United Liberty
I’m Sick of AIG
Mon, 03/23/2009 - 7:12am | posted by Matt Wittlief
This week has featured a lot of discussion on AIG. There is widespread outrage over the payments of bonuses to employees. There is finger-pointing and flip-flopping regarding who knew what and when in regards to the bonuses. We have the House and the Senate proposing and passing legislation to address the bonus issue. AIG CEO Edward Liddy testified before the House Financial Services subcommittee on Capital Markets. Obama and team have been making statements which appear, at times, to be inconsistent… I’m pretty much spent on the issue, but will offer my thoughts.
I have not been able to find a clean, clear and accurate report of what these bonuses are all about. Certainly, some portion of these were so-called retention bonuses. I’ve read differing reports and opinions on the exact nature of these payments. In one version, these were payments which were paid to AIG employees to stay on staff for a period of time while the company begins down its path of controlled destruction. This makes sense to me - especially for certain employees. Some useful contributors may choose to cut their losses, quit or pursue early retirement. It may be worthwhile to entice them to help clean up the mess with a bonus payment.
The other version I have heard of this is that these were negotiated well before the federal bailouts. Many of the employees in the the financial division of AIG which caused so much of the problem were paid largely in bonus compensation in the “good years” when CDS seemed like great products. When the economy began to turn sour and these financial instruments began to lose money, AIG took the position that these were extraordinary circumstances and not the fault of the individual employee. So, they wrote a contract to protect the bonuses at a certain level despite actual performance.
Both of these are plausible explanations because I’ve witnessed both of them first hand in my own work life. Many people will argue (quite vociferously) that these employees do not deserve any sort of bonus. Why should we pay the people who destroyed the economy - or at least destroyed AIG - to stick around? Fair point. However, let’s remember that not all employees are created equal. Also, despite engaging in a practice which has led to the destruction of the company, these may well be some of the only qualified individuals to help destroy the cancer itself. Further, it is also very likely that senior management and even the executive leadership and Board of AIG did not see this as the fault of the employees who we now say created the mess. This is precisely the same argument that many people are using to say that we should not punish the delinquent homeowners.
Regardless, the people are angry. And their anger is all over the place. Personally, I think most of the anger is misplaced, but this is due to the myriad of opinions, stories and rhetoric out there trying explain this mess. At the end of the day, my anger traces back to the government interfering in this mess in the first place. A disorderly collapse of AIG may well have caused a very ugly situation back in September. But, now we are treated the politicization of every action of this company as it tries to destroy itself. Ed Liddy’s opening remarks and various appendices can be found here and provide interesting reading material.
While most of America was concerned with AIG bonuses, the real AIG story this week was the release of details of how AIG has used the money it has received from the government thus far. The details can be found in Liddy’s testimony linked above. In summary, a whole lot of banks have received money as payments from AIG on various contracts and financial derivatives. This includes, tens of billions of dollars to many foreign banks. It also names the largest recipient as Goldman Sachs ($12.9B), who has already receives billions in TARP money - and not so coincidentally is the former employee of Henry Paulson, Robert Rubin, John Corzine, Jim Cramer, Erin Burnett, Josh Bolten, George H.W. Bush IV, Neel Kashkari, Robert Zoellick, and many others in the government and in media. I have a hypothesis that “too big to fail” means “would cause Goldman Sachs to lose money.”
The story doesn’t quite end here. Now Congress has to act. So, the House quickly drafted and passed H.R. 1586. Note that the bill was introduced on March 18 and passed on March 19. No matter what you might think of the Constitutional or ethical merit of this bill, it is ludicrous to introduce and pass legislation so quickly without time for sufficient debate and review. At least this bill is short enough that it is plausible that most members actually read the full text.
That’s all for now… I’ll leave you with a link to a statement in favor of the legislation by libertarian-friendly Rep. Tom McClintock (R-CA).
To me, I see the AIG bonuses as the “let them eat cake” moment in American history. It’s not the whole story, but it sums up just how out of touch big finance is with the majority of the country.
For me personally, I used to laud deregulation and Ayn Rand style free markets, and as those markets have gotten more free to do what they like with less regulation we’ve ended up with a system that rewards people who fail with more money in one year than a teacher, police officer, or doctor even will see in their lifetime.
The system does not produce the intended results. It does NOT reward those who are productive. It rewards those who are most connected.
I’m done.
Understand the frustration… but, it is important to recognize that the mess we are in is not due to unregulated free markets. Our government has created a patchwork of regulation are other mechanisms to interfere with the market. Tax subsidies and corporate handouts, laws on the books which are not enforced, lobbyists and former CEOs in high places, manipulation of interest rates and all the other programs conducted by the Federal Reserve, and inconsistent regulation which allows rules to be circumvented in nefarious ways all serve to have a quasi-command economy which spits in the face of the free market.
Keep the faith. The system has created predictable results - we need to work together to educate and fight for true free markets with consistently enforced laws and regulations which keep the government out of the day-to-day functioning of the economy.
No, that faith is long gone.
