Attaturk Because America wants more lecturing from these two:
Thanks, Fred Hiatt.
Josh Marshall on Sweetheart Deals
Over at DealBook, Steven Davidoff has a run-down of just what those newly-released AIGFP bonus contracts tell us.
Here's the key take away ...
This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.
Meanwhile, Daniel Gross points to the big question ...
Congress should also hear from the many AIG counterparties who together have received billions of dollars of taxpayer funds so far through AIG. These folks bought insurance from or did business with a company that was unable, as it turned out, to make good on its financial commitments. And yet because the government didn't let AIG file for Chapter 11 bankruptcy protection, these counterparties have been made whole. I'd like to hear Goldman Sachs CEO Lloyd Blankfein tell Congress why it was appropriate for taxpayers to make a payment to Goldman of $5.6 billion in credit-default swaps, and why Goldman shouldn't eat at least a portion of the losses it would have suffered had the taxpayers let AIG fail. It would be nice to hear from the half-dozen German banks, including the state-owned Landesbank Baden-Wuerttemberg, who have benefited from one of the biggest transfers of taxpayer wealth to Europe since the Marshall Plan. Or from executives at Citadel, the beleaguered hedge fund that received $200 million in payments from AIG's securities-lending business. They should be duly sworn in and forced to explain why taxpayers should pay these claims just because their firms bought insurance without determining whether the insurer could pay the claims.As you know, like many others, we were hitting like crazy on this point long before the story became all bonus all the time. Who are the counter-parties? To a great degree, we now know who they were -- at least the major ones. Deutsche Bank, Goldman Sachs, a bunch of other banks in Europe. But in many respects these big institutions were just pass throughs. Hedge fund X goes to Goldman to place a bet against the US housing market. Goldman outsources a big chunk of the risk to AIG. Hedge fund X wins the bet, collects from Goldman, which in turn collects from AIG. The transactions are obviously much more complicated; but that's the rough trajectory.
The best article I saw on this today was Serena Ng's in the Journal. Many discussions of these credit default swaps have conditioned us to think of them as de facto insurance policies. So I buy a bunch of mortgage debt. But I also buy some CDS insurance to cover myself against the risk of my investments going under. But that's not what was happening in a lot of these cases. A lot of this was smart hedge fund managers who could see the housing meltdown coming three or four years ago and placed bets against it.
Not that there's anything wrong with that, so long as you place your bets with institutions that can cover your winning hand.
But why are we paying off these debts? Like Dan Gross said above, do we really need to cover all of Goldman's exposure dollar for dollar? Maybe we split it fifty-fifty? Remember, Goldman says their balance sheet is strong and it's share price is holding up relatively well. Maybe they can help the taxpayer managed a bit of this heavy lift?
And not just Goldman. I'm picking on them because their exposure to AIG's arrested collapse was especially great. And there were a lot of Goldman alums at least fortuitously involved in saving AIG. But the same logic applies to all the other counterparties.
It's a complex business. And even a lot of right-thinking economists are worried that these hedges and sellings of risk back and forth are so tied up and knotted together that cutting the cord could trigger a chain reaction toward the kind of meltdown we only barely avoided last fall.
Maybe so. But when you look at these payouts up close, that rationale for making these people whole is very questionable. At a minimum it's worth bringing a few of those CEOs up to Capitol Hill and asking them just why they got our money and why we can't have some of it back.
- Hilzoy adds:
The introduction to the contract says that one of its aims is to "recognize the uncertainty that the unrealized market-valuation losses in AIG-FP's super-senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FP's employees and consultants."That certainly suggests that AIG-FP was aware that there might be significant losses, as does the fact that they got their compensation locked down in a way that made it independent of their profits or losses. (Unless their bonus pool exceeded the amount guaranteed in the contract -- then they got to keep more!) And hard as it is to imagine that AIG's general management had somehow overlooked the signs of trouble in the subprime market in early 2008, it's even harder to imagine that whatever whoever signed off on this would not have asked: why does AIG-FP want this? How bad do they think it's going to get?
I imagine it would be worth scrutinizing the public comments of AIG executives between the first quarter of 2008, when this contract was written, and September, when it collapsed. But that's only one point. I hope that every law enforcement agency with anything resembling jurisdiction goes over everything about AIG-FP with a fine-tooth comb. There are more than enough peculiar aspects to this story to warrant it.
