeates the financial industry.
No one is going to bat for the bonuses? Sorry, but it sure sounded that way.
Are the people getting bonuses of $100K really that talented? Would they get snapped up right away, or would their big salaries be exactly those most difficult to duplicate in a rotten job market? Bet most of them wouldn’t try. And what’s the point of paying ‘retention’ bonuses to those who’ve already departed?
As to the ‘sanctity of contract’ – Glenn Greenwald (and many others) discussed this at length, and I’d refer you to his columns. The bottom line is that contracts get renegotiated all the time, for any number of reasons. A good example would be union contracts negotiated with the automakers that were reopened in order to get the automakers bailed out. And had AIG been dealt with as it should have, in bankruptcy court, those contracts would have been void anyway.
The point about the relative size and importance of the bonuses to the enormity of the AIG bailout is well taken. People should be fuming about the $Bs, not the $Ms. However, in no way does it justify paying those bonuses.
It’s not just about punishing these fellows though: it’s about recognising and and not perpetuating a systemic flaw. This represents the institutionalisation of huge profits/bonuses for taking incredible and irresponsible risks; you simply cannot allow this to continue if you do not want the same behaviour and systemic attitudes to replicate themselves. There must be some kind of consequences – how would bankruptcy affect these sacrosanct contacts? – and if not bankruptcy for the entire institution, then certainly not the institutionalised bonuses for collaborating with and profiting from this institutionalised and systemic behaviour.
Michael Brendon Dougherty wrote:
“No one here is going to bat for the bonuses.”
Well Michael, I see that line in your original post noting that as compared to bailouts themselves these bonuses are drops in the bucket, but otherwise it could seem that the rest of it—and indeed Lewis’ article almost entirely—could very much appear to be sniffing at those who are outraged at these bonuses, and even though it’s now obvious that wasn’t your intent that’s frustrating.
Frustrating because obviously much of the outrage over these bonuses is itself only frustrated, re-directed anger over the bailouts as a whole. And yet, still, the entire message of Lewis’ piece seems to be a kind of sneering at the “innumeracy” of the hoi polloi with nary a peep about the innumeracy of those financial titans he seems to feel are so hellishly cool and whose advanced thinking was that buying and insuring those subprime mortgages and credit default swaps were just so numerically cool.
Not all that different from Lewis’ piece on Iceland with its scarcely hidden disdain at the Iceland fisherman who became an investment banker and all those other Icelanders who got involved in high finance without the sparkling Ivy MBA’s that Lewis apparently feels mean so much.
Look, for instance, at what seems the central cri de coeur of Lewis’ piece which you didn’t mention in favor of talking about the innumeracy of the herd:
“Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem — the people who borrowed money to buy homes they shouldn’t have bought.”
So aha, Lewis feels, it wasn’t those Brioni-suited financial geniuses with the $100,000 throw rugs in their offices and the weekend homes on the Hamptons and the Harvard and Wharton degrees and etc. that apparently so embarrassingly impresses him that are responsible for *giving* these mortgages. (And then “securitizing” them and over-rating them and insuring them and building endless hollow spreadsheets out of them and etc., etc.) No, it was the (utterly understood and long not a problem) phenomenon of people simply being too optimistic about how much house they could afford that was the problem.
And no it wasn’t the fault of those guys with the $1000 razor haircuts on Wall Street who he so obviously (if still perhaps unconsciously) idolizes who thought they were so smart so that they could take their corporations into incalculable depths of debt based on models your average ditch-digger would laugh at; it’s again those damned homeowners.
And it’s even further frustrating because if ever there was a time that the public would understand and appreciate that true conservative, free-market people *aren’t* just shills for big corporations and sleek bankers and fat country-clubbers it’s now. And understand and appreciate that true conservative, free-market principles regard these bailouts as corruptions of almost the highest magnitude.
And yet what do we get but Republicans and faux conservatives *starting* these bailouts and still playing footsie with them and Democrats and liberals continuing them, and nobody but nobody blasting them for the abominations they ever-more obviously are. And nobody pointing out that with 30 seconds of thought it can seem that the purposes of damned near each one could seem to be reached by the government in ways that aren’t so antithetical to free-market principles, and to hell with saving this or that mere corporate entity.
