Lest You Weren't Sure...

OK, Tom Friedman is an idiot.  Here he explains that the "AIG brokers" need to do the patriotic thing and return their bonuses:

Everyone who has a stake in stabilizing and reforming the system is going to have to suck it up. And that starts with the brokers at A.I.G. who got the $165 million in bonuses. They need to voluntarily return them. Everyone today is taking a haircut of some kind or another, and A.I.G. brokers surely can be no exception. We do not want the U.S. government abrogating contracts — the rule of law is why everyone around the world wants to invest in our economy. But taxpayers should not sit quietly as bonuses are paid to people who were running an insurance scheme that would have made Bernie Madoff smile. The best way out is for the A.I.G. bankers to take one for the country and give up their bonuses.

I live in Montgomery County, Md. The schoolteachers here, who make on average $67,000 a year, recently voted to voluntarily give up their 5 percent pay raise that was contractually agreed to for next year, saving our school system $89 million — so programs and teachers would not have to be terminated. If public schoolteachers can take one for schoolchildren and fellow teachers, A.I.G. brokers can take one for the country.

Oh my.  I laud the teachers who gave up a 5% percent raise, but this is not a helpful comparison.  I will just guess that a typical base salary for the highly compensated folks at AIG is $200,000 per year (the 25 highest paid had an average salary of $270,000).  For a person who just got a $1 million dollar bonus, the bonus is 83% of total compensation, not 5%.

Now, if Tom Friedman wants to explain that the "brokers" at Merrill, Citi, and Goldman Sachs also need to give back their bonuses, then fine - after the laughter subsides we can continue the conversation.  Maybe we can pick up with the topic of how much Mr. Friedman expects to get back from the prominent Democrats who led FNMA earlier this millenium.  Let's see, Obama advisor Franklin Raines took a total of $90 million from 1998 to 2003; Jamie Gorelick snagged $26 million; Obama advisor Jim Johnson got hijmself 421 million.  This despite accounting fraud and the eventual FNMA crack-up.  What has Friedman penciled them in for?  And AIG has used its government support to make payments of roughly $13 billion to Goldman Sachs - how much of that money is Goldman Sachs going to be asked to return?

It seems like a quibble to point out that many of the employees of American International Group are stationed overseas and may not even be US citizens, so whether they can be successfully encouraged to "take one for the country"  is up in the air.

However, I will point out that AIG employees (both past and present) lost about $675 million in deferred compensation "earned" in previous years based on the firm's losses in 2007 and 2008 (page 2), so they have hardly been unscathed by the AIG debacle.

And do keep in mind - in March of 2008 AIG eased out Joe Cassano, who had led the charge into credit derivatives.  Some of the people who stayed behind were no doubt a part of the problem, but many were involved in other, profitable lines of business and could have been part of the solution either at AIG or elsewhere.  In order to keep the business up and running AIG entered into the deal now in question.  Plenty of people had nothing to do with credit derivatives (AIG FP has other business lines), stayed in good faith, worked hard in good faith to turn the problem around and expect to see AIG honor its commitment.

Oh, enough.  Friedman cannot see the problem in his own argument:

Best I can piece together, the administration’s recovery plan — due out shortly — will look something like this: The U.S. government will create a facility to buy the toxic mortgages off the balance sheets of the major banks. They will be bought by a public-private fund or funds in which taxpayers will, in effect, be partners with hedge funds and private equity groups. The hedge funds will be there to provide expertise in pricing and trading the assets. The taxpayers will be there to guarantee — gulp — that the hedge funds won’t lose money if they take the early risks and to also lend them money to make some of the purchases. Taxpayers will benefit from any profits these partnerships make.

Uh huh.  And then a year from now, or two,  Congress will scream that these greedy hedge fund operators enriched themselves at a timne of national crisis on the backs of the honest, hard-working American taxpayer who does nto understand yada, yada, yada.  And Congress will demand a re-write of the rules to make sure that no one profits from the rescue and columnists like Friedman will cluck sympathetically.  And in anticipation of that day, and in response to Obama's heroic straddling on these bonuses (He doth bestraddle Washington like a Colossus), the folks the Fed will try to induce into partnering up with them will stay away.

After Obama establishes that a deal is not a deal and that his word cannot be trusted the odds of a successful rescue coming together get a lot longer.  But maybe we can recoup some of that $165 million. 

Restoring our financial system to health was never going to be easy.  Doing it in an environment where no one will be allowed to make money is going to be impossible.

