With Defenders Like This

Andrew Ross Sorkin of the Times takes on the lonely assignment of defending the AIG bonuses.  (Lonely?  Well, yes, I am keeping him company, but that can get lonely in a hurry.)

He opens with a point I had made:

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers’ money. Hard to argue there.

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

He is weak on the point emphasized in the letter to Geithner from AIG chief Liddy - AIGFP has many risk books and lines of business that are not credit derivatives and which do require care and tending.  In addition to overlooking the possibility that many of the AIGFP people were not employed in credit derivatives, he ignores the fact that this was a retention bonus pool, not an incentive bonus pool.  Joe Cassano had led the charge into credit derivatives; AIG management had pushed him to one side and tried to persuade the underlings to stay on and help pick up the pieces.  If AIGFP was like any other organization of that size, some (not all) of the survivors were former rivals of Cassano who were delighted to see him go and eager to try and right the ship.  Yet now they are the villains?

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book.Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Mr. Sorkin closes with a reminder that we are all Joe the plumber now, subject to the political whims and posturings of government officials:

Mr. Cuomo wants to know who A.I.G.’s lucky employees are, and how they have been doing at their jobs. So here is a suggestion for him. Get the list, and give those big earners at A.I.G. a not-so-subtle nudge: Perhaps they will “volunteer” to give some of their bonuses back or watch their names hit the newspapers. But in the meantime, despite how offensive and painful it might be, let’s honor the contracts.

Mr. Sorkin is not as cavalier in his speculation about what would happen after these names were leaked (Improperly?  Illegally? I'm shocked!) as Mr. Crowley of TNR, who acknowledged this:

You might run the risk of intimidation and threats against these people. But that might be a risk worth taking.

And if the threats or intimidation are carried out by people driven by the heated rhetoric of "leaders" like Obama?  Don't think of it as a tragedy - think of it as a follow-up story for Sorkin.  We can take for granted that the civil liberties poseurs who would be horrified to learn that the government was bending the law to wiretap suspected terrorists would applaud this obvious trampling of an individual's privacy rights by opportunistic politicians employing governmental power to advance their own populist agendas.  Let's hear it for mob rule.

One argument Sorkin overlooked is that the problems at AIG went far beyond the Financial Products group.  AIGFP has been a useful whipping boy for insurance regulators who would rather blame unregulated credit derivatives than admit to their own failure to supervise AIG.  Based on recent disclosures, AIGFP has required $27 billion of government support for its credit derivatives between September and December 2008; in the same time period the securities lending activity has absorbed $44 billion of support.  Who broke AIG?  Here is the WSJ:

AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets.

Eventually the NY Times may return to this.  They were actually pretty good covering the Senate testimony of NY State Insurance Commissioner Dinallo in early March:

“The creation of financial supermarkets can have what I would call a knock-on effect,” said Eric R. Dinallo, the New York State insurance superintendent.

He said state insurance regulators had done a good job keeping A.I.G.’s insurance subsidiaries solvent. But then A.I.G.’s derivatives business — A.I.G. Financial Products, the purveyor of the now-notorious credit-default swaps — got into trouble. The financial products unit was not an insurance company and was beyond state purview, Mr. Dinallo said. But it was under the same umbrella with the insurance companies, and in the crisis, it threatened to strip the insurers’ capital away.

“Thank God, there are still some separations intact,” Mr. Dinallo said.

Mr. Shelby expressed doubts that A.I.G.’s state-regulated insurance companies were entirely innocent. He said they had engaged in a risky securities lending business and ended up needing $35 billion of the Fed’s bailout last fall.

“Are you trying to evade your responsibility?” he asked Mr. Dinallo. “You can claim here today that you have little responsibility for all of these problems?”

Mr. Dinallo said that it was true that the securities in the lending program were the property of A.I.G.’s insurance companies, but that the lending activity had been orchestrated by another part of A.I.G. — a special unit set up and controlled by A.I.G. the holding company. State regulators had no jurisdiction over the special unit, but it could layer big risks back onto the insurers, he said.

In any case, Mr. Dinallo said that the New York State Insurance Department spotted the problem in 2006 and began quietly working with A.I.G. to unwind the risky investments. But they ran out of time. Only about a quarter of the portfolio had been cleaned up by the time last September’s crisis struck.

They worked the problem for two years but ran out of time.  Right.

