NYT admission: AIG is racketeering

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RussB's picture
RussB
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NYT admission: AIG is racketeering

The NYT's Andrew Sorkin has written a piece unusual for the MSM.

http://www.nytimes.com/2009/03/17/business/17sorkin.html?hp=&pagewanted=print  

What's unusual is not the standard MSM corporatist ideology and theological adherence to "Too Big To Fail", the angry volcano everyone dances around, looking more and more tribalistic all the time. Nor is the slimy sanctity-of-contracts argument unusual. On the contrary, it's the same old heads-I-win, tails-you-lose.   

What's unusual is how Sorkin openly states, as a matter of fact and not rhetoric, that AIG and the banks are literally extortionists, only metaphorically holding society at gunpoint, but just as surely demanding protection money or else.   Sorkin actually says the AIG gangsters need to be paid or they'll get revenge through intentional subversion and treason.

Let's go through it:  

Quote:

The Case for Paying Out Bonuses at A.I.G. By ANDREW ROSS SORKIN

Do we really have to foot the bill for those bonuses at the American International Group?

It sure does sting. A staggering $165 million - for employees of a company that nearly took down the financial system. And heck, we, the taxpayers, own nearly 80 percent of A.I.G.

It doesn't seem fair.

So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain.

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers' money. Hard to argue there.

"This isn't just a matter of dollars and cents," he said. "It's about our fundamental values."

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the "fundamental value" in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

This is disingenuous. As others have pointed out, there are many perfectly legal ways that contracts can be modified after the fact: if material conditions change, acts of god, force majeure, and most relevant in this case, fraud and crime.

The facts are that AIG has been running a massive pyramid scheme, selling fake insurance policies to banks to enable them to evade capital reserve requirements. Meanwhile, enabled all the way by corrupt regulators, it was allowed to turn around and claim it wasn't selling insurance after all, and therefore wasn't subject to regulation as an insurer, or to maintain the requisite capital reserves of an insurer. It could instead invest the revenues from this scam in other derivative scams, enabling other pyramid schemes, and so on. All of this was certainly in violation of the spirit of god knows how many laws, and I have no doubt an intrepid prosecutor could prove them guilty in the letter-of-the-law sense.

In particular, these bonuses are clearly "fraudulent conveyance", which is stripping assets from a company in the form of "compensation" when you realize the company is in financial trouble. It's looting plain and simple, stealing from the company on your way out the door. (AIG is, of course, insolvent in reality; only redistribution of wealth from the taxpayers is propping it up.)

We saw another particularly brazen example of this at Merrill late last year.

So let's be clear: there are ample reasons to void these "contracts", or at least delay their execution, which shouldn't for a moment unnerve any legitimate businessman.  

Quote:

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be "breaking a bond," Ms. Meyer says. "They are raising a whole new question about the trust and commitment organizations have to their employees." (The auto industry unions are facing a similar issue - but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

Beyond the facts of AIG con artistry, let me emphasize the broad fact that the finance "industry" from its inception has sought to exist outside the law. Its entire lobbying agenda has been to empower it above the law, beyond regulation. They have in fact wanted to be outlaws, and succeeded in becoming so.

Of course, as always with feudalists, they only wanted the upside profit from this, and wanted only the people to bear the risks, the costs, the losses, the pain.

And now through flunkies like this they dare to cite the "sanctity of contracts" and accuse anyone who is skeptical of wanting to "break a bond"?

What contracts? AIG wrote all these contracts they could never pay off. Right there they have forfeited forever any right to have any contract which would benefit them, like these loot-seeking "bonus" contracts, honored. They no longer exist in the world of contracts.

What bond? AIG and its confederates long ago renounced any "bond" they could possibly have had with anyone, with any society. For all intents and purposes, they renounced any American or even human citizenship when they embarked upon their monumental con job and looting expedition, when they sought the eradication of all regulation, all social restraint, all rule of law, except where such things could be twisted to their benefit. They are anti-social to the level of a capital crime. They no longer exist in the world of bonds.

So I would happily deal with them as the outlaws they always wanted to be.

And now for the terrorist threat:  

Quote:

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave - the buzz on Wall Street is that some have, and more are ready to - they might simply turn around and trade against A.I.G.'s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

So here MSM Sorkin goes further than anyone else I've seen in saying (1) these cadres have intentionally set financial charges all over the economy, (2) they are now demanding protection money, (3) if they're denied, the bombs will go off, (4) indeed these agents will personally detonate these charges, (5) in order to destroy the American and global economies.