So its frustrating seeing Lewis’ mewling over our alleged innumeracy even if you’re right that it’s an interesting little aspect of all this and certainly is exactly the kind of thing that is fodder for a blog entry.
What would be more satisfying to me at least however is seeing TAC—”the premier journal for thinking conservatives” supposedly—come out with what seems eminently justified and that is an entire cover and issue (if not a few entire issues) devoted to blasting the hell out of these bailouts and both the Republicans and the Democrats and talking about the alternatives gone wanting and unexplored, and putting itself on the public map as being at least the one place where the public’s justified anger could find a home.
Cheers,
TomB,
But what is the point of lamenting and chastising bailouts that happened 6 months ago other than to just fuel your anger toward the financial system? That doesn’t seem like to be a great attitude to have. Sure you might be pissed off, but wouldn’t you rather be concerned with how to get out of this mess with as little damage as possible instead of looking back six months and spouting anger at bankers, Democrats, and Republicans?
What *is* frustrating about the bonuses and bailouts is that very few people want a healthy debate about it. They would rather keep it a 2-dimensional argument of pro or anti bailout/bonuses. The problem is that the financial crisis has many dimensions that all have varying importance. For instance, I was anti-bailout all along and thought the whole thing was hastily put together. But the bailout is what we got, like it or not, so I’m willing to move past being anti-bailout in order to try and figure this whole thing out. It is another roadblock, but those are the circumstances now.
When Mr. Dougherty said, “No one here is going to bat for the bonuses,” I’m assuming he means that nobody here is going to support them as legitimate and worthy. But they may be able to accept them if that means the best chances of moving forward. Like it or not, AIG needs employees to operate. Like it or not, our government has given them $170 billion to continue to operate. Like it or not, the reality is that we need AIG to operate in order to keep the system on its fragile footing. If the creditors at AIG even get the hint that they won’t get paid, the whole system slips and we go into another downward spiral. So why try and undercut that? Being angry isn’t a good reason to undercut the system we have in place. Sometimes we need to learn to channel our anger in order to get to a better place.
For instance (hypothetically speaking), if a kid does something reprehensible you could hit him out of anger. It would definitely teach the kid a lesson and he may not do it again out of fear of getting hit again. But now a bad relationship is formed between you and the kid. So, instead of hitting the kid, you take the high road, and work with him. You make sure he understands that you are very upset, but at the same time, you try and understand why he did what he did so that you can both find ways to avoid the problem in the future. This way, a good relationship is formed and trust can be built. Taking that example to the current crisis, we need a good working relationship between government and business. We cannot afford to alienate the business sector. We must work with them. We must use our anger to say we are upset, but then hold back and understand why bonuses were paid (to keep people at the company). And then move from there.
It sounds like you, and many others in the United States, want the bankers to change their ingrained habits when they are in ICU after a heart attack. Thats not possible. Unfortunately, we need the bankers to get us out of this mess. And once we are out we can then start to make changes. I agree with you that the whole banking and finance system is messed up and needs to be reformed. I agree with you that real conservative principles would look down on all of this. But conservatism isn’t that simple. Conservatism is humble enough to recognize the circumstances and work with them in order to keep society stable so that we can build upon our fragile footing. Once we get our financial system out of ICU, then we can begin to make changes that reflect prudent free-market tactics.
I’ve come to the conclusion that there is no clean way out of this. There is not “golden solution.” Many people still think that there is a solution where all can be happy. A solution where a whole sector of our economy gets absolutely screwed (most times justifiably) but everyone walks away happy. Obama’s rhetoric plays into this hope that we will storm out of the crisis with a golden solution. In order to get the best solution, we are going to have to live with some bad stuff – like bonuses being payed out banking execs.
The claim that ‘we need AIG to keep the system going’ is an argument whose generic version is ‘Nobody likes to help these people (bankers etc) out, but we have to do this to keep from having a ‘meltdown.’ This is a constant theme from the mainstream financial press, as well as from Obama’s economic team.