MORE:  Good outrage from, well, Eliot Spitzer, thereby answering the age-old question of who will guard the guardians - Johns.  His theme is that Goldman, Merrill et al were paid out at 100 cents on the dollar at a time of otherwise shared pain:

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

Goldman was a leading creator and distributor of the CDOs guaranteed by AIG FP and made a tremendous amount fo money in the process.  When I see Tom Friedman calling for them to give some of their money back I will take him more seriously.  A teensy bit more.

Comments

[glasater]

Charlie Rose had on his show of 3/17 Hank Greenberg along with Meredith Whitney and two lady journalists.

Beside the video there is a transcript of the conversation below.

The conversation is very enlightening.

[Charlie (Colorado)]

Yeah, this is the same Tom Friedman of the unlimited unquestioned travel expense account and the constant name dropping about visiting Dubai and the Emir.

Will patriotically forgo the profits of his next best-seller?

One tremblers to think what his hought processes must be like.

[bgates]

And if these people gave money back now, they would suffer as a result of the current economic climate, making them unique in the world, and probably in the entire history of global commerce.

I will just guess that a typical base salary for the highly compensated folks at AIG is $200,000 per year (the 25 highest paid had an average salary of $270,000). For a person who just got a $1 million dollar bonus, the bonus is 83% of total compensation, not 5%.
I can't stand the idea that people that wonderful would have to get by on a mere $200,000. For all the good that they do, and all the shareholder value they provide - can't we have some kind of telethon or something? Save the Hamptons?

Restoring our financial system to health was never going to be easy. Doing it in an environment where no one will be allowed to make money is going to be impossible.
What if there was no legal obstacle to keeping the money, but people decided to give it back anyway? I have no expense account, despite the fact that I wrote this Friedman column in the comments a day or two ago, so I've patriotically foregone any proceeds connected with the whole business already. Do I have standing to make such a suggestion?

[bad]

Restoring our financial system to health was never going to be easy. Doing it in an environment where no one will be allowed to make money is going to be impossible.

Maybe that's the point.

[DebinNC]

There are likely 7000+ AIG folks getting retention bonuses, relatively few fat cats and none approaching Raines/Gorelick levels.

[daddy]

The most sickening thing for me today was in the hearing where Liddy read the piano-wire decapitating death threats to Barney Frank. In essence Liddy was pleading for his employees lives, fortunes, and sacred honor. And in so many words, Barney Frank vilely responded, 'Tough S__t".

This is Nero winning every event at the Olympics.

Or the 'no-compulsion to convert' clause in militant Islam.

Or an invitation to your daughter for dinner at the Palace with Sadaam.

Or any other "offer you can't refuse" from any thousand Stalin's or Castro's or Mao's we've seen through human history.

The evil that Barney Frank did today was different in degree, but not in kind, and that is a very dangerous game to play in a well armed society, that still remembers what our Constitution is, and what our Revolutionary Generation founded this Nation to be.

[pagar]

Just a reminder, Rep Frank will be in charge of:

drafting legislation to reshape financial regulation

[Pofarmer]

Restoring our financial system to health was never going to be easy. Doing it in an environment where no one will be allowed to make money is going to be impossible.

I think you've got it exactly backwards. These folks are bailing water on a ship that's already sunk, one that's hemoraging hundreds of billions of taxpayer dollars, with no end currently in sight. That's what's got people pissed off. If they were making money no one would be batting an eye. Yeah, I know, I know, think how much worse it could be if.......yada, yada, yada.

[Pofarmer]

These folks are bailing water on a ship that's already sunk

Did I mention they were steering, running the engines, loading the cargo?

And for the white collar folks that got retention bonuses to stay on with a failing company, don't think that didn't piss off the blue collar types who just got a pink slip and shown the door.

[memomachine]

Hmmm.

Meanwhile Congress stole $8,000,000,000.00 of taxpayer money doling out earmarks in the last omnibus spending bill.

[kim]

Forget the ignorant muddle; the Axelrod meme machine has figured out how stupid the media is. Didn't Greenwald just call them the 'mindless media' in the process of retailing phony Dodd spin?
============================================

[Donald]

Barney needs a ball gag and the same treatment Ving was getting in Pulp Fiction. What? Oh never mind. The object is to punish, I withdraw the statement.

[Ranger]

Goldman was a leading creator and distributor of the CDOs guaranteed by AIG FP and made a tremendous amount fo money in the process.

