The Real AIG Outrage

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Farmer Brown's picture
Farmer Brown
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The Real AIG Outrage

From today's Wall Street Journal:

The Real AIG Outrage


President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.
* * *
Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.

The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.

Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.

But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it "a false statement" to say that his agency couldn't regulate the London office.

And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit.

That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.

Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.

Current AIG CEO Ed Liddy was picked by the government in 2008 and didn't create the mess, and he shouldn't be blamed for honoring the firm's lawful bonus contracts. However, it is on Mr. Liddy's watch that AIG has lately been conducting a campaign to stoke fears of "systemic risk." To mute Congressional objections to taxpayer cash infusions, AIG's lobbying materials suggest that taxpayers need to continue subsidizing the insurance giant to avoid economic ruin.

Among the more dubious claims is that AIG policyholders won't be able to purchase the coverage they need. The sweeteners AIG has been offering to retain customers tell a different story. Moreover, getting back to those infamous bonuses, AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both.
* * *
The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.

Please add your comments to the Opinion Journal forum <http://forums.wsj.com/viewtopic.php?t=5474> .

 

DrKrbyLuv's picture
DrKrbyLuv
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Re: The Real AIG Outrage

AIG should have been spun off; the profitable insurance division was destroyed by the financial division.  This seems to be a common theme, large corporations diverted cash to financial casinos rather than to invest in product/service development and factories that make things. 

GM for example, and many other big players became hedge funds that helped destroy the productive part of the business financially and in spirit.  Corrupt politicians paved the way for the sacking by colluding with powerful bankers.

For example, Senator Phil Gramm helped eliminate the only thing standing between common sense lending and a looting of
the treasury; the Glass-Spiegel Act, enacted during the
Depression to prevent another depression - yea, the same Phil Gramm involved in the Enron scandal. 

Obama Received a $101,332 Bonus from AIG - the two biggest political benefactors of AIG are Obama and Senator Dodd who added the bonus stipulation to the bail-out bill.  This is bribery everywhere but congress - which is insulated from the rest of the nation.

The problem is systemic and that is what they want to hide.  Our nation does not control monetary policy or even the issuance of our currency - how can we expect politicians to serve the people when they are held in servitude to central banks who really call the shots. 

At the core is an irrefutable conflict of interest between the going, sustainable, concern of the nation as opposed to the central banking web of debt.

Larry

CB's picture
CB
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Re: The Real AIG Outrage

Patrick - while the article makes the extremely important point that the bonus paymnets are a 2 bit side show, it seems to me the author is still trying to deflect blame from the Wall Street firms by suggesting that "if the regulators had just done their proper jobs none of this bad stuff would have happened". The investment banks, through their lobbying efforts, managed to ensure themselves a regulatory environment that lacked effective oversight or restraint. They were free to make bets without the capital to cover potential losses. This was a highly speculative environment resting on fundamentally unsound business practices - bought and paid for with campaign contributions and likely other favors as well, but the ideas came from Wall Street, not Capitol Hill (where there was willing collusion). I am not sure he is correct that poor maligned Hank Greenburg had nothing to do with the mess. If I am not mistaken much of the unsecured insurance was sold before 2005 and the credit downgrade was brought on by the discovery that the firm was undercapitalized given the risks they had taken on. The author seems to blame Elliot Spitzer for exposing the vulnerability. So - unsound business practices lead to a credit downgrade - which then exacerbated the problem and led to more speculation trying to raise capital to cover their bets - how is this fate the fault of Spitzer or anyone else other than those at the firm itself? I am sure those at AIG might say "well, everyone else was playing these games, so to be competetive we had to do it as well.... Yeah? tell that to the well-run small banks that are now being asked to pay higher fees to the FDIC.

The people at Treasury are unelected tools of the Street, friends of the Fed, pals of GS (and if not they don't last). Congress is full of people who need to pay to play - subject to manipulation by those who can support their election expenses - puppets of their patrons (perhaps partners in a few cases). What a mess. The WSJ has been a cheerleader for much of this crap - an enemy of anyone who would dare to restrict the freedom to play with other people's money. A pox on them all!

CB's picture
CB
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Re: The Real AIG Outrage

Larry, Dodd did NOT add the the "bonus stipulation" (that stripped the retroactive clause) to the bill - that was insisted upon by Wall Street and Treasury - over Dodd's strenuous objections. The Obama folks are trying to deflect blame to others with this nonsense and the right is piling on Senator Dodd. There are no angels here, that being said, just crooks and thieves.