Do you really believe that if AIG had been sent to bankruptcy court instead of bailed out that we’d now all be eating roots and berries? And what is a ‘financial meltdown’? Sounds to me like moms should start telling little kids to ‘eat your broccoli , or there will be a financial meltdown.’ To prop up AIG or bail it out is a policy decision, and it deserves analysis beyond Chicken Little nostrums.
Had AIG been sent to bankruptcy court, instead of the taxpayer enriching Goldman and UBS et al by making payouts on AIG’s CDS contracts, in full, those contracts would have been settled for pennies on the dollar. Bonuses would have been paid if allowed by the court, and the bonus money would come out of creditor’s hides and not the taxpayer. Far from a ‘meltdown’, letting AIG go under would have been a step back to sanity and health, allowing the market place to begin healing by culling the sick, thus creating opportunity for players smart enough to have survived.
As for needing the bankers who got us into the mess to get us out: where’s the logic there? Indeed, logic suggests these people are, in fact, not at all talented and should be replaced. Conclusions one might fairly reach about the character of this group is even worse – recklessness, reward without merit, and greed are hardly characteristics that will bring the US back to financial health.
No doubt the mainstream financial press, and creatures of Wall Street like Geithner, see a world where AIG goes bankrupt and Citi and BofA get seized as being an Armageddon type event, a meltdown. That’s because it’s the end of the world as they know it. Their goal is a return to the the status quo ante, because it benefits them the most. I doubt this is possible, and I’m even more skeptical of its desirability.
I’m not from the mainstream press, and I have been pretty critical of how the Obama administration has handled this issue. Again, this is not a black and white issue. It is not 2 dimensional. Looking at this as “Bankers v. The People,” is not the way to approach the financial crisis.
If AIG had declared bankruptcy, without much warning, then there would have been runs on many financial institutions. Anybody with positions in AIG would be racing to find out how to get short-term money. Investors, and companies, with positions with companies who had positions with AIG would be racing to pull money out. It would have caused a chain reaction that would have left hundreds of institutions insolvent within a few days time. Many banks would have had to close their doors to its customers. And this is when the real problem sets in. Liquidity is then frozen and commerce halts. Your money would be FDIC protected, but you would not have instant access to it because your bank would be insolvent. In this situation, millions of people are now subject to a ham handed and ineffective government to get their money for them. HIGHLY undesirable.
Would it have been as bad as the Great Depression? I have no way of knowing. But why put an entire country in that situation? It now becomes more than a financial issue. I’m not saying that world would have ended and we would have been stuck eating roots and berries. But the problem would have quickly spread to small businesses that are the rocks of communities. It would have had an incredibly destabilizing effect.
As I said in my first post, the bailout plans were poorly conceived and I didn’t support them. But regular Ch. 11 or Ch. 7 bankruptcy would have caused instant panic. I actually think a government receivership/planned bankruptcy would have been the best option. Essentially, you have the government guaranteeing main creditors that they will have access to cash via the Treasury or Fed, but the the company, AIG in this case, gets wound down and broken up. This way, the execs who ran the company into the ground get hosed and so do the board members who only cared about cash. If the company can be saved, the government picks board members and executives and proceeds as a court would do under Ch. 11 – giving the company 3 years to become profitable or forcing it into Ch. 7 liquidation.
People have to realize that the financial sector does not operate in a vacuum. Choices by higher ups, as we have experienced, have profound effects on the rest of the country, and world. I think this is why decentralization is the way to go. But, we didn’t have that, so we have to work with what was given to us now. If we can stabilize the economy and decentralize some of the power away from Wall St., I would be all for it. But like I said earlier, we are not at that point yet.
As for your point about the bankers, I think you are painting all bankers with a pretty wide brush. Not all bankers are conniving, unethical, and greedy people. A lot of them are. But you have to remember that it was a small section of AIG (the CDS division) that over-leveraged the whole company and brought it down. Should the executives have stopped this? Sure, but not everybody understood what was happening. Only a handful of people knew CDS enough to operate them correctly. I must ask, if you hate bankers so much, do you have a bank account? Or do you only pay with cash? Bankers are a fact of life, and in order to have some type of desirable outcome, you have to give them some trust. You just have to keep them in check with a watchful eye, something nobody was doing in the past.