I do like free markets, but I’m done with capitalism that has more Ayn Rand than Adam Smith.
The Credit Default Swaps that brought down AIG were COMPLETELY unregulated. Total free market with no oversight or intervention.
Glass-Steigel (Stielgel Seigel whatever) if it had been kept in place would have kept AIG from forming at all and kept banks out of the investment business. Keep Glass-Steigel and no meltdown. Recession maybe, but not the crazy mess we have now.
Government regulation can be heavy handed and poorly implemented but it’s a lot better that the chaos we have now. Or put another way, I’d take 1979 over 2009 any day.
That wasn’t the free market; that was the completely unrestrained market—that is, unrestrained by either regulation *or* supply and demand. Housing prices could never have gotten that high without the government lowering interest rates far below their market price. Without that “simulus”, there would have been no boom and thus no bust either.
When we talk about the free market, we aren’t talking about a market where anybody can do whatever the hell they want. A true free market is constrained by economic reality. Each firm is limited by the amount of money that can get, and the total amount of money in the economy is limited. In other words, the market is regulated not by the laws of Congress, but by the laws of economics.
But when Congress messes around with the bankruptcy laws, or the Federal Reserve prints money, or Fannie and Freddie can issue securities that are “riskless” because taxpayers will take the hit if they fall, that suspends the laws of economics. Congress attempts to replace them with their own laws, but bans on certain behavior can never be as thorough as fundamental monetary constraints. Eventually the violation of economic law reaches a point where the economic reality reasserts itself with a vengeance, as it is now.
Yet somehow, Congress never learns.
Very well said, Brent!
Actually, in the Ayn Rand inspired theology of many modern “capitalists” a free market is a place where people can do whatever the hell they want. And we’re supposed to have faith that they will do what’s best for everyone over the long term.
I’m not sure what all you include in “economic forces” but markets are an artificial construct. They are made by the society. It’s kind of like a corn field. There are natural forces at work but no one would ever mistake a cornfield for a natural occurrence.
The point of regulation is to make sure that our markets run as efficiently as possible. That way, when corrections happen, then the effect is limited.
I’ll bring up Glass-Stiegel again. With Glass-Stiegel in place there would STILL have been a housing bubble and a crash. The difference is that the crash would not have bankrupted my bank, and my bank would still be lending money because it would have sufficient reserves.
Instead my bank collapsed last October. Thank God for the FDIC.
Just because there are natural forces at play like supply and demand does not mean that we can’t put some reasonable and prudent controls on the system. We damn rivers to control floods. We put up traffic lights to reduce accidents. We can put financial systems back in place that keep the market stable, and, in fact. Stable enough that failing institutions are free to fail like they should.
The things you mention, like the Federal reserve (oddly enough a private institution owned by it’s member banks) or our “wonderful” new bankruptcy laws were all under the sway of Objectivist philosophy and it’s radical interpretation of free market capitalism that is as much a utopian phantasy as anything you would hear from Karl Marx.
It’s that Objectivist Ayn Rand anti-government crap that’s ruined our economy. Its time to bring back good sound regulation and good governance to go with it otherwise our economy will continue to suffer.
First let me say that I appreciate your thoughtful and knowledgeable responses. It is good to have that to have a good debate.
To me, there are short-term and longer-term reforms which are necessary. As I noted before, I am not against regulation. I do believe that is is possible for markets to be self-regulating, but markets won’t self-regulate when there is a patchwork of government imposed regulation. In the interim, I am in favor of reinstating Glass-Steagall. Ideally, a new simple and thorough legal framework could be developed allowing for private enterprise to create the precise nuances of regulation in a competitive framework. That would take time. But, adding more ad hoc regulation and throwing more taxpayer money at the SEC will not work.
I have not read too much Ayn Rand, but my understanding is that individual actors will do what is best for them and have to live with the consequences. I would be surprised if she felt this would lead to Pareto optimality. Some people would be worse off, but it would be a result of their actions and abilities. I’m also confused because you refer to “economic forces” as an “artificial construct” but “supply and demand” as “natural forces” - when I said “economic forces” I was referring to supply and demand.
I’m sorry that your bank failed. And, it’s nice that the FDIC was able to save you. That cost me money. It’s a shame that the FDIC was not able to properly protect you in the first place. I would say if there were independent banking regulators which could examine capital positions and risk in a competitive environment that you may have received earlier warning that your bank was in trouble. The FDIC will go bankrupt - it’s only a matter of time. Then, we’ll all be stuck with less protection and/or higher taxes. I’d rather have optional private bank insurance and banks which operate on different leverage ratios - from full reserve down the spectrum to 12:1 leverage or more. The consumer makes the choice where to put their money and how to protect it.
Finally, yes, the Federal reserve is a private bank. But, really in name only. It is a quasi-government entity with special privileges which have served to help bring about the “ruined” economy. They play a significant role in creating the booms and the busts and they have that power because of the government. So, it’s not “anti-government crap” - it is government crap.
Thanks for the good debate.
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