If I ran someone down in a car on a deserted road, it would take a lot of gall for me to ask him to pay me an exorbitant price to take him to the hospital since there's no other car around. When you run someone down, taking him to the hospital is the least you can do, and payment shouldn't so much as enter the picture.Likewise, when you run the world financial system and the American taxpayer down, it takes a lot of gall to ask for not just a performance bonus, but a retention bonus as well. Any remotely decent person would stay and try to unwind the damage s/he had caused, if s/he was the only person who could do so, and would be content with his or her salary. (After all, it's not as though people in financial services are generally underpaid.)
If the people in the AIG Financial Products felt this way, they could have made all these legal issues about contracts vanish by simply declining their bonuses. And they could solve the retention problem by agreeing to stay around as long as they're needed, at their existing salaries. Instead, they are using our predicament to extract even more money for themselves. And that's obscene.
Josh Marshall on Why It's Cutting
Like you, I've been watching this AIG bonus story unfold over the weekend. And though I did not see it at first, I think it may prove to be a turning point, both for AIG and the government.
I don't believe the bonuses themselves are the heart of the matter, nor the fact that they're going to the very executives who caused AIG's implosion or even the galling reality that, since all money is fungible, they're being paid with taxpayer dollars. What's really driving this forward -- and what makes it such a dangerous moment for the White House -- is the jarring image of the administration's impotence.
Secretary Geithner found out about the bonuses. He told AIG CEO Edward Liddy it wouldn't fly. And Liddy, in a curiously imperial letter, tells Geithner that much as he is pained by the situation -- to blow it out his ass. Which he apparently proceeded to do.
There's really no other way to describe it. From the Journal ...
Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit -- whose woes caused massive losses at the giant insurer -- are due on Sunday, and added "quite frankly, AIG's hands are tied."...
Mr. Liddy wrote in the letter to Mr. Geithner that it followed a conversation between the two men on Wednesday about "compensation arrangements" at the financial products unit and AIG in general. "I admit that the conversation was a difficult one for me," Mr. Liddy wrote.
In the letter, Mr. Liddy wrote that "outside counsel" had advised that the previously agreed to payments to employees at the financial products unit are "legal, binding obligations of AIG." He wrote that there are "serious legal, as well as business, consequences for not paying."
"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Mr. Liddy wrote, but added, "Honoring contractual commitments is at the heart of what we do in the insurance business."
Few exchanges have so captured the disconnect that makes this situation so politically explosive. We're collectively taking our country's future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we're receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us -- dictates we promptly accede to. There's a beggars can't be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we've been told, that in addition to picking up the tab we're being played for fools.
- Josh says Required Some Redacting, But ...
DH makes a decent point ...
As Liddy surely knows, when a company wants to get out of a contract that is questionable or troubling, it can generally find some legal theory to justify disavowing the contract. Here, given what has happened at AIG, it would be shocking if there were not a plausible argument that the AIGFP ******* breached whatever contracts allegedly entitle them to bonuses. Assume that AIG refuses the bonuses, and the ****bags sue to collect them. AIG gets a jury trial. What jury in the USA would award bonuses? It's damn near inconceivable. Liddy is paying the bonuses because he wants to pay them and could give a fuck about honor, decency, taxpayers, responsibility, whatever.I was going to write this up tonight; hopefully I'll be able to tomorrow. But the real issue for these people at AIGFP is criminal jeopardy. As noted earlier, a lot of the stuff these folks were doing looks like fraud. It would be helpful to make that clear. It might lead to more constructive decisions on stuff like these bonuses.
- Aravosis How to solve AIG's bonus problem
My friend Chris wrote me this morning:Chris is Paris posted something on this earlier, but here’s a twist:“In a letter to Geithner dated Saturday, Liddy informed Treasury that outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.”Let’s assume that’s true, and start the countdown clock.
When the auto industry needed a bailout, the true believers in the GOP said the problem was labor costs and that the auto companies really needed to declare Chapter 11 so they could renegotiate their union contracts.
I don’t know a whole lot about bankruptcy law, but if AIG is “stuck” with a personnel payment structure that doesn’t make sense in the current climate, surely the Republicans will remember their brilliant suggestion for handling auto assembly line workers who are being “paid too much.”
Surely they’ll stick with that approach. I mean, it’s not like their argument in this would change just because now we’re talking about bankers and investment brokers. That would be ridiculous, wouldn’t it?
So I think we should give them kudos for integrity and making tough choices – by starting a countdown clock and praising them for how quickly they will no doubt get around to making the same suggestion for screwing bankers that they made for screwing auto workers.
Too bad we couldn’t run a betting pool on how long it will take. That would be a way for at least one person outside of Wall Street to make money off of this bullshit.- Marcy Wheeler finds The Semtex in the AIG Retention Contracts
Here's how I understand the white paper AIG just used to convince Tim Geithner that, while the US government can force car companies to cut the wages of line workers, the US government cannot force banksters to cut the wages of the thugs who broke the global financial system. There's a lot of mumbo jumbo about contract law, but that's not the real reason AIG is arguing Geithner can't strip the bonuses. It's the "business reasons" that amount to a deliberate threat:
For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.