MORE:  Lots of links and coverage at the FT.

Comments

[Old Lurker]

But the most useful angle is to remind everybody how Obama promised, because he is so smart and surrounded by people that are so smart, to avoid just exactly this sort of thing, while lashing out at the incompetence of the Bush team. THAT's what makes this so delicious.

[centralcal]

Happy St. Patrick's Day to all JOMers!

[Jane]

Hey guys - Father Peter has manage to live stream 970 AM - so if you want to listen to FWDAJ live today you can do it at the LUN.

The link is on the left under: "Listen to the show live".

The link is also available at FWDAJ

[DebinNC]

What time, Jane?

[centralcal]

Cool Jane. I will try to tune in at work, once you let us know what time of day your program airs.

[DebinNC]

WSJ: The Real AIG Outrage

[Jane]

What time, Jane?

12-1 EST.

Next we will have to start taking calls so you guys can all call in and make me look good.

[DebinNC]

Spend now, details later

The Obama administration is working to prevent such stories [of "mass confusion"] about the stimulus bill.

I bet they're working mightily.

[Ranger]

Drudge is headlining a WaPo story that paints this as very bad for Obama:

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/16/AR2009031600640_pf.html>Anger Over Firm Depletes Obama's Political Capital

President Obama's apparent inability to block executive bonuses at insurance giant AIG has dealt a sharp blow to his young administration and is threatening to derail both public and congressional support for his ambitious political agenda.

It seems this is re-enforcing the sense of Obama in over his head inside the Beltway.

[clarice]

I am so sorry I will be out then, Jane--but soon you'll have a three hour program I am sure of that.

[Jane]

No sweat Clarice, there is always next week.

[Dorothy Jane]

First of all - (I hate to be a dope) what is LUN?

Second - Obama is speaking and I can't help wonder - why are Bush's deficits EVIL and his MUCH MUCH BIGGER deficits are okie dokie? I just don't get it.

[RichatUF]

WaPo is doing their part.

Senior managers submitted their resignations. Some employees didn't show up at all..."It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

Also OTS testimony on how many people were watching the AIG dots.

Seems that if Obama spooks off all the talent the AIG problem "solves itself"?

And good news Obama is doubling down on his budget and focusing on healthcare, environment, and education.

[Old Lurker]

"First of all - (I hate to be a dope) what is LUN?"

So easy to spot the newbies! Again, welcome DJ.

LUN = "Link Under Name" which means the poster has placed the URL of a link in the URL box on the comment form. That then makes the name Bold, and clicking on it takes one to the link.

[hit and run]

Jane:
Father Peter has manage to live stream 970 AM - so if you want to listen to FWDAJ live today you can do it at the LUN.

Awesome!

NEXT ASSIGNMENT: Live call-in number!!!

[Captain Hate]

I need something orange to wear today.

[bio mom]

Robert Gibbs, who represents Obama, is an oaf. His childish barbs about the Republican "cabal" yesterday could have been written by Paul Begala (and probably were). So unpresidential! So frat-boy! And so very insulting to the 47% of Americans who did not vote for Obama. I am quite disgusted by this.

[Jane]

Captain,

For some reason I always end up in orange on St.Paddy's day. I think it is subliminal or something.

[bad]

hey Dorothy Jane!!! good to see you again!!!

[Etraneus]

Is this how facism happens?

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.

The government is fanning the flames. The president himself. Senators (R (Iowa)!) asking for seppuku on the part of business leaders. Talk about abrogating contracts, devising special legislation to tax only specific people. Incompetent buffoons like Barney Frank and Chris Dodd railing about incompetence.

All over $165M, a gnat compared to the elephant of waste, political payoffs and abuse inherent in the "stimulus" package, not to mention Obama's Robin Hood budget.

It's just outrageous, but instructive to be able to clearly see who the thugs are.

[Charlie (Colorado)]

I like this part:

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

(Emphasis, of course, mine.)

So, after months of lawyering, they determined there was no legal way out, and the "Administration" agreed. Then it's gets out in the press and the O, in great outrage, says he wants Geithner to do anything legal to claw them back (which they'd already agreed was impossible) but does so after the checks went out (and I damn bet they were really wire transfers, so they've already cleared to the other's accounts.)

Q: What kind of idiots does he take us for?
A: First class.

