The AIG bonus controversy would be annoying if it weren't so funny. A few puzzles:
READ MY LIPS: Congress is going to pretend to talk about slapping a personalized tax on AIG bonus recipients. Cool. Will that really get the money back from the non-US citizens of AIG who toiled in London, Paris, Tokyo, and Hong Kong these many months? I am not a master of international taxation, but I really, really don't think so. Still, it's fun to imagine the surprise in Washington when they realize that American International Group has overseas offices as well as employees from abroad. Don't think of it as a bonus - think of it as foreign aid! (Or as enriching millionaire foreigners on the backs of the US taxpayer...)
[UPDATE: THE BRIGHT LIGHTS CONTINUE TO SHINE. Jane Hamsher of Firedoglake had a chance to chat with a progressive Senator:
I later interviewed Senator Merkeley, who I really, really like. He's a true progressive whose commitment to fighting the banks on cramdown is one of the bright lights on the Hill right now. I asked him if he'd been made aware, as a member of the Senate Banking Committee, about the impending AIG bonus payments -- as Rep. Kanjorski had. He says he hadn't.
I then wanted to know how they planned to address the problem going forward -- namely that there are still about a billion dollars worth of AIG retention bonuses still to be paid this year. He said that from discussions he's had in the halls, in the caucus, in committees, three options are being considered:
1) A legal strategy about the contracts -- his understanding is that breaking them would be tough, "it ties us up in court forever" he said.
2) Telling AIG to get together with their employees, tell them that it's wrong to take the money and encourage them to voluntarily break the contracts. "Tell them they've got to change their culture."
3) If they don't get rid of the contracts voluntarily, "we grab it back through tax revisions."
I pointed out that the Financial Products Division was headquartered in London, and many of the employees might not be subject to US taxation. He said he wasn't aware of that.]
DUMB KABUKI: On Monday Obama expressed his outrage, assuring us that "I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole."
Block them? They had been paid the previous Friday! Great. Obama is outraged, out of the loop, and powerless - welcome to the club, and we are delighted to know he feels our pain. Of course, the rest of us did not spend two years successfully attempting to become the Most Powerful Man in the World, so we are troubled by his lack of either clues or power.
"A DEAL IS A DEAL" MEETS THE LAW OF UNINTENDED CONSEQUENCES: The WaPo makes the obvious connection about a world in which deals today are undone by Congressional polling and posturing tomorrow:
Several industry executives, observing the pressure being exerted on AIG and other big banks, say they are worried about joining in government efforts to rescue the financial system in the newly charged political environment.
"Am I afraid of the populist outrage? Yes," said Lynn Tilton, chief executive of Patriarch Capital, a private-equity firm that has weighed making such an investment.
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.
This is going to hamper participation in TALF and make another idea on the table - the Fed partnering with hedge funds to buy "toxic waste" - a full non-starter. Well, unless the Fed and Treasury can promise today that Congress will let the hedge fund partners keep their (presumably obscene) profits a year or two from now. And since a deal is no longer a deal, what would that promise be worth?
Actions have consequences, but I guess failure to posture frantically also has consequences.
Troubling. I wonder how much of this would be happening if Barack Obama were in charge.
thanks for the linkbacks, and nice article too, helped me wrap my head around this a little better.
Posted by: skwguitar | March 18, 2009 at 10:09 PM
Foo, I was not drawn in to what you were saying. I was content to pass the detail by, trusting that sometime between the comments and the end of the thread that someone would give a cogent summary that made sense to me and was enough for me to know.
Then TM chimed in with his soapbox cracking and I thought, good for Foo, he persisted to make a point he believed in. And I thought, good for TM, to recognize it charitably.
Then you snarked, and it came across to me like a cold wet mackerel to the face. You probably didn't mean it that way, and it wasn't directed at me, but it sure harshed my mellow.
Yeah. Selfish of me to feel my mellow was harshed, but I did.
So I suppose you didn't need to say it, and I didn't need to smack the mackerel back at you. I'm content to drop it.
Posted by: sbw | March 18, 2009 at 10:19 PM
Mr Uk,
If I were picking subjects, this wouldn't be one. You're absolutely correct. I haven't much to say about the theoretical ex post facto tax lynching precisely because it is a tale told by idiots.
I would note that the desperate need for traders who understand the transactions involved is dropping rather rapidly and that cheaper and just as knowledgeable replacements are probably available at very reasonable cost. I find the "hedge funds will snap them up" argument peculiarly risible, given the rate at which hedge funds are folding.
The entire ABS market is shrinking and the Fed promise to gobble them up is going to cause it to shrink even more quickly.
BTW - I find President Telobama's choice of uniform very suitable and fitting.
Posted by: Rick Ballard | March 18, 2009 at 10:30 PM
Mr Ballard,Similarscapegoating ishappening here>/a>
Posted by: PeterUK | March 18, 2009 at 10:42 PM
An exchange is a cooperative organization, where its members submit to regulations (margins, reporting, transparency) in order to get others to submit to the regulations, and to reduce the credit risk of dealing with each other. And wherever the an instrument trades on an exchange, the OTC market disappears -- who would trade with a counterparty who might default, when you can trade with the exchange which has a much lower default risk?
In other words, there is a free market in regulation, in which participants freely submit to the regulations, and, in fact, pay handsomely for the privilege of being regulated.
Well this is a bit off topic, but I've been maintaining lately that exchanges are an example of private regulation. Yes, exchanges are all regulated, by the SEC, CFTC, etc., but it is a public-private partnership what those regulations are.Posted by: cathyf | March 18, 2009 at 11:11 PM
Mr Uk,
There really aren't that many songs in the dirty fascist socialist songbook.
I've been trying to fit this Treasury report, which mentions that primary dealers are forecasting a $1.6 trillion deficit this year with this FOMC report which seems to indicate that the Fed will purchase up to $1.75 trillion worth of debt this year (including $300 billion of "longer-term Treasury securities").
I sure wish I could guess which shell the pea is under but I can only lean a little towards the one labeled "Inflation". I'll bet the Chinese wish they had accounts with US domiciled dealers. They're going to miss out on the Fed purchase of Treasuries. That could get expensive after that $300 billion is gone.
Posted by: Rick Ballard | March 18, 2009 at 11:19 PM
cf, there is a hefty third market.
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Posted by: kim | March 19, 2009 at 12:13 AM