In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
Translated, I take that to mean that AIGFP is a party to a bunch of contracts insured by AIG the US government. And if AIGFP somehow does something that equates to a default on those contracts, then AIG the US government is on the hook for hundreds of billions of dollars.
The white paper goes on to explain just one scenario that might trigger a default in terms of these contracts.
Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts and claims.
I take this to mean that if a bunch of AIGFP managers quit because they didn't receive bonuses promised in their contracts, then France could, if it wanted, to appoint its own designee. And if that happened, then it would equate to a default and those contracts would kick in, at a cost to AIG the US government of at least tens of billions.
In other words, I take this to be a threat: "if you don't give us our bonuses, we'll trigger a default event that will cost AIG the US government tens of billions of dollars." It's just a polite way of saying, "Pay us the $100 million ransom or we start exploding the suicide bomber vests we're wearing."
Frankly, I have no idea whether this particular threat--France responding in a way that would set off a default--is real, or whether there are similar events that those AIGFP managers demanding their ransom could easily trigger.
But what they're doing is pointing to one relatively preventable area, noting that we might be able to defuse the explosion before it went off if we worked hard enough with the French, but saying that that, in general, is the kind of thing the AIGFP managers might contemplate if they don't get their bonuses.
AIG agreed to pay the guys whose gambling AIG the US government insures hundreds of millions of dollars in bonuses. And the gamblers are now saying they would be willing to blow their own gambles--ignite their semtex vests--if we refuse to pay up.In New Terror Video, AIG Demands Huge Ransom from U.S.
Shadowy Group Seeks Bonuses, Golf Retreats http://www.borowitzreport.com/
American intelligence experts are analyzing a new terror video from the American International Group (AIG) in which the leader of the shadowy organization demands billions of dollars from the United States.
In the four-minute tape, which surfaced over the weekend and caused deep concern among U.S. officials, a man believed to be the chairman of AIG says that if his organization is not paid its ransom, "chaos and destruction will rain down on the American economy.""If we are not paid billions more in bonuses and corporate golf retreats, America will be made to suffer," the man threatens.Intelligence analysts said that the man, AIG chairman Edward M. Liddy, appears to be speaking at a luxury beach resort that offers few clues as to his exact location, although there is "good intelligence" pointing to the Ritz Carlton in the Cayman Islands."We have some reason to believe that he and other AIG executives are there, based on a series of intercepted room service orders from the all-day dining menu," one analyst said.Reacting to the video, Homeland Security Secretary Janet Napolitano raised the nation's terror alert level to orange, meaning "taxpayers are about to get reamed again."Treasury Secretary Timothy Geithner also released a response to AIG's latest demands, but intelligence experts said they would need several weeks to decipher Mr. Geithner's response.
Krugman sees A Continent Adrift
I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
...The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such “automatic stabilizers” are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.
But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
...Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
DougJ notes that Fareed Zakaria is very shrill
This is strange coming from such a serious commentator:
In fact, though consumed by the economic crisis in its first 50 days, the Obama administration has nevertheless made some striking moves in foreign policy.
[....]
These are initial, small steps but all in the right direction— deserving of praise, one might think. But no, the Washington establishment is mostly fretting, dismayed in one way or another by most of these moves. The conservative backlash has been almost comical in its fury. Two weeks into Obama’s term, Charles Krauthammer lumped together a bunch of Russian declarations and actions—many of them long in the making—and decided that they were all “brazen provocations” that Obama had failed to counter. Obama’s “supine diplomacy,” Krauthammer thundered, was setting off a chain of catastrophes across the globe. The Pakistani government, for example, had obviously sensed weakness in Washington and “capitulated to the Taliban” in the Swat Valley. Somehow Krauthammer missed the many deals that Pakistan struck over the last three years—during Bush’s reign—with the Taliban, deals that were more hastily put together, on worse terms, with poorer results.
Many normally intelligent commentators have joined in the worrying. Leslie Gelb, the author of a smart and lively new book, “Power Rules,” says that Hillary’s comments about China’s human-rights record were correct, but shouldn’t have been said publicly. Peter Bergen of CNN says that “doing deals with the Taliban today could further destabilize Afghanistan.” “It’s change for change’s sake,” Gelb writes ruefully. Ah, if we just kept in place all those Bush-era policies that were working so well.
I guess Zakaria has finally let anti-Semitism get the better of him. That or he’s spent too much time in the fever swamps of the angry left-wing blogs.
Or maybe both.
Sully on Why The Newspapers Died
Clay Shirky offers a brilliant and brutal obituary. They all saw the Internet revolution coming, but they couldn't adjust their fundamental worldview:
When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse. This shunting aside of the realists in favor of the fabulists has different effects on different industries at different times. One of the effects on the newspapers is that many of their most passionate defenders are unable, even now, to plan for a world in which the industry they knew is visibly going away.
The curious thing about the various plans hatched in the ’90s is that they were, at base, all the same plan: ... ...
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