Your scenario of what would have happened if AIG was allowed to go bust is interesting, but what facts support it? My argument is that had AIG gone under it would have seriously affected many very wealthy, very politically connected people and institutions. One of the original points of this discussion was that outrage about bonuses distract from the more outrageous backdoor subsidy sent to Goldman Sachs and others by honoring AIG’s CDS contracts. Whether the course is bankruptcy or bailout, I’d never claim we’re in for an easy time. However, no matter what big name goes under, the sun will come up, and if the sun comes up someone will be looking to make a buck. That being so, credit will once again flow. My view is that Wall Street is fundamentally corrupt and unreformable except by allowing the market to function.
As to bankers – at my financial level, the bankers I encounter are just working people like me. You’d have to go way far up the food chain to get to someone who gets a six or seven figure bonus. I trust my bank because all of my deposits are insured in full by the FDIC – and even if the bank is taken over I retain immediate access to all my money.
As to trusting bankers at the level of high finance – you’re joking, yes? The history of high finance in America is a history of one financial panic after another, beginning in the early 19th century, occurring every 10 years or so, with increasingly devastating effects. Culminating in the Great Depression, at which point the recidivism of the banking class was noted and some attempt made to control it. If you were born before about 1985 you are now witnessing your second major financial system collapse, both created by levels of fraud and incompetence at the highest levels. I trust people like this, all right. I trust them to be consistent.
The Lehman Brothers bankruptcy provides a lot of evidence for what most likely would have occurred if AIG would have filed for Ch. 11.
On Sunday, September 14, it becomes obvious that Lehman is insolvent due to over-leveraged CDS contracts and rumors that the bank did not have enough money to pay the swaps off. Barclay’s and BofA both decide not to purchase the bank because the debt was outrageous (~$630 billion).
On Monday, September 15, the markets drop 4%, the largest drop since the day the markets re-opened after the September 11 attacks. That day bank stocks were murdered Goldman Sachs down 19%, Citi down 15%, AIG down 60% (people were fearing its bankruptcy too). Some of the losses were from the fear of AIG going under on top of Lehman. But the fear is what was causing the runs. Nobodly really knew if AIG was bankrupt, they just guessed, and couldn’t afford to wait to find out. So they took their money out.
The next day, Tuesday September 16, the government knew the markets couldn’t take much more, so they bailed out AIG for $85 billion.
People were pulling money out of the market simply out of fear. This is how Wall St. works, a simple rumor can make people panic because they don’t want to be the one stuck with money when a company goes under. Its like a giant game of hot potato. The general fear was that AIG, one of the largest insurers in the world, went bankrupt and got no government help, it would mean that no bank was solvent and the government wasn’t coming to help. So now there would be no way for anybody to recoup their losses because there was no more buyer of bad banks. So regular banks would sit on their money and not give it out of fear that they wouldn’t be solvent once the industry would de-leverage. This is what happened with IndyMac bank. They ran out of money, knew they didn’t have enough, so they closed doors, wouldn’t allow people to take out money, and then went bankrupt. So the FDIC had to come in and bank people’s money.
As for it only being rich people affected, AIG was one of the 10 most commonly held stocks in 401(k)s, so it wouldn’t just be rich people screwed. Pretty much everybody had some insurance policy with AIG. Even if you don’t know it, your insurance company probably sold it to AIG. The company was active in 130 countries with 74 million customers, rich, middle class, and poor. So if AIG went bankrupt, all those insurance policies held by banks and other businesses would be worthless, and they would be forced to write it down. I mean, the bailout allowed Goldman and Morgan Stanley to survive. But if the insurance market in the country went insolvent, it wouldn’t just be rich people hurting.
You are free to disagree, but living in those conditions would be hell for everybody. The rich and greedy would pass the buck on down. Consumer confidence would be shattered and foreign confidence in U.S. business would battered as well. The poorest always get hurt the worst in these types of situations. Like you said, the sun always rises, but the question is, at what cost?
Your distinction on local and corporate bankers is important. I hope we can get to a point in a year or so when we can decentralize power to local banks because we can trust them more than than the corporate execs.
