Mr. DeSantis leaves AIG

Jake DeSantis has famously submitted his resignation because he concluded that AIG had betrayed him and every other employee now working in AIG's Financial Products group who never profited from the ill-fated credit default swaps that subsequently wrecked the company. DeSantis believes he has earned his bonus. And he has if his account of his AIG career is at all accurate. Yet, problems remain.

First, DeSantis should have his bonus but for the fact that his company is insolvent and remains in business mostly because the Bush and Obama administrations were willing to keep it out of bankruptcy court. Why ought the taxpayers reward him and others like him when he willingly participated in this dubious enterprise?

Second, was DeSantis aware of the dangers posed by these credit default swaps? If he was, did he blow a whistle? Did he indirectly profit from this activity (by working for a company that greatly profited from this activity)?

Third, let us not forget that the relevant events occurred in a capitalist economy — in the especially brutal American system, no less. Fairness would have as much bearing on the AIG bonus situation as it had, say, on the UAW members who were forced by the crisis and political hectoring to give back additional monies and benefits. Does DeSantis believe that these men and women deserve this fate in any way at all?

While I find it easy to feel sympathy for Mr. DeSantis' plight; I also believe that the wrong he has suffered at the hands of AIG and the public pales when compared to the despair and misery one can easily find throughout the world. It is a matter of proportion. The world has more pressing problems to address than the one made public by Mr. DeSantis.

Kill off the zombie?

The Christian Science Monitor wonders whether the Obama administration should select the euthanasia option in the AIG case.

The rocks that might wreck the ship of state

The AIG mess

Alexander Cockburn believes the Obama administration now courts serious trouble. The highlight of his account:

Rough though the week has been, there is a silver lining for the White House. It stems from the very word that has landed Obama and his team in such trouble — "bonus". A bonus is something people can relate to. You hope to get it at Christmas. It's a reward for working hard. You don't give bonuses to thieves and deadbeats. Yet at the same time as the uproar over $165 milion in bonuses is in full spate, Obama has approved bailout of AIG to the tune of about $200 billion, much of it passed on to the infamous "counterparties" like Goldman Sachs and foreign banks.

Among those who have pointed this out is former New York governor Eliot Spitzer, who contributed an acrid column to the Slate website. It's his first surfacing since he was politically destroyed in a sex scandal, certainly contrived by major Wall Street players, worried that when the roof fell in — as it did — he would be telling his attorney general to issue indictments. The fact that Spitzer feels secure in entering public life again, lashing the Wall Street gangsters, shows how vulnerable Obama and his administration are to charges that they have no serious plan beyond bailing out the big Wall Street banks, and no intention of asserting control of the assets they substantively own, by formally taking them over. Obama is dancing on the edge of a volcano.

Popular outrage focuses on Senator Dodd

Senator Christopher Dodd (D-CT) must regret some his ties to AIG as scrambles to save his political career, according to the New York Times:

Across Connecticut, anger is erupting against Mr. Dodd, the chairman of the Senate Banking Committee, whose stature in Washington once reflected the state's beneficial ties with the financial industry. Now, he finds himself a symbol of the political establishment's coziness with tainted corporations and a target of populist wrath over their excesses.

A reversal like this can happen and should be expected when a powerful and well-known politician appears to have aided corporate looters while most of his or her constituents suffer through an economic crisis.

On Thursday, the senator sought to defuse the furor over the latest revelation, holding a conference call with reporters to explain how legislation meant to limit executive compensation was changed at the last minute. That change exempted bonuses protected by contracts, like those at American International Group, a big campaign contributor to Mr. Dodd that received billions in federal bailout money.

Some of Connecticut's citizens were unimpressed by Dodd's excuse:

In dozens of interviews, residents said they were appalled by Mr. Dodd's ties to financial firms and believed that he had damaged himself as he prepares to run for re-election next year.

It remains to be seen whether this backlash moment has the staying power needed to undermine Dodd's 2010 reelection efforts.

Another pundit jumps on the populist bandwagon

E.J. Dionne writes:

We are at the beginning of a great popular rebellion against those who showed no self-restraint when it came to lining their own pockets. Their entitlement mentality arose from an inflated sense of their own value and of how much smarter they were than everyone else.

The sound you are hearing in response to the AIG payoffs — excuse me, bonuses — is the rancorous noise of their arrogance crashing to earth.

Yet there is much hand-wringing that this populist fury is terribly perilous, that the highfliers who could not control their avaricious urges have skills essential to repairing the damage they caused in the first place.

Beware populism, we are told. Honor those AIG contracts. Forget about any moral reckoning and just fix the economy.

This view is wrong on almost every level, especially about populism. Of course not all forms of populism are attractive. But as historian Michael Kazin argued in "The Populist Persuasion," the "language of populism in the United States expressed a kind of idealistic discontent" and "a profound outrage with elites who ignored, corrupted and/or betrayed the core ideal of American democracy."