From the WSJ 2/14/09 

Quote:

The most stringent pay restriction bars any company receiving funds from paying top earners bonuses equal to more than one-third of their total annual compensation.  That could severely crimp pay packages at big banks, where top officials commonly get relatively modest salaries but often huge bonuses.

As word spread Friday about the new and retroactive limit -- inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.

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GregSchleich
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Re: The Real AIG Outrage

CB

The "author" of the WSJ article happens to be the editorial board. This was their lead editorial. I agree completely with your observations. This is the typical irritating WSJ spin. But yes, I was surprised and pleased they pointed out the diversionary aspect of the bonuses distraction. That headline did grab my attention!

Greg 

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GregSchleich
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Re: The Real AIG Outrage

Larry

Phil Gramn certainly makes a nice poster child for all that's wrong in the Washington/Wall Street catastrophe. He sure is an obnoxious ole curmudgeon, isn't he?! But I just hate to see him get all the credit. Two of the guys who were most instrumental in promoting the Gramn-Leach-Bliley Act which of course repealed Glass-Steagall, were Robert Rubin, Obama transition team advisor and godfather to virtually his whole economic team, and Larry Summers, now his top economic advisor. Less well known, is the fact that last November when he was President-Elect, Obama saw fit to send Gramn's cohort, Jim Leach (Gramn-LEACH-Bliley) to represent him at the G-20 meeting.

But Rubin and Summers were also instrumental in preventing the regulation of over-the-counter (OTC) derivatives(including credit default swaps) which we now know ultimately sank AIG. In 1998 when Brooksley Born, Chairperson of the Commodity Future Trading Commission (CFTC) explored the possibility of regulation, Rubin and Summers pilloried her. Testifying before the Senate, Summers accused the CFTC of casting a "shadow of regulatory uncertainty over an otherwise thriving market, raising risks for the stability and competitiveness of American derivative trading."

To be fair though, it was Phil Gramn, after all, who snuck in the legislation they all wanted, preventing OTC regulation, hidden as an attached rider. Democracy in action!

Greg 

     

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RSLCOUNSEL
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Re: The Real AIG Outrage

I've only a few minutes so I didn't read all of the above, apologies for any duplicate comments:

WHY DID THE USG FUNNEL ANOTHER $30B INTO AIG:

http://tedbits.blogspot.com/2009/03/where-is-aig-bailout-money-going.html

 

WHERE DID THE MONEY GO?

 

http://tedbits.blogspot.com/2009/03/us-taxpayers-to-bailout-european-union.html

 

WHY ARE WE FOCUSED ON BONUSES?

 To distract you.

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Erik T.
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Re: The Real AIG Outrage

Sorry folks, but I just don't buy all this "Outrage at AIG" nonsense, and I think it's diverting attention from real issues.

Imagine that the government put a great big 55-gallon drum full of $100 bills on a street corner in NYC. No guards, no security, and not even a sign stipulating any rules. Then they come back a few days later and when all the money has vanished, they express "outrage" at the people of New York for being thieves!

The government gave these jokers upwards of $100B with virtually no stipulations, restrictions or guidelines for how it would be spent. These are wall street guys, and are world-famous for being greedy self-serving types. The fact that they took all this money with no strings or restrictions attached then bonused a lot of it out to themselves should surprise nobody.

Outrage at AIG is completely misplaced. The country should be outraged at Congress for giving AIG all this money with no restrictions, stipulations or covenants on how it should be spent. The fact that it was spent on bonuses is no surprise and stands as testament to the incompetence of Congress, not AIG.

Erik

 

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scbissler
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Re: The Real AIG Outrage

Definitely no angels anywhere in this mess, but looks as though Dodd has 'fessed up to his part :

http://news.yahoo.com/s/politico/20090318/pl_politico/30833

CB's picture
CB
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Re: The Real AIG Outrage
Quote:

(CNN)Treasury Secretary Timothy Geithner told CNN Thursday his department asked Sen. Chris Dodd to include a loophole in the stimulus bill that allowed bailed-out insurance giant American International Group to keep its bonuses.

In an interview with CNN's Ali Velshi, Geithner said the Treasury Department was particularly concerned the government would face lawsuits if bonus contracts were breached.

Dodd admitted to CNN Thursday he'd added the controversial provision after a Treasury official pushed for it. Earlier in the week, Dodd had said he had not played any role in the addition of the loophole.

Geithner told Velshi Thursday he takes full responsibility for the situation.

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