This reads like James Bond villainy. And it seems correct. It seems to be exactly what's happening here.

So why aren't these extortionists in prison? "Rule of law"? Last time I checked extortion was a crime as well.

Here's the rest: 

Quote:

Not that any of this takes the bite out of paying these bonuses. For better or worse - in this case, worse - someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

Now we can debate why A.I.G. felt it necessary to guarantee seven executives at least $3 million apiece when the economy was clearly on shaky ground. Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg. But another possible explanation is that A.I.G. knew it needed to keep its people.

That is the explanation offered by Edward M. Liddy, who was installed as A.I.G.'s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.)

"We cannot attract and retain the best and brightest talent to lead and staff" the company "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury," he said.

There's some truth to what Mr. Liddy is saying. Would you want to work at A.I.G.? Sure, maybe for $3 million. But not if you could go somewhere else for even more - or even much less.

"The jobs are terrible," said Robert M. Sedgwick, an executive compensation lawyer at Morrison Cohen who represents a number of employees of banks that have taken government money. "You have to read about yourself in the paper every day. These people are leaving as soon as they can."

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work - against taxpayers' interests.

"The word on the street is that A.I.G. employees are being heavily recruited," Ms. Meyer says.

Of course, if taxpayers had not bailed out A.I.G., these contracts would not be worth anything. Andrew M. Cuomo, the attorney general of New York, made the point on Monday, when he subpoenaed A.I.G. for the names of the people who received the bonuses. If A.I.G. had spiraled into bankruptcy, its employees would have had to get in line with other unsecured creditors.

Mr. Cuomo wants to know who A.I.G.'s lucky employees are, and how they have been doing at their jobs. So here is a suggestion for him. Get the list, and give those big earners at A.I.G. a not-so-subtle nudge: Perhaps they will "volunteer" to give some of their bonuses back or watch their names hit the newspapers. But in the meantime, despite how offensive and painful it might be, let's honor the contracts.

So it's no longer just rabble-rousers in the blogosphere accusing AIG and the banks of racketeering and extortion, and making comparisons to terrorism. We now have the NYT's corporatist business section conceding the truth of this and ordering us to knuckle under and submit.

I've long had my doubts about the Too Big To Fail religion. I believe it's a classical Big Lie, meant to terrorize the people into standing by like sheep as the country is further looted.

But even beyond the "truth" of what would happen if we rejected the bailout ideology and let these insolvent entities go down, I don't see how any human being would want to live under the thumb of this protection racket, paying up every month or else the system goes down and you wouldn't be able to buy cheap crap from China anymore.

The exponential debt model is not sustainable. One way or another this financial edifice must come down anyway. Many material things will have to be foregone. Wouldn't it be better to take what real wealth still remains to us and use it toward a rational, human transformation and devolution? What's more, wouldn't it be better to come through it with our human dignity intact?

One thing's for sure. We keep obeying the dictates of government and media, and keep "bailing out" these criminals, and we'll soon have nothing left of wealth or dignity.     

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Re: NYT admission: AIG is racketeering

Good points, thanks Russ.  It has taken me a long time to come close to understanding even the basics of this derivatives mess.

I believe the only reason Obama is shouting against the bonuses is that he sees the difficulty this has caused in floating future banking wealth transfers.

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Re: NYT admission: AIG is racketeering

Thanks, Mark. Glad you found it helpful.

As for what Obama really wants or thinks, who knows? People want to give him the benefit of the doubt, but if you consider:

1. He appointed Summers and Geithner, two hard-core corporatist warriors, as his two top economic cadres (and apparently really wanted Rubin until Rubin became too hot to handle on account of his Citi entanglement); and

2. has embarked upon this continuation of the Bush policy (though less confidently; it's as if he has the same extractive will but lacks the guts to plunge ahead, and the results are halting, ad hoc, and bumbling),

then it seems there are only two possibilities. Either this is exactly the policy Obama wants, and he's just looked incompetent in following through, or he's utterly confused and in over his head - confused about who he appointed, about what to do, how to do it, surprised by things he really has no business letting surprise him. (E.g. the AIG bonuses were announced a year ago; how can anyone in the biz claim to be surprised now? Did they really think AIG was going to learn a lesson and not do this? Or were they delusionally planning on trying to keep it quiet? It's a mystery.)  