Phillip Kibbey wrote:
“Sure you might be pissed off, but wouldn’t you rather be concerned with how to get out of this mess with as little damage as possible instead of looking back six months and spouting anger at bankers, Democrats, and Republicans?”
Six months? Phil, AIG just received it’s latest tranche of $30 billion some two weeks ago, and already people are saying that another $20 to $30 billion more will likely be injected into it in the near future. And Treasury just pumped some humungoid chunks into a couple of other southern banks, and etc., etc., so in fact we are right in the thick of this stuff now, with no end in sight. Indeed I see the Las Vegas *casinos* are shuffling up to get a piece of this corrupt pie, so what’s next? The pimps of the country incorporating so as to belly up to this open bar because their business too has gone … flaccid?
So no, people who are exercised over this aren’t some cranks fixating on the past who can be dismissed by saying they’re cranks and the cry to let bygones be bygones and to move on and etc. and so forth. Not that this is what you are doing but of course that kind of smear and plea for somnabulance has always been a favorite of sharpies trying to fleece their suckers into forgetting the first fleecing they gave them.
So we are still in the thick of this and so as to address the balance of your posts it seems to me it can be said to come down to the validity of your assertion that we ought to accept them given your apparent feeling that they “mean the best chances of moving forward,” or, as you said as regards the AIG bailouts in particular “[l]ike it or not, the reality is that we need AIG to operate in order to keep the system on its fragile footing.”
Except to all that I’d say that what I said before which is that maybe—maybe—we need some of AIG’s *functions* to be operated by the government for awhile. Just like maybe—maybe—we need some of CitiBanks functions to operate for awhile and etc. and so forth. But we don’t need those corporate *entities,* and yet preserving same is exactly and expressly *what* these bailouts are intended to do.
For instance I can even swallow the government having stepped in when AIG was looking like it had to go into bankruptcy and saying that it would make good on such defaults that it thought might endanger the stability of the system, but saving AIG itself is entirely irrelevant to that. Just the same as with saving all these banks supposedly to keep credit flowing, even though they don’t seem to be using their bailout money all that much for that, and even though the government itself could have stepped in and simply said that *it* would be the lender of last resort if any bank was too stupid to make a sound loan.
And you yourself talk about alternatives like planned bankruptcies, which is a great idea, if indeed they would even be needed at all given what I believe is the abundance of flexibility already in the existing bankruptcy system to allow government to minimize or eliminate the disruption that any firm’s tanking would involve. (Such as, for instance, having the government step in after any Chapter 11 filing and ask that it be appointed the receiver so that it can liquidate the entity in as slow or orderly a fashion as it thinks desirable, and which still allows the government to pay whatever bills that the bankrupt estate couldn’t if it thought that was necessary too.)
But no, instead of government devoting even 30 seconds of thought to such things (which we laypeople have come up just off the cuff), it’s gone whole hog with taxpayer money trying to preserve these rotted-out corporations themselves instead of just their important functions.
And here’s a question for you given your assertion that as ugly as it might be we have to do what we are doing just out of pure utility: Just when do you acknowledge that it hasn’t worked to date and shows no evidence that it will work any better in the future? The government keeps pumping this dough into AIG for instance, each time saying that’s all that’s needed to keep it on its feet. And yet every three months or so gee, another huge tranche turns out to be needed. Just as the government keeps pumping dough into Citibank, and yet Citibank’s stock just keeps falling and falling and falling.
And on and on an on. So yes I *am* concerned with the pragmatics of what will work, and no I don’t believe the present bailout course will work, for exactly the same reason that it hasn’t worked for Citibank. Indeed, what else *can* that experience show other than that people who believe government doesn’t know what it is doing trying to save such a loser? (And these are people in the know, in the market.)
And I’m also not just blowing off steam for the sake of same but also concerned about the future too since I’m afraid the lesson of all this is going to be an almost complete rejection of free-market ideas. And that’s why I feel the Republicans and faux conservatives especially ought to be raked over the coals for going along with all this bailout stuff so far which is so diametrically opposed to true free-market principles.