Goldman was also at the center of the Internet IPO scam in the late 90s. They managed the public offerings of scads of internet companies based on really questionable assessments of future profitability, then sold off the initial shares to well connected clients, who then dumped them on unsuspecting investors. Goldman made tons of money off of the IPO process, and their well connected investors often trippled their money in a few hours, then walked away and took no losses when the companies tanked.

And the guy who was running the whole thing? He's now the governor of New Jersey.

[jeanne]

Thank you, TOM! I'm so glad to see someone finally tie the prior Fannie Mae bonuses to the current brouhaha over AIG. Raines et al were allowed to skate after they defrauded Fannie out of hundreds of millions (MORE than the entire AIG bailout, let alone the bonuses).

It wasn't only Friedman, Frank, Dodd, Obama et al who DID NOT condemn those outrageous Fannie payouts. The MEDIA defended them. Rather than be outraged at Raines, they quickly took up the diversionary theme that he "wasn't formally tied to the Obama campaign".

So while we're talking about selective outrage, let's not let the media off the hook. (you didn't...as in going after Friedman. Good on you)

[Pofarmer]

Meanwhile Congress stole $8,000,000,000.00 of taxpayer money doling out earmarks in the last omnibus spending bill.

But, it was only such a small fraction of the total of over 400,000,000,000 that we didn't/don't have. Hey, no worries, the Fed will just by it.

Oh, wait, look, the Dollar adjusted index is down another $1.40. What could be causing that???

Get ready for a another round of Stagflation, folks, cause your expenses are gonna go up, but your wages surely won't.

[Appalled]

Lost in the hoopla of all this was that the retention bonuses were agreed to for a reason. AIG wanted to retain people to unwind the credit swaps in an orderly fashion. The people who were retained agrred to stay, instead of putting their resumes out and finding other jobs ASAP.

If I recall correctly from the testimony, the AIG folk who took the bonuses will be losing their jobs at the end of the year, when all their crazy deals have been unwound. If I were in their position, facing a rough job market with a scarlet AIG on my resume, I would not give up ANY cash I were contracturally entitled to. Now, I might give it up if I were guaranteed a job at AIG after the credit swaps are all unwound. But, somehow, that would probably just outrage Barney Frank all over again, and, after the political nonsense we have just seen, I would not trust such an agreement to be honored.

Populism (both the right wing and left wing versions) is just so frickin stupid...

[RichatUF]

jeanne-

I recall that anytime the Fannie and Freddie looting was brought up the racism card was played. The US got such a great deal with the Fannie and Freddie "public private partnership" that Team Zero is turning to the same blueprint to "clean up" the banking system.

[kim]

Well, you are close, Appalled. It isn't the populism that's bad, it's the demagoguery that manipulates it.

And yes, Rich, liberal guilt over racism got us the housing mess and this Presidential mess. High time those liberals got over it.
=======================================

[Tom Bowler]

Let me see if I understand this correctly. Fannie and Freddie are public guarantors of mortgage backed securities backed by the faith and trust of Uncle Sam, while AIG was a private guarantor of mortgage backed securities through a type of insurance called "credit swaps"?

Fannie and Freddie being government supported are the good guys so, "Yay Rah Rah! Bonuses for the team! Let's make housing affordable!"

AIG on the other hand is part of that evil money grubbing private sector, making big bonuses on foreclosurers. What bastards!

[cathyf]

Another obvious point that I haven't seen made is that there are three bonus dates and last Friday was only the second. Every one of those 7000+ AIG employees can "give back" the third bonus payment by quitting right now.

A mass default on AIG's obligations is one thing. A complete ending of their ability to function at all really would cause global economic collapse that would make the great depression look like a minor blip.

[RichatUF]

cathyf-

Every one of those 7000+ AIG employees can "give back" the third bonus payment by quitting right now.

A mass default on AIG's obligations is one thing. A complete ending of their ability to function at all really would cause global economic collapse that would make the great depression look like a minor blip.

Never let a crisis go to waste. More economic dislocation and pain helps the administration get their goals passed. If they have to blow up a few more banks and take a few insurance companies with them-well broken eggs and omlets. And for those banks that thought they had rental agreements, Geithner's there to tell 'um "You fucked up, you trusted us."

[Rick Ballard]

"Fannie and Freddie are public guarantors of mortgage backed securities backed by the faith and trust of Uncle Sam, while AIG was a private guarantor of mortgage backed securities through a type of insurance called "credit swaps"?"