Is this not an entirely appropriate reaction to elite decisions dating to the 1980s that ultimately ran our economy into the ground?

The AIG backlash

According to a Macedonia International News Agency report (the link with commentary can be found at Zero Hedge):

A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all.

"It's a mob effect," one senior executive said. "It's putting people's lives in danger."

Liddy seeks to save face

During his House testimony today (3.18.2009), Edward Liddy, AIG's CEO, stated that "…he had asked some recipients to give at least half the money back," according to the New York Times.

Panic grips the Street

According to the Washington Post:

The firestorm over bonuses paid by insurance giant American International Group has triggered alarm at other financial firms, threatening federal efforts to draw private investors into economic recovery programs.

…

A senior executive at one of the nation's largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.

Other firms want to bide their time to see how early participants in the rescue programs are treated before they decide whether to sign up, said the executive, who spoke on condition of anonymity.

Briefly put, it appears that America's rentier capitalists will take the government's money when it comes without strings attached. But they will think twice about taking this money when it comes with these strings. I find their reluctance odd, however. Are we to believe that they and their agents would rather have their firms made bankrupt by the crisis than to bind themselves to rules requiring transparency, personal integrity and fiscal probity? I ask because bankruptcy is a probable alternative for some of these companies. If my conjecture is true, if they prefer firm failure to governmental oversight and regulation, then those rentiers staffing companies facing destruction simply do not care how greedy and vicious they appear to the rest of the country while those who work at firms that can survive the crisis seemingly wish to engage the Obama administration in a game of chicken in order to gain an advantageous position from which to exploit the crisis for their personal advantage. Both possibilities are outrageous and ought to draw a firm response from the Obama administration.

The reason why the AIG bonus scandal matters

Yves Smith of Naked Capitalism concisely identifies a reason for its significance:

I agree, as others have said, the bonus affair seems overdone, but on another level, it makes perfect sense. Intuitively, the public knows the execs and troops of the big financial firms were overpaid in recent years since the earnings were overstated, due to phony accounting and insufficient loss reserves. They can't get that money back, but the idea of even more going out the door, even amounts small relative to the bailouts, now that the companies are bust, is offensive.

What likely offends most common folk is not the size of the AIG bonuses per se. Nor is it their size when compared to the bailout payments the government has already made to AIG. Rather it is likely the size of these bonuses when compared to the job compensation most Americans enjoyed even in the best of times. Obviously few feel secure in the midst of a crisis. It appears to these individuals that AIG's executives got the lion's share of the rewards from the destruction of this company but have suffered little from their catastrophic mistakes. Nor, for that matter, will these well-compensated executives need to personally manage the risks generated by the AIG bailout. Their wealth can save them from a bad fate if they are prudent. The risks will mostly fall upon the taxpayers of the present and the future. Most American taxpayers are not well-compensated and will not be so any time in the future if the current crisis is a manifestation of America's secular economic fate.

The compensation matter poses, then, a question of justice (what share of the burdens must be given to these executives if justice is to be served), on the one hand, while it presents the world with an instance of a class-specific injury (the exploiters accumulate and the exploited suffer because of this accumulation). It ought to be interpreted as a path that leads to more pressing political problems and not to the pressing issue of the moment.

Yet another AIG outrage

According to the New York Times:

The bonuses that the American International Group awarded last week were paid to 418 employees and included $33.6 million for 52 people who have left the failed insurance conglomerate, according to the office of the New York attorney general [emphasis added].

Retention bonuses were paid to employees who were not retained!

Senator promotes seppuku

The story briefly put:

Iowa Sen. Charles Grassley suggested that AIG executives should take a Japanese approach toward accepting responsibility for the collapse of the insurance giant by resigning or killing themselves.

But why would the Senator wish the disgraced AIG executives would die with their honor restored?

It sounds like a plan

In an article appearing on the Huffington Post (a link appears on Naked Capitalism), William K. Black, Thomas Ferguson, Robert Johnson and Walker Todd offer a practical solution to the AIG bonus outrage. Their plan:

1. "…[T]he US trustees in charge of the firm [AIG] must immediately instruct the corporate treasurer to make no payments of any bonuses. They also need to order him to issue stop payment orders on any checks that fly out the door at the last minute, as with Merrill Lynch."
   
2. "…[T]he trustees need to split off the derivatives unit from the rest of the firm and separately incorporate it. This step leaves AIG's other businesses free to operate as usual. If the recipients of the bonuses refuse to waive them, then the derivatives unit should at once be thrown into bankruptcy, terminating all obligations to pay them."
   
3. "AIG CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake of public confidence and to send a clear signal that gaming the system is unacceptable."
   