There's nothing like legal liability and high-profile prosecutions and lawsuits to put the fear of God in people. And the Masters of the Universe badly need a little fear of God right now.
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Drum on Helicopter Ben
Ben Bernanke has long said that even with interest rates near zero, the Fed still has plenty of monetary ammunition left to stimulate the economy. Today he put his money where his mouth is and announced that the Fed would be buying up a trillion bucks worth of treasury bills and mortgage securities. This is known as quantitative easing, aka printing money. The Wall Street Journal rounds up some reaction:Guy LeBas of Janney Montgomery Scott provides the basics: "Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end....Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading 'how to trigger inflation.' "
David Greenlaw of Morgan Stanley says the purchase of mortgage securities is designed to drive down interest rates: "In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."
Paul Dales of Capital Economics isn't sure that $300 billion of Treasury purchases is enough: "This could just be the opening salvo....Overall, no one knows whether these measures will work. Much depends on whether banks loan out the cash they raise from selling Treasuries and whether households and businesses spend, rather than save, any extra borrowing....At the least, no one can say that the Fed isn’t trying."
So there you have it. $300 billion in new money, another $200 billion over time from lower mortgage rates, and a clear message that the threat of deflation is being taken seriously.
That's what the adults were up to, anyway. Back in make believe land, meanwhile, it was AIG bonus time 24/7. Gotta keep Congress busy with something, I guess.
Benen on Galbraith's 'NO RETURN TO NORMAL'....
In the cover story for the next issue of the Washington Monthly, James Galbraith, a University of Texas economist and senior scholar with the Levy Economics Institute, has a must-read analysis of the economic landscape, just how serious the economic crisis is, and why the Geithner plan may come up far short of what's needed.In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don't capture the key feature of that crisis -- which is, precisely, the collapse of the financial system.
If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work?
It is a chilling piece, challenging long-held assumptions -- embraced even by members of the Obama administration -- about self-stabilizing economic models. If this downturn is unlike most modern recessions, and Galbraith believes that it is, then the "return to normal" is off in the distance, and these initial steps taken by the White House are woefully inadequate.
As Paul Glatris, the Monthly's editor in chief, put it, "If Galbraith is right -- and I fear he is -- it means that tens of millions more Americans will be out of work in a year or two or five, even if the stimulus creates all the jobs the president expects. It means that the big banks really are 'zombies' that will neither resume normal lending nor grow their way out of insolvency regardless of how much money the Treasury pours into them. It means that the auto companies will burn through every dime the government lends them and still not turn a profit."
Galbraith goes on to offer a recipe for a more comprehensive approach to what ails our entire financial system. Take a look.
Kevin Drum on Healthcare This Year?
Jon Cohn's tick-tock in the New Republic about Obama's healthcare plan is mostly fairly ordinary stuff: some of Obama's advisors wanted to go slow, others wanted to seize the moment, meetings were held, etc. etc. But through it all, Obama was Obama:
Health care, in the end, might have gotten pushed aside — except that one very senior official in the administration kept insisting that it stay on the agenda. That official was Obama himself. Repeatedly, the president made clear that he was not abandoning health care reform.
....By the end, the debate had coalesced around three options: investing around $1 trillion over ten years, offset by new revenue and some substantial reductions in Medicare and Medicaid spending; investing a slightly lower amount, in the neighborhood of $600 billion, which could be offset by more modest revenue increases and reductions in Medicare and Medicaid; or putting aside just $300 billion, offset mostly by changes to Medicare and Medicaid. A final decision wasn't made until Friday, February 13, as a deadline for setting the budget loomed. Rejecting the $1 trillion proposal, because the offsets it required seemed too severe, Obama went with the $600 billion option — $634 billion, to be precise.
This seems to be typical Obama: he really does know what he wants, and he really does insist on getting it. At the same time, as long as things are moving in the right direction, he seems profoundly willing to compromise about how fast he gets there. I haven't quite figured out yet whether I think this is good or bad, but it's what we've got. We may have a liberal in the White House, but we don't have one who's temperamentally likely to knock heads and try to make history.
Rachel continues on Afghanistan, this time with NYTs reporter Dexter Filkins:
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