For the last forty years or so especially conservatives and free-market believers have been very successfully painted as being mere shills for the greedy and big business. And by supporting and indeed even by refraining from bashing the hell out of these bailouts as being the ultimate in free-market corruption all that’s being done is confirming that charge for as long into the future as one can imagine. And rendering any future pleas to trust in the free market just laughable.
Ad so once again my remarks aren’t out of some fit of personal pique, nor indeed even marginally just a matter of anger. In fact given my age and financial situation almost nothing that can happen can touch me personally so I have no reason to be even anticipatorily mad. What I do believe in however is ideas, and I see no reason why they should always be wielded meekly, after the fact, after the triumph of all the bad ideas that are out there.
Cheers,
TomB,
I was referring to the first AIG bailout back in September. I know they have received more money, but to me its just a continuation of the first bailout. As they unwind their books its becoming clear that they owe more than most experts thought. Its kinda of a perfect illustration of how ugly and risky the CDS market was.
You wrote:
“Except to all that I’d say that what I said before which is that maybe—maybe—we need some of AIG’s *functions* to be operated by the government for awhile. Just like maybe—maybe—we need some of CitiBanks functions to operate for awhile and etc. and so forth. But we don’t need those corporate *entities,* and yet preserving same is exactly and expressly *what* these bailouts are intended to do.”
But I don’t trust the government to run the company any better than private company. The government half runs Freddie and Fannie, yet they still managed to put those companies into highly leveraged positions and ran huge debts, even when warned about it in 2004. Even now, the government has a 79% stake in AIG and still can’t manage to oversee and regulate something like executive bonuses. In the planned bankruptcies that I advocated above, the benefit is that the bad management and board is replaced by, I hope, private sector managers who are then overseen by a regulator, or in this case, a receiver such as the government. I wouldn’t want the government to appoint some bureaucrat to the position of CEO and then basically pull his/her strings. Our government was not designed to run businesses.
If we revamp our regulatory system, which badly needs an overhaul, then a private company should be in a much better position to run a “new” AIG than the federal government.
I agree with you that our bankruptcy system is really flexible. But in a situation like AIG, its main creditors would have to wait weeks before they would find out if AIG’s assets would be enough to repay them. Investors don’t have weeks to find out, so they take their money out and run with it. In a planned bankruptcy setting, the government can assure all the main creditors beforehand that they will get their money, thereby avoiding a run on the company. The point is to avoid runs on our key financial institutions which would have thrown the system into instant shock. Modern investment is run on a system of trust, and if that trust is broken, people will immediately take their money elsewhere. And they can’t trust anywhere else, they take their money and sit on it. This would literally stop commerce, which would be horrible.
You wrote:
“And here’s a question for you given your assertion that as ugly as it might be we have to do what we are doing just out of pure utility: Just when do you acknowledge that it hasn’t worked to date and shows no evidence that it will work any better in the future? The government keeps pumping this dough into AIG for instance, each time saying that’s all that’s needed to keep it on its feet. And yet every three months or so gee, another huge tranche turns out to be needed. Just as the government keeps pumping dough into Citibank, and yet Citibank’s stock just keeps falling and falling and falling.”
Regarding AIG, I don’ think the bailout has failed. It was designed to keep the company afloat to avoid systemic shock, and it has done just that. The reason it keeps growing is because we are finding out that their assets aren’t worth anything really, based on how leveraged their CDS were. It just goes to show how bad the CDS problem is. Should there be a breaking point? I’m not sure and I wouldn’t know at how much money.
When we move onto Citi and other financial institutions, I’m much more inclined to look into more options like traditional Ch. 11. AIG is unique in that its scope is so broad that it could not be allowed to file for traditional bankruptcy. Other financial institutions can. Bailing out every institution is a terrible idea, so we agree there. Each institution is different in their contribution and risk to the whole system. I’m not defending mass bailouts. I’m defending the bailout of AIG, and accepting executive retention bonuses as a necessary consequence, because AIG was simply unique. I’m not sure you can compare Citi and AIG. What works for AIG won’t necessarily work for Citi and vice versa.