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Re: NYT admission: AIG is racketeering

I hate to break this to you RussB, but Obama is feigning outrage.  How could he not know about AIG bonuses when corporate bonuses for bailed out companies is a hot topic in the news?  Unless, of course, he is incompetent.  Which looks to be the case because he failed to nominate several key appointees in the Treasury Dept and the ones he has looks like a bust.  NYT has an agenda and it is not one that benefits the health of your nation.

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DrKrbyLuv
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Re: NYT admission: AIG is racketeering

RussB said:

What's unusual is how Sorkin openly states, as a matter of fact and not
rhetoric, that AIG and the banks are literally extortionists, only
metaphorically holding society at gunpoint, but just as surely
demanding protection money or else.   Sorkin actually says the AIG
gangsters need to be paid or they'll get revenge through intentional
subversion and treason.

The facts are that AIG has been running a massive pyramid scheme,
selling fake insurance policies to banks to enable them to evade
capital reserve requirements. Meanwhile, enabled all the way by corrupt
regulators, it was allowed to turn around and claim it wasn't
selling insurance after all, and therefore wasn't subject to regulation
as an insurer, or to maintain the requisite capital reserves of an
insurer. It could instead invest the revenues from this scam in other
derivative scams, enabling other pyramid schemes, and so on. All of
this was certainly in violation of the spirit of god knows how many
laws, and I have no doubt an intrepid prosecutor could prove them
guilty in the letter-of-the-law sense.

Great Post!  You have squarely struck the mark. 

This is a racketeering conspiracy and should be investigated under the onerous RICO (Racketeer Influenced and Corrupt Organizations Act) federal law (from Wikipedia):

  • United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.  While its intended use was to prosecute the Mafia as well as others who were actively engaged in organized crime, its application has been more widespread.
  • The racketeer must forfeit all ill-gotten gains and interest in any
    business gained through a pattern of "racketeering activity." RICO also
    permits a private individual harmed by the actions of such an
    enterprise to file a civil suit; if successful, the individual can
    collect treble damages.
  • Option of seeking a pre-trial restraining order
    or injunction to temporarily seize a defendant's assets and prevent the
    transfer of potentially forfeitable property, as well as require the
    defendant to put up a performance bond.
    This provision was placed in the law because the owners of
    Mafia-related shell corporations often absconded with the assets. An
    injunction and/or performance bond ensures that there is something to
    seize in the event of a guilty verdict.
  • In many cases, the threat of a RICO indictment can force defendants to
    plead guilty to lesser charges, in part because the seizure of assets
    would make it difficult to pay a defense attorney. Despite its harsh
    provisions, a RICO-related charge is considered easy to prove in court,
    as it focuses on patterns of behavior as opposed to criminal acts.
  • Although its primary intent was to deal with organized crime, Blakey
    said that Congress never intended it to merely apply to the Mob. He
    once told Time,
    "We don't want one set of rules for people whose collars are blue or
    whose names end in vowels, and another set for those whose collars are
    white and have Ivy League diplomas."

RICO gets results as the penalties are swift and severe.

Larry

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Re: NYT admission: AIG is racketeering

UPDATE: http://www.nytimes.com/2009/03/17/business/17bailout.html?_r=1&ref=business

 

Geithner is incompetent. As I stated earlier, Obama is feigning outrage.

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Re: NYT admission: AIG is racketeering

Gadfly is correct - the administration handwringing is damage control:

Quote:

Politics

SPIN METER; Cue the Washington outrage

Mar 17th, 2009 | WASHINGTON -- Cue the outrage.

For months, the Obama administration and members of Congress have known that insurance giant AIG was getting ready to pay huge bonuses while living off government bailouts. It wasn't until the money was flowing and news was trickling out to the public that official Washington rose up in anger and vowed to yank the money back.

Why the sudden furor, just weeks after Barack Obama's team paid out $30 billion in additional aid to the company? So far, the administration has been unable to match its actions to Obama's tough rhetoric on executive compensation. And Congress has been unable or unwilling to restrict bonuses for bailout recipients, despite some lawmakers' repeated efforts to do so.

The situation has the White House and Treasury Secretary Timothy Geithner on the defensive. The administration was caught off guard Tuesday trying to explain why Geithner had waited until last Wednesday to call AIG chief executive Edward M. Liddy and demand that the bonus payments be restructured.

The White House expressed confidence in Geithner -- but still made it clear he was the one responsible for how the matter was handled.

