A danger to the nation

Yves Smith of Naked Capitalism addresses once again the AIG bonus scandal. This time she extensively quotes from her email correspondence with William Black, a professor of law and economics at the University of Missouri-Kansas City. Given Professor Black's past work on the Savings and Loan crisis, his take on the AIG scandal is worth considering and reproducing in full:

This [the AIG situation] is the consequence of six things on the Treasury end of things:

(1) the failure to use Chapter 11 bankruptcy/pass-through receivership to deal with deeply insolvent financial institutions

(2) the failure to expose, and to the extent possible, remedy through restatements the massive accounting fraud that AIG was/is engaged in that triggers the bonuses

(3) the failure to bring criminal charges against the control frauds

(4) the failure of Treasury as negotiators — they had all the leverage when they bailed out AIG and could have conditioned the aid on at least the VP tier and above giving up their bonuses

(5) the weakness of Treasury's current lawyers who, if press reports are accurate, couldn't think of any way for the U.S. government to take effective action against what it reportedly views as a scandal,

(6) (and I haven't seen this discussed) why was Treasury blind-sided by this? It confirms that they did not conduct even the most obvious due diligence on AIG's assets and contingent liabilities

Given what we know about the lack of due diligence by AIG on underlying assets, particularly nonprime paper, this confirms exactly how dangerous Treasury is to the the nation. It is also consistent with the concern that it faces such a critical staff shortage, particulary [sic] in the relevant skills (which the folks it hires from Wall Street lack). I doubt that they have five senior officials that have ever reviewed loan files for a living or conducted meaningful due diligence (which requires cracking the loan files).

On the AIG end we see the perverse incentives of keeping the senior level folks on that caused the crisis. They have every incentive not to be honest about the true extent of the losses. They know the place is dead (hopelessly insolvent) and have strong incentives to loot the corpse, e.g., through bonuses. They do not alert Treasury sufficiently in advance even to bonuses that they should know will be perceived as scandalous (though another problem with keeping these failed elites in power is that they are clueless about the reaction of normal people). They do not work to limit bonuses, e.g., by being honest about past accounting fraud. I believe when the facts come out that we will find that they did not make criminal referrals on the prior senior officials that led AIG's accounting fraud (which would have given AIG and the Treasury a far stronger legal basis for refusing to pay bonuses that were "earned" via accounting control fraud.

I don't oppose bonuses that are actually earned through long term performance. That is not the case with the AIG bonuses. We can offer well designed performance pay if we use bankruptcy or receiverships.

Fraud and looting, dissembling and the force majeure now exercised by American finance capital — these are becoming the significant and blatantly outrageous features of the AIG bonus scandal.

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