Sunday, March 22, 2009

Reading Around: Obama and AIG

Let me say upfront that I have been of two minds about the AIG bonuses. First, as a lawyer, I flinched at the thought of breaching a contract - there are just too many ways that this approach was so wrong. I still got annoyed at the idea that somebody got paid a retention bonuses for screwing up and losing money.

Then I got calmed down and realized the whole bonus donnybrook was a side show. Here is a medley about the financial crisis.

Ruth Marcus at The Washington Post wrote Grin and Bear the Bonuses that showed the side of the AIG dustup that got ignored by the cable news:
"Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective.

In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government -- even when that is in the national interest. This is similarly counterproductive."
David Ignatius - On the Financial Crisis, We're Stuck in 'Phony War' Phase - washingtonpost.com:
"What will happen if Obama's efforts fail? That's the question that really worries me when I think about history. During the 1930s, European politicians failed to solve the economic crisis through normal democratic means. So the public turned elsewhere. People became so angry with bankers and business tycoons, and with the bickering parliamentarians, that they turned to authoritarian leaders who promised national action -- in the form of fascism. That nightmare scenario may seem far off today. But there's an ugly mood developing, as people start looking for villains to blame for the economic mess."
For those conservatives knocking the New Deal, please remember what happened elsewhere (such as Berlin and Rome) during the Great Depression did not happen here.

David Brooks hits on the broader problems with his Perverse Cosmic Myopia - NYTimes.com:
"Some of these reasons have merit, especially the last one. But one thing is for sure: The American agenda might work to ease the immediate crisis, but efforts to build a long-range global architecture certainly will not. After all the pious talk about post-Bush international cooperation, the current approach will lead to a big multilateral zero.

Many people used to wonder how the world’s leaders could be so myopic at various points in history — like during the Versailles Treaty or the turmoil of the 1930s. We don’t have to wonder any more. We get to watch the cosmic myopia replay itself in our own times."
I have no problem, intellectually or personally, with this bit of reporting from The Nation, AIG's "Best and Brightest":
"The Obama Treasury Department apparently has accepted AIG's argument that it is contractually obligated to pay the bonuses – because the government cannot order a private company to break its contracts. Barney Frank had a good idea: the government wouldn't have to order a private company to break its contracts; the owners of the company could do that. 'I want the American government to assert its right of ownership in this company,' Frank told Rachel Maddow. 'We own 80 percent. We should run the company.'"
Frank has a great idea. His idea proves - by being the exception - why socialism fails: politicians have no idea how to run a business.

Harold Meyerson's The Nationalization Option shows - to me - the rule for politicans when confronted by a business problem:
"A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them.

It's certainly not because Americans are dead set against bank nationalization: A Newsweek poll this month found that 56 percent of respondents supported it. Hell, Alan Greenspan supports it. But Geithner seems unable to imagine a banking system not run by its current leaders or owned by its current shareholders or engaged in the same arcane securitization practices that led to its collapse. An administration that is busily creating alternatives to our health-care system and our energy policies is being dragged down by a Treasury secretary who cannot conceive of an alternative to our catastrophic system of banking."

Fortunately, Geithner is not the only public servant grappling with banking's daily outrages. In the Senate, Vermont's Bernie Sanders, joined by Illinois' Dick Durbin, has introduced a bill to cap the interest rates on credit cards. Even as banks are borrowing funds from the Fed interest-free and are counting on taxpayer largess to keep them from going bust, they are still charging usurious rates of interest. In 2007, the Demos Foundation found that one-third of credit card holders were paying rates in excess of 20 percent, in some cases as high as 41 percent, and the rates have not dropped notably since then.

Then The Atlantic has Socialism, American-Style which has some very interesting links to polls showing that Americans might no more understand our economic system than do the Republicans. We, the people, seem to be less averse to a hands on approach than our politicans.

But the business sensibility has to take into account just how entangled internationally are our financial institutions. I am getting the image of a house of cards. Obama and Geithner pull the wrong card and we make a terrigble situation horrible.

Jim Hoagland over at The Washington Post hits on this problem in To Understand AIG, Follow the Money:
"Why? The best guess I hear is that the banks were not buying insurance at all -- they seem never to have diligently asked if AIG could pay off, which it manifestly could not. They were in effect buying a piece of the firm's AAA rating, which enabled the Europeans to inflate artificially their required credit reserves and lend out ever more of their capital for bigger profits -- until the crash came. Or as financial blogger John Carney has put it, the customers were in on the scam.

If that is not the case, the administration needs to make public the facts that refute it. If these reports and suspicions are founded, the administration needs to explain what happened and get in front of what could become destabilizing public anger. International in nature, this crisis can be resolved only by international cooperation. Outbursts of protectionism and anti-foreign fury will add to the uncreative destruction of this crisis."

Thomas Friedman hits on it even harder with The Inflection Is Near?:
"Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: “No more.”

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...

We can’t do this anymore."
Speaking of the rest of the world, The (Scottish) Sunday Herald editorializes New capitalism must put good before greed and it is worth reading.

Paul Krugman's Despair over financial policy worries