"I do know that Secretary Geithner last week engaged with the CEO of AIG to communicate what we thought were outrageous and unacceptable bonuses," White House spokesman Robert Gibbs said. Gibbs said he could not provide a timeline that would show when members of the administration -- including the president and others at the White House -- became aware of the bonuses.

In an interview with The Associated Press, Obama's chief economic adviser Lawrence Summers said: "In the context of what we're doing, Secretary Geithner was notified, he has said, last week. As he reported to the rest of us, he moved aggressively and immediately, aggressively and immediately, to recoup whatever could be legally recouped. He recognized that you can't just abrogate contracts willy-nilly, but he moved to do what could be done."

The bonus problem wasn't new, as many lawmakers and administration officials knew only too well. AIG's plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored. A November SEC filing by the company details more than $469 million in "retention payments" to keep prized employees.

Back then, Rep. Elijah E. Cummings, D-Md., began pumping Liddy for information on the bonuses and pressing him to scale them back. "There was outrage brewing already," Cummings said. "I'm saying (to Liddy), 'Be a good citizen. ... Do something about this.' "

Around the same time, outside lawyers hired by the Federal Reserve started reviewing the bonuses as part of a broader look at retention and compensation plans, according to government officials who spoke on condition of anonymity. The outside attorneys examined the possibility of making changes to the company plans -- scaling them back, delaying them or rescinding them. They ultimately concluded that even if AIG's bonuses were withheld, the company would probably be sued successfully by its employees and be forced to pay them, the officials said.

In January, Reps. Joseph E. Crowley of New York and Paul E. Kanjorski of Pennsylvania wrote to the Federal Reserve and the Treasury Department pressing the administration to scrutinize AIG's bonus plans and take steps against excessive payments.

"I at that point realized that we were going to have a backlash with regard to these bonuses," Kanjorski said in an AP interview. In a meeting with Liddy later that month, he said he told the AIG chief that "all hell would break loose if we didn't find a way to inform the public ... and that we should take every step to put that information out there so we wouldn't have the shock."

Around the same time, Congress and Obama's team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout. In February, the Senate voted to add such a proposal to the economic recovery bill that cleared Congress, but in final closed-door talks on the measure, that provision was dropped in favor of limits that affect only future payments.

"There was a lot of lobbying against it and it died," said Sen. Ron Wyden, D-Ore., who proposed the measure with Republican Sen. Olympia J. Snowe of Maine. He said Obama's team is sending mixed messages on what will and won't be tolerated on bonuses, with the president coming out strongly against excessive Wall Street rewards but top officials not following through.

"The president goes out and says this is not acceptable, and then some backroom deal gets cut to let these things get paid out anyway," Wyden said. "They need to put this to bed once and for all."

Last Wednesday, an apparently tense conversation between Geithner and Liddy brought the matter to a head. Geithner had learned of the bonus payments the previous day, said a Treasury Department official familiar with the government's dealings with AIG.

Liddy, in a letter to Geithner on Saturday, referred to their "open and frank conversation" over the retention payments on March 11. "I admit that the conversation was a difficult one for me," Liddy wrote.

It posed a challenge for Obama's team as well. Knowing that the bonuses were about to be paid, the administration moved over the weekend to get ahead of what was certain to be an embarrassing story.

Unprompted, officials leaked news of the bonuses to select reporters late Saturday afternoon, highlighting what Geithner had done to try to restrain the payments. The story quickly became fodder for the Sunday news talk shows.

Then on Monday, the president himself came out strongly on the issue, calling the payments "an outrage" and publicly directing his team to look for ways to cancel the payments.

Questioned repeatedly to explain this in light of the fact that the administration had already scoured its options and come up empty -- and that the bonuses had already gone out the door to their recipients -- Gibbs said that the president wanted his aides to make sure "to exhaust all legal remedies."

That did little to quell the expressions of outrage that were blasting about by Tuesday.

"It's shocking," said Sen. Mitch McConnell, R-Ky., the minority leader, that "the administration would come to us now and act surprised."

MarkM's picture
MarkM
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Re: NYT admission: AIG is racketeering

Agree with all on the point of feigning outrage.

Let me get this straight.  The government owns 80% of AIG, yet has absolutely no managerial powers?

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Re: NYT admission: AIG is racketeering
MarkM wrote:

Agree with all on the point of feigning outrage.

Let me get this straight.  The government owns 80% of AIG, yet has absolutely no managerial powers?

When you own 80% of something (especially where the thing would cease to exist if you withdrew your financial support), you have all the managerial power you care to exercise.

So what does that tell us about this administration? 

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