Not exactly, Tom. The FMs did not have the full "faith and trust of Uncle Sam" and there were a great many CDS contracts settled at the auction. The totals amount of FM MBS outstanding at the time of their takeover is put at $1.5 trillion (by that Wiki - I've seen higher estimates). The CDS coverage would have been much higher but the "net to zero" effect allows claims that "only a few billion was actually lost". The actual loss was a minimum of $120 billion (the auction established a value of roughly 92 cents on the bonds) and the pockets into which the $120 billion went have never (AFAIK) been identified.

Perhaps identification of the "winners" of $120 billion on the Fed backed CDS contracts should be the focus of public ire rather than the truly minuscule $165 million paid in bonuses?

[Ignatz Ratzkywatzky]

Maybe somebody smart can correct me but what exactly is the great sin of CDSs?
They are a hedge against an entity's other investments, a form of insurance.
The charge is they are an abomination because parties with no connection to either end of the underlying securities r assets were allowed to trade in them as well.
If that is the horror of it all shouldn't we also be burning down the MERC and CBT and every other commodity trading venue and anyone who has ever shorted a stock or bought a put or call, or a lottery ticket for that matter?
Seems to me there was nothing inherently wrong with CDSs, or MBSs either, except that they were priced irrationally. And not to beat a dead hobby horse, but instituting mark to market accounting in 07 guaranteed that the stupid pricing would wreak the maximum damage when the bottom fell out of real estate.
What I find truly sad is that I think there is a pretty good chance the financial sector would have survived quite adequately had mark to market not been tied to capital requirements and the uptick rule had been retained to limit the shorts' power.
No bailouts, no porkulus, no Obama, none of this insanity; just a garden variety recession.

[Rick Ballard]

Ig,

There's nothing "wrong" with real (as opposed to synthetic) CDS traded on a regulated market. The unregulated synthetics really do closely resemble fire insurance being sold to arsonists. The "wrong" part of MBS comes from the fact that the percentage of "rotten apples" included was not determined by the market or any economic rationale but by the FMs imposed "guidelines" authorized by the CRA legislation.

The MBS market could have handled the CRA problem or the CA suburban deadbeat problem but it couldn't handle both of them together.

The rationale for the existence of commodities markets is relatively obvious. I can't quite identify a rationale for the existence of ABS/CDS instruments as currently constituted. The fact that ABS issuance is down by around 80% since people figured out what they really are indicates that the 'need' for them to exist as presently constituted is minimal.

[Tom Bowler]

Thanks for the link, Rick. So both the FMs and AIG rely on CDS contracts for as a way to offer guarantees to investors. Additionally the FMs have the implied guarantee that, because they are government supported, they won't be allowed to fail. But it's only an implied guarantee.

Perhaps identification of the "winners" of $120 billion on the Fed backed CDS contracts should be the focus of public ire rather than the truly minuscule $165 million paid in bonuses?

That's a list that could make for some interesting reading.

[cathyf]

Well this is specific to MBSs and not general to all ABSs, but the main advantage of MBSs is that, correctly structured, they can pretty much completely diversify away location risk. The saying about real estate that everyone has heard -- "the three most important things are location, location and location."

Living in rural America (where my house with the magnificent victorian woodwork is worth about $110,000) I am quite aware of what damage a plant closing or a military base closing or a natural disaster can have. When you have a couple of local banks, and all of their loans and all of their deposits are local people and local property, a single bad event can cause a complete economic meltdown. There is a flood and the landowners along the river lose their homes, buildings, stored grain and machinery, and the year's production. Or a big employer shuts down and people have to move away and there is no one moving in to buy their houses. People default on their loans, and take their deposits with them as the move away, and deplete their savings, which means that the banks have to call in their loans to raise capital. Which kills off the local businesses, causing more job losses, population losses. And eventually it spirals into a complete economic catastrophe.

MBS are one of the things which prevent this spiral where a single local bad event can destroy an entire local economy. Location is a risk that can be diversified away, and the MBS is the tool to do it.

[Rick Ballard]

Both MBS and CDS work fine under loads envisioned during the original design process. The 92 cent coverage on FM MBS indicates that to be true.

Now, add ARMS, no docs, 100% LTV, ALT-As and geographic concentration due to compliance with CRA "guidelines" and you have a 15,000# trailer on a light bumper hitch rather than on a frame hitch. Even if you put it on a frame hitch you'd find out that the brakes, transmission and radiator weren't quite up to the job about 10 minutes after starting up a hill.