Wednesday, March 18, 2009

Feeling Good Kicking AIG In The Shorts

America awakened today feeling much better about themselves after a three-day binge. Nothing like a good ass-kicking of our latest favorite bogeyman, American International Group.

Let's review.

The insurance giant awarded $469 million in "retention payments" to 418 employees, some of them driving the once proud firm $1.6 trillion in debt. On the premise of AIG being too big to fail, the government pumped $170 billion and took 80% control to keep the company afloat.

The bonuses for "prized employees" represent .0027488 of the taxpayers bailout.

Rather than fixing the problem, Congress on Tuesday was fixated on revenge. One congressman introduced a bill taxing the bonuses 100%. Sen. Max Baucus, chairman of the Senate Finance Committee, was more circumspect. He was told by the Internal Revenue Service the maximum tax could be only 92%.

Why resort to taxing the culprits?

Fear. Fear that the bonus babies would sue what contractually was theirs. Seems the employees and AIG contracted the bonuses last April before the company tanked. AIG chairman Edward Liddy said he had no choice but to pay. That opinion was echoed by no less than Larry Summers, second in charge of Treasury.

Oh, really? Since when can contracts not be broken? If one party is willing, there's a way. Ask any United Auto Workers union stiff who gave up plenty so his bosses at General Motors and Chrysler could receive federal bailout money.

Richard Shelby, a conservative voice of the U.S. Senate, offers this explanation. It's OK to leverage union autoworkers contracts but tread softly with those contracts coming out of Wall Street. Oh.

If these bonuses are such a big deal, who knew what and when?

Those who knew they were coming down the pipe were: Fed chairman Ben Bernanke, Wall Street insiders and most of the responsible print and television business reporters.

Who didn't who should have was Treasury Secretary Timothy Geithner and ultimately President Barack Obama.

Geithner is an enigma with an acute case of amnesia. He was chairman of the New York branch fed and helped negotiate the initial bailout of AIG last September. If Bernanke, his boss, knew about the bonuses, why didn't Geithner who said he first learned about them last Tuesday?

The spin in Geithner's defense is he is running Treasury without help, such as a general commanding an army without an officer's corps. Obama's stringent ethics rules have prevented so far any political appointments Congress would approve to fill the void. It makes one wonder why the career Treasury bureaucrats can't take the initiative to help their new boss.

Obama is giving Geithner, so far proving only he's a PR nightmare, a lot of slack. "I bear full responsibility" for the AIG fiasco Obama told a crowd Wednesday at the Orange County Fairgrounds in Costa Mesa, Calif.

But, Congress' wrath Wednesday was directed at AIG boss Edward Liddy who tried to explain progress the firm has made to correct its problems by selling company assets, lowering the $1.6 trillion debt to $1.2 trillion since September.

But, no, he was forced to suffer the slings and arrows from Congress. AIG now stands for “Arrogance, Incompetence and Greed,” said Rep. Paul Hodes, D-N.H. Rep. Gary Ackerman, D-N.Y., cited a “tidal wave of rage” throughout the country. He said AIG made taxpayers look like "suckers."

Monday in a radio interview, Sen. Charles Grassley, R-Iowa, suggested the AIG executives apologize and either resign or commit suicide like the Japanese do. Ouch.

Liddy took the verbal abuse like a man. Here's a guy who comes out of retirement as chairman of Allstate Insurance Co., is appointed to run AIG in September by the government and agrees to work for a dollar a year salary.

He read aloud threats that AIG employees had received, including one that suggested that all bonus recipients should be “executed with piano wire around their necks.” Another one read: “If the government can’t do this properly, we the people will take it in our own hands and see that justice is done. I’m looking for all the CEO’s names, kids, where they live, etc.”

Congress during this three-day binge pointed fingers in the blame game at everyone but themselves.

Sen. Ron Wyden, D-Ore., said he wrote a provision in the Senate's version of the $787 billion stimulus bill that would have capped executive compensation to those firms receiving federal bailout funds. He said someone in conference committee removed the provision before it was passed and signed into law by President Obama.

That "someone" was Sen. Chris Dodd, D-Conn., who on Tuesday denied any knowledge but on Wednesday confessed. He declined to name the person at Treasury who suggested the provision be removed.

Oops. That leads directly to the much maligned Mr. Geithner. Hmm.