If we are talking about Citi exclusively, I personally feel it should be broken up. One problem is that nobody has any money to buy the parts and the individual parts aren’t profitable enough to stand alone as a singular business. So it should probably just file for Ch. 11, or work out a planned bankruptcy. But then again, I don’t know about Citi as well as I do about AIG. It is (was?) the world’s largest bank measured by holdings. I’d have to read more about Citi in order to come to a better conclusion on it.
We also agree that there needs to be more ideas out there. The Obama Administration has been pretty disappointing in the lack of fresh ideas to get us out of this mess. The system is messed up and needs reform for sure, and I don’t think the administration fully understands that, or understands it and just rejects it as untrue to them.
Again, over my last few posts, I’ve been speaking of AIG in particular. I used Lehman’s as an example of what would have likely happened if AIG has filed for Ch. 11. Every bank and institution needs to be looked at separately.
TomB and mrmetrowest, I’ve been enjoying this discussion. Thanks for engaging me in it.
It was not irrational fear that caused withdrawals from AIG – AIG was insolvent, just as Lehman, due to having written CDS contracts that it could not hope to honor. At the end of the trading week of 9/15, Citi’s share price was 20.35. It closed last Friday at 2.62. Goldman was 128.70 on 9/20 it was 97.32.
Citi’s shares have fallen further because Citi is widely believed to be insolvent, still alive only due to government intervention. Goldman has retained value because its financial status is thought to be much stronger, and has attracted new private capital (Warren Buffet). This is not panic – this is the market repricing assets. Unpleasant, but in my opinion the alternative is a command economy where the state dictates asset prices based on the desires of certain influential groups.
My retirement accounts etc have been whacked like everyone. That’s my fault. Maybe they’ll get whacked some more, but I’d prefer that to what I see as the alternative – a fundamentally corrupt system and a country headed for long term decline.
Phil, to address one additional point you made in a response I didn’t see when I last addressed you in concluding that response you wrote:
“Your distinction on local and corporate bankers is important. I hope we can get to a point in a year or so when we can decentralize power to local banks.”
So here’s my question given that with these bailouts we are by definition trying to *save* the megabanks that *have* corralled the power away from decentralized local banks: How in the world are we going to get to that desired point?
Indeed it’s kind of hilarious in a way; over the last thirty years or so damn near everyone has bemoaned the giant conglomeratization of so much of our economy, and indeed perhaps there’s no better (or worse) example of same than in the banking industry. Small local or regional banks eaten up by the few biggies the way people eat popcorn. (With the few left totally deserving the respect you so rightly note we should have for them.)
But, anyway, now, gee whiz it seems that the there’s something fundamentally, spectacularly wrong with the business model of these mega-corps and mega-banks! Hooray! They’re gonna explode and smaller institutions are gonna scoop up the viable shrapnel left behind and we’re gonna de-centralize just like our aesthetics prefer, not to mention just as economics says should happen.
But instead no, we’re opening up our veins to prop up these dinosaurs. Inviting inflation like madmen. Indebting our children. And you believe that somehow after we’ve (unfairly) revived these diseased goliaths they are going to *voluntarily* agree to be dismembered? Or that they aren’t going to use their clout to prevent that from happening involuntarily?
I’ll bet you that right now any number of these companies and banks that have already received billions are *still* paying their lobbyists and *still* making political contributions; all in essence with taxpayer money no less. And the American taxpayer is thus paying for their own continued and future fleecing.
I understand that you have a very important if not indeed a transcendent point to the effect that when faced with a potential catastrophic meltdown like this government may have to do things that would normally make free-marketeers vomit. So that, for instance, government wakes up one morning to find a company like AIG or Citibank tottering and it doesn’t know the effects of a sudden bankruptcy or collapse and doesn’t have time to figure them out. So okay, pass ‘em $10, 20 or 30 billion to keep ‘em going long enough to stave off the emergency and figure out which of their functions are indeed so crucial and how to maintain them and get someone to take them over. But to just keep mindlessly pumping money into them to preserve not just those functions but all their functions and indeed the entities *themselves* is something entirely different. It’s either crony capitalism or crony socialism, and the point is not only that it’s obscene but that it isn’t even working.