[centralcal]

Also, Dorothy Jane (so glad you took our invitation to stick around), after you get the hang of LUN . . . you may want to downlad the Foxfire browser. Several of us who are html deficient (me *cough*) love it because we can do cool things like the techies here (bold, italics, links in the comments, etc.)

I still haven't figured out how some get little hearts (Ann, that would be you) and thingies in the comments.

[centralcal]

oh, and "downlad" is the Irish pronunciation of download.

Yes, I am Irish, 100%

[hit and run]

Over there on the memeorandum box:

Lydia Saad / Gallup:
Majority Receptive to Law Making Union Organizing Easier

Receptive? What kind of word is "receptive" in describing a poll result?

It's the kind of word one uses when one knows that the people don't really support the law, but can be persuaded (made receptive) by careful wording of the poll question.

[Jane]

oh, and "downlad" is the Irish pronunciation of download.

LOL

Well top o'the morning to you Centralcal.

[clarice]

Chaco, PUK, Rick, companeros de mi vida, Bubbalas, we are wasting our time--demagoguery is so much easier and-- dare I say it?-- far more profitable.

[clarice]

(I left out the others of you because you are clearly too honest to do this with a straight face..though Soylent could surely make the grade and was just dropped inadvertently.)

[Ranger]

I think the WaPo article is a shot across the bow of the administration. The long term hands in DC fear and angry public. The target may be AIG today, but action has a logic of its own, and revolutions eat their young. Those elected officials stoking the fires now may draw the angry crowds to DCs door demanding accountability for the hundreds of billions of pork passed out in the Porkulus bill. Those truely angered by the AIG stuff will start turning out for "tea parties."

[Thomas Collins]

LUN, Dorothy Jane, is Link Under Name. It refers the reader to the fact that clicking the name in bright blue unveils the web site that the poster has entered in the "Web Site URL" rectangle. So, you could say, in your case, LUN for the Paraphernalia blog (the blog reached when the bright blue "Dorothy Jane" is clicked).

If you are a dope, I am, too, because I had no idea what LUN meant when I first encountered it.

[Charlie (Colorado)]

Centralcal, type ♥ and you get ♥

[DebinNC]

Not wanting to waste the AIG crisis, Dems consider attaching BO's health care and cap/trade plans to the reconciliation bill and bypass Republicans entirely. LUN

[Jane]

&hearts

Just checking

[Charlie (Colorado)]

You know, let's assume that AIG were simply placed in receivership formally under Chapter 11. (Wouldn't qualify for Chapter 7, I don't think; much of AIG's business is still a going and profitable concern.)

Which, by the way, I suspect would have been preferable for several reasons.

Then they would have needed to wind down their positions, and they would have liked to do sowith the people who knew how it worked. But why would the high-powered folks want to stay, when they now knew they weren't going to get much of their expected compensation and were likely to be terminated at the end of the process?

Answer: they'd be offered retention bonuses, paying out in the future, in order to motivate them to stay.

What's more, these retention bonuses would be written so they were like debtor-in-possession; I don't know the legal term offhand, but you can be sure the retention bonus wouldn't be something that the court could reverse later, or else it wouldn't work. A retention bonus you can't be sure you'd get is no motivation to stay.

[Charlie (Colorado)]

Jane, you have to have the semicolon. '♥' not '&hearts'.

[DebinNC]

&hearts

Just checking

Jane, add a semicolon after hearts.

[Extraneus]

You need the ; at the end, Jane.

[Caro]

♥

me, too.

[Rick Ballard]

"Is this how facism happens?"

No. That's just an illustration of the dirty socialist press working for the commie in chief. Although it's surely disquieting to the folks in that office it's as "real" as a college sit in or one of Sharpton or Jackson's street theater productions using the usual derelicts as props.

If unemployment went to 20% and people who actually want to work get mad, then the atmosphere becomes conducive for a 'March on Rome'.

Ranger's illustration is correct wrt general anger taking its own path. As the capital strike continues and the idiots "in charge" in DC fumble in the dark we could see more of a Tea Party atmosphere. The problem will remain that productive people generally won't take time off to engage in street theater and the rabble who can generally be motivated to set down their bongs for a morning are unlikely to demonstrate in favor of liberty.