The only Congressman trying to get to the root cause of the AIG cancer was Rep. Scott Garrett of New Jersey, the senior Republican on the subcommittee. He complained that the administration still has no exit strategy for disentangling itself from the insurance giant. “Part of me wants to say to some of the loudest critics, ’What did you expect and why weren’t you asking more questions before?’ I would argue that the real outrage now is the $170 billion of taxpayer money that’s been pumped into this company and to what effect.”

Great question.

Scott Polakoff, acting director of the Office of Thrift Supervision, said regulators failed to accurately predict what would happen to AIG’s so-called credit default swaps — a form of insurance — if housing values collapsed, as they have.

Orice Williams, director of financial markets and community investment at the Government Accountability Office, the government’s top watchdog agency, told the House committee that the government’s intervention helped AIG avoid failure, but that the company is still struggling to pay back the money. Market and other conditions have prevented the insurer from making significant asset sales, she testified. She said most restructuring efforts are still under way.

Just how bad was AIG before the government stepped in?

In the last quarter, AIG posted a record $61.7 billion loss, highest in American business history. It was equivalent to squandering $465,000 a minute.

And, get this: While some say AIG is too big to fail, Liddy wrote in an opinion piece in the Washington Post published Wednesday that AIG was "too big to manage."

“The company's overall structure is too complex, too unwieldy and too opaque for its component businesses to be well-managed as one entity,” Liddy wrote.

The strategy the company is pursuing is to sell off as many pieces as possible to pay back the money advanced from the Treasury and the Fed and keep the healthy businesses afloat to generate profits for taxpayers.

That strategy is also risky. The company owns more than 30 separate operating units and has customers in more than 130 countries; it insures more than 100,000 entities that employ more than 100 million Americans, along with more than 30 million U.S. policyholders.

There’s plenty to sell. AIG is a sprawling holding company with its fingers in dozens of businesses, from various lines of insurance — including life and property-casualty — to asset management, real estate lending, aircraft leasing, and investment products and services for both big institutional investors and consumers.

But putting a price tag on those assets has proved to be tougher than anyone imagined. A big part of the problem is trying to estimate future profits during the worst global downturn since the Great Depression. With few buyers available, the government is faced with the prospect of continuing to pump money in the ailing company before it self destructs.

What all this means to President Obama is that despite his popularity he's going to have one hell of a time convincing Congress to spend more bailout money on our failing banks, certainly the biggest losers such as Bank of America and Citigroup.

The administration also is seeking ways to regulate the entire financial sector "to prevent this from ever happening again," Obama said. We've heard that before.

Never has a regulation been written that those tricky Wall Street lawyers haven't found a way around.

The biggest fear on Wall Street is the new rules will choke economic growth when the markets stabilize. We've heard that before, too.

One thing is certain. The culture on Wall Street has changed forever. You can thank those 418 AIG bonus babies responsible for .0027488 of the problem.

Don't we feel better now that we have blown off all that steam?


hlr said...

Your blog on this issue is good, a bit sardonic or tongue-in-cheek, but it describes the situation. Nevertheless, the bonus payments were badly timed. One of the arguments made by Liddy was that the complexity of the myriad transactions was such that they would be hard to unravel by others if those who designed them were to quit because they were denied their bonus. Maybe. I attached a pdf file from yesterday's WSJ. The drawing is readable if you increase the size by zooming. The drawing shows one of the type of transactions that ate up lots of funds.

ljr said...

I think your analysis of the AIG bonuses is fairminded. What I'm concerned about is the backlash against anyone receiving a bonus from an institution receiving TARP money, such as yours truly as a Wells Fargo employee. This is madness. I could spend a hour or more talking about the injustice of basically having to pay back a bonus that is basically already spent (mainly on my kids' educations). I think what we'll find here is another case of the law of unintended consequences again rearing its ugly head. Just like some many of the other knee jerk reactions we've seen so far in this financial mess we're in. Above it all, the management of the financial crisis by about every politician has been a classic example of cover thy ass. It's not an extreme to make parallels with the spread of jingoism in the early 20th Century that had the effect of imposing discriminatory barriers on foreign residents. It's classic fear, and misplaced anger. And in the case of our politicians, not owning up to their own responsibilities. Wow, is Chris Dodd ever a weasel. LJR