And I’d even go further in terms of not being foolishly enslaved to free-market principles. Seems to me an eminently reasonable regulation we should enact in the wake of all this is perhaps the simplest possible that could be imagined: Give someone (the Fed or Treasury or whomever) the power to simply say to any economic entity “stop, you are getting too big to fail, or that you are already too big to fail and you therefore must divest yourself of X or Y or Z.”
So sure this would seem tremendous infringement on the free-market ideal in terms of punishing the very ones who have been the most efficient. But in the wake of what we have now who really wouldn’t be willing to pay that price to avoid a repeat of today? Getting held up for trillions by those who only *seemed* to be the most efficient and who masked their inefficiency by undertaking gobs of debt and risk so mammoth it defies belief?
Indeed upon reflection I don’t even know that this does do any violence to the free-market philosophy: After all that just tells us *how* things work and how the inefficient will eventually fail. I don’t see where it tells us that we also have to accept all the *consequences* of that if we don’t want to.
Cheers,
The difficulty with the bailout analysis is that Phillip can, as have many analysts, cite to the market’s response to Lehman’s bankruptcy. Of course, that is rather derivative, isn’t it; the entity largely to benefit from the bailout providing the rationale for it? And, as one Congressman noted, all the horribles claimed if nothing were done still happened. Its adherents are left with asserting things would be much worse. How can that ever be disproven? One thing is proven, of course, we now have trillions more in debt.
As for the bailout, it provokes outrage because it synthesizes the perversity of developments in our economic system over the last 20 years. Finance (whose productivity really cannot be established because it generates activity that may simply be switching money around rather than genuinely productive) creates a climate of entitlement irrespective of performance–I think we used to call that welfare.
And, even more perverse, are “conservatives” claiming that the “sanctity of contracts” ought to be affirmed. Yet these are largely the same conservatives who reflexively call for the voiding of union contracts in bankruptcy, although our laws place collective bargaining agreement on a higher legal footing than individual contracts.
Yes, the bonuses are an insignificant part of the bailout. Indeed, they are insignificant compared to the Merrill bonuses that were extraordinary advanced to December (from their normal January) in order to beat closure on the BoA deal and be subject to changes in the law likely to come from the Dems. But both are emblematic of the corrupt, self-dealing culture of entitlement created by finance; in which unproven claims of superior performance and talent are unthinkingly rewarded with absurdly large amounts of money.
(And, BTW, Andrew Ross Sorkin’s piece was shallow and unreflective; quite typical of the garbage that passes for business reporting these days.)
Philip Kibbey is largely right about a sudden, unexpected bankruptcy. But part of my anger is that Congress and the Treasury and the Fed never even mentioned, not once, the possiblity of doing ANYTHING except take money from the taxpayer. I’m also convinced that most in the Congress didn’t even understand the issues involved — and they still don’t understand. Someone kept repeating “systemic failure” and “financial meltdown” and many of them just caved in.
Further, it’s not too late to do anything about the original bailout heist. Clawback is painful, but it’s a word the MSM need to start adding to their vocabulary.
Finally, this idea that depositors or policy-holders would lose their shirt in an AIG receivership is preposterous. The AIG insurance unit was largely sound. At the very least, it isn’t utterly insolvent the way the financial products unit is. There is no reason under the sun that the healthy units wouldn’t be separated from the losers, in which case the policies are protected and the creditors and derivatives counterparties take a hit. In any case, the losses are there and they have to be booked. Yes, Goldman Sachs going down and so on would have negative effects on many of us, perhaps all of us, but those negative effects would be diffuse and far less painful than having every single taxpayer pick up the tab for the boys and girls at Goldman or UBS or Soc Gen or wherever. I think we should be doing everything we can to save capitalism and to save the taxpayer, not trying to save “the system” (i.e. the status quo ante).
I think the two go hand in hand. If the bailout was justified, so are retention bonuses to keep the smart people on board. If AIG was too big to fail, then certainly it’s worth keeping knowledgable employees on board.
Personally, letting AIG go into bankruptcy is not the end of the world. And having a federal judge manage the group’s return to solvency is no worse than what we are attempting to do now.