If I were organizing Tea Parties, I'd shoot for Saturdays and focus on elected officials homes - say a nice visit to the Dodd in CT with signs displaying pictures of his Irish mansion saying "Where's ours?" underneath. That or a visit to Barney's Male Brothel in DC.

[RichatUF]

Jane-

forgot the semicolon.

I ♥ Jane

I ♥ St. Paddy's Day

Yea, Obama is using the crisis to double down on his budget. Yammer on about no tax increases but left out the part of rationing and tax increases in Medicare and tax increases as part of his less energy agenda.

Team Zero's Midnight in America Agenda.

Less but more expansive health care.
Less but more expensive energy.
Less but more expensive education.

[clarice]

♥

[Jane]

♥

ok

[hit and run]

&liver;

[hit and run]

Darn. Sure could use a new one of those.

[Thomas Collins]

Lots of ♥ ♥ ♥ for all JOMers on this Saint Paddy's Day!

[clarice]

Dodd is such a puke when you buy him he doesn't stay bought:
"Senator Chris Dodd (D-Conn.) on Monday night floated the idea of taxing American International Group (AIG: 0.9822, 0.2021, 25.91%) bonus recipients so the government could recoup the $450 million the company is paying to employees in its financial products unit. Within hours, the idea spread to both houses of Congress, with lawmakers proposing an AIG bonus tax.

While the Senate constructed the $787 billion stimulus last month, Dodd unexpectedly added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009,” which exempts the very AIG bonuses Dodd and others are seeking to tax. The amendment is in the final version and is law.

Also, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to opensecrets.org.

Dodd’s office did not immediately return a request for comment.

One of AIG Financial Products’ largest offices is based in Connecticut"

http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig---time/

[Caro]

♣

trying for a shamrock.

[Caro]

Hey, it worked!
Happy ♣ Day. ♣ ♣ ♣

[centralcal]

Well, dang, I am at work, but don't want to miss out . . .

I ♥ the Irish

[hit and run]

Obama said that his stimulus bill would allow Caterpillar to rehire previously laid off employees. http://news.yahoo.com/s/ap/20090317/ap_on_bi_ge/caterpillar_layoffs>But now we get this:

PITTSBURGH – Caterpillar Inc. is laying off more than 2,400 employees at five plants in Illinois, Indiana and Georgia as the heavy equipment maker continues to cut costs amid the global economic downturn.

Sometimes I just don't know if I can trust this guy.

[clarice]

I &heart; hit..Hit, why not blog that for AT?..I have to run out in a bit..

[Caro]

That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009,” which exempts the very AIG bonuses Dodd and others are seeking to tax.

Great catch, Clarice. What a hypocrite!

[Fresh Air]

And good news Obama is doubling down on his budget and focusing on ^ruining healthcare, environment taxing air, and education teaching minority children to hate whitey.

FTFY

[bad]

Ha ha, clarice, I've already stolen that Chris Dodd stuff and pasted it over at Tapper.

Stealin' from you next, Hit.

[clarice]

Thanks you, Caro--I hope Jane uses it today. Gosh he's even wrose than his crooked old man.

[Ranger]

Obama said that his stimulus bill would allow Caterpillar to rehire previously laid off employees. But now we get this:

PITTSBURGH – Caterpillar Inc. is laying off more than 2,400 employees at five plants in Illinois, Indiana and Georgia as the heavy equipment maker continues to cut costs amid the global economic downturn.

Sometimes I just don't know if I can trust this guy.

Posted by: hit and run | March 17, 2009 at 11:22 AM

We now have documented proof that Obama Lied, Jobs Died!

[bad]

Any lawmaker who voted for the stimulus bill voted for AIG bonuses.

The president signed that bill.

Looks like campaign commercials just got made.

[narciso]

His old man may have had some crooked dealings, but he was a patriot true and true
the same cannot be said of the Dodd the lesser
with a straight face. Supporter of the VietCong, Castro, the Sandinistas, and if pressed the Taliban if not explicitly AQ

[Old Lurker]

Rick, "The problem will remain that productive people generally won't take time off to engage in street theater "

Interesting observation: My partner's (business partner, stop that) son just got his MBA from appropriately big name school. Most of his class spent a chunk of time (the summer between years) working in other countries. Upon graduating, a surprising number of them went back to the Asian country they had visited.

So, combined with the already observed exodus of recently minted PhD's who are going elsewhere, I think we can add "brain strike" to "capital strike".