4. Investigate "…the validity of AIG's past accounting and securities disclosures and its executive compensation program…." "…[T]he Office of Thrift Supervision, the Securities and Exchange Commission, and the FBI" can perform this investigation.
   

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.

Obama administration will try to block questionable AIG bonuses

The New York Times reports that:

President Obama vowed to try to stop the faltering insurance giant American International Group from paying out hundreds of millions of dollars in bonuses to executives, as the administration scrambled to avert a populist backlash against banks and Wall Street that could complicate Mr. Obama's economic recovery agenda.

Lest we forget, the federal government now owns about eighty percent of AIG. But will this fact matter? How could have this situation come about in the first place? After all, as Glenn Greenwald makes clear:

The only way a company like AIG throws up its hands from the start and announces that there is simply nothing to be done is if they are eager to make these payments. One might expect AIG to do so — they haven't exactly proven themselves to be paragons of business ethics — but the fact that Obama officials are also insisting that nothing can be done (even while symbolically and pointlessly pretending to join in the populist outrage over these publicly-funded "retention payments") is what is most notable here.

More pointedly, as the Razor's Edge wonders: "How did the AIG executives expect to sneak this by the media and angry taxpayers?" Can the AIG people be that clueless? Or did they expect the Obama administration to provide the political coverage they needed to further loot this company?

Some crisis links (11.10.2008)

Paul Craig Roberts, after considering Barack Obama's advisers and early appointees, fears the War Party and Banksters will remain in power once Obama becomes President.

Using Oren Kerr as his foil, Glen Greenwald rightly accuses America's intellectual elite of betrayal during the Bush crime wave regime (see this, this and this). When considered as a whole, they were polite if not silent during that time. Neither may be appropriate responses to the events and actions of the moment. Greenwald writes:

The question isn't whether invective as opposed to reasoned argument is appropriate. Even with regard to the most morally urgent debates — perhaps especially there — conclusions are only worthwhile if steeped in premises that are well-supported, analysis that is well-informed, and reasoning that is sound. Nobody disputes that. The issue is that huge numbers of elites and other experts (such as Kerr) who came forth to opine on what the Bush administration was doing failed to inform the public, failed to sound the alarm, about just how radical and lawless these assertions were — what a profound departure from our constitutional traditions they represented.

Instead, many of our leading opinion-makers and elites often defended those policies and thus legitimized them. Even when there was opposition, it was typically tepid, mild, respectful, ambivalent, constrained, dispassionate — creating the appearance to a citizenry that relies upon experts and elites to sound the alarm when things have gone fundamentally off track that there was nothing unusual or noteworthy about the powers this administration was claiming and the conduct in which it was engaging.

Paul Krugman advocates that President-elect Obama opt for a stronger and consistent version of FDR's New Deal reforms. In this Krugman sounds a bit like a left Keynesian!

So also Rahm Emanuel, who informed the world that:

US President-elect Barack Obama intends to push a comprehensive programme of social and economic reform beyond an immediate emergency stimulus package….

Mr. Emanuel brushed aside concerns that an Obama administration would risk taking on too much when it takes office in January. He said Mr. Obama saw the financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years.

The economic crisis continues to cull the weak. The vultures thus continue to eye a rapidly fading General Motors, according to the Wall Street Journal. The Obama administration wants to save the American auto industry but might not arrive quickly enough to save this relic from America's industrial past.

These days, thanks to Treasury Secretary Paulson's enormous generosity with money belonging to others, survival concerns do not trouble AIG, who will receive another $40B from America's taxpayers, according to the New York Times. Peter Morici suggests implementing an alternative to extending the AIG bailout:

If AIG can't make it on the money the taxpayers have already apparently squandered, then the Treasury should simply exercise its warrants, take control of AIG, and sell off AIG's solid insurance businesses for what they are worth. The Treasury can buy back the CDOs for common shares in the company and reorganize the new AIG with more responsible management.

An involuntary pull on the ‘brake handle’?

Having already considered the significance of the AIG bailout for the course of the financial crisis, David Lindorff concluded by noting that:

The good news is that, if the US economy collapses, the Pashtun farmer in northeastern Pakistan, the Iraqi shopkeeper in Fallujah, the Iranian worker in Tehran, and the peasant in Venezuela, will no longer have to worry about being bombed or having their children mowed down by a US helicopter gunship. The US would no longer have the funds to pay for such foreign wars. And because a collapse of the US consumer economy would also drag the rest of the world into a prolonged global slump, perhaps reminiscent of the 1930s, we might actually see a significant enough drop in carbon emissions from idled cars, factories and power plants that the global warming catastrophe that is threatening us all will be significantly delayed, giving humanity time to come up with a serious long-term response.

A collapse means the 'indispensible nation' will have received its comeuppance and that much of the world might live a little easier, freer and safer after the crisis takes its toll on America's empire.