This is not a good thing for our team.

[clarice]

Well,narciso, that is true. The younger is a crook and a leftist..oddly he generally came thru for his rich Dem constituents in Ct. and throughout the financial industry.

Perhaps he's schizophrenic.

[DebinNC]

Caterpillar mentioned in this article about the damaging effects of the Obama tax schemes on big companies.

[hit and run]

Go Jane Go!

I ♥ live streaming Jane!

[narciso]

The problem is when he does something
seemingly right, it's for what we call economic motives, not any principle his vote on tort reform, gave us Enron and options disaster, his support for the CRA which benefited Countrywide for a time, and a quid pro quo. His father, former Justice Department
official, Nuremberg prosecutor, was cut of a different cloth, you notice how I can him the Lesser, instead of junior, or even the pretencious fils I use by Buckley the lesser.

[Rick Ballard]

OL,

This is the type of crap which bothers me at the moment. The advice given is bunkum from the "ten to fifteen years to recover" on the value of a house to the “If it’s the only thing marring their credit, it’s probably not a big issue,”.

A deadbeat is a deadbeat and there is absolutely no shortage of residential tenants at the moment. I'd fire a property manager who gave any special treatment to a deadbeat who had walked on a contract.

[terry eckard]

these guys should have been fired for screwing up in the first place..I do not know of any job where you screw up so bad ...and get a bonus! this pure stupied! contract? to do what..? come on !!!

[kim]

C'mon, read all about it, terry. These are the good guys who may be able to keep AIG from going thermonuclear.
================================

[kim]

You are buying the broad brush demagoguery, terry. Examine this closely so that you don't sound like a fired up member of a lynch mob.
====================

[Will]

Isnt the answer to this dont give them taxpayer money. I imagine in every occurrence of someone using taxpayer money at least 1/10th of 1 percent gets used foolishly.

The idea of stepping in and taking the money back is as abhorrent to me as AIG paying them in the first place. I have worked for low base and big bonuses before. You agree to that upfront.

Could the Feds decide that my employer takes govenrment money and is paying me too much??

Get the govenrment out of business.

[kim]

Obama and Dodd and the Democrats brought this on themselves. Read the point about what Dodd did in February to guarantee the bonuses and compare and contrast it with his rhetoric today. This sort of baloney permeates this administration. They are trying to cover themselves with demagoguery and you are going to let them get away with it.

Frankly, I think Obama and Gang are running scared. It should be obvious that they are largely to blame for a lot of this mess, and distracting the righteous anger is a panic tactic to deflect it. It can't last for long, because there is a lot more of this chaos coming down the road. They don't know what to do except be greedy, grasping, and demagogic. It is poor, poor governance.
==========================================
=================================================

[kim]

I like that Ranger: Obama Lied, and Jobs Died.
=============================================

[Charlie (Colorado)]

We now have documented proof that Obama Lied, Jobs Died!

Oh, crap, there goes the Apple stock.

[Charlie (Colorado)]

these guys should have been fired for screwing up in the first place..I do not know of any job where you screw up so bad ...and get a bonus! this pure stupied! contract? to do what..? come on !!!

Terry, if every trader who lost money were fired, there would be no one left in Manhattan south of 14th Street.

[Charlie (Colorado)]

Isnt the answer to this dont give them taxpayer money.

Will, because of the various insurance plans etc, we're gonna give them taxpayer money one way or the other.

[Thomas Collins]

Is the "February 11, 2009" exception under discussion the one provided by Section 111(b)(3)(D)(iii) of the Emergency Economic Stabilization Act of 2008, as amended by Section 7001 of the American Recovery and Reinvestment Act of 2009 (which is usually referred to as the stimulus bill)? I read these provisions as not relating to taxability, but allowing pre-2/11/09 contracts to escape the restrictions on bonus payments imposed on companies receiving TARP monies. It would seem to me that for American citizens and American residents (and for non-citizens and non-residents performing services effectively connected with the conduct of a US trade or business), bonus monies are subject to US income taxation notwithstanding when the contract providing the bonus becomes effective. There are special tax provisons in both the 2008 and 2009 acts affecting companies receiving TARP funds, but the 2/11/09 provision doesn't seem to be one of these.

I have LUNed a site providing links to the stimulus bill if others want to join in the statutory analysis fun (if my analysis is wrong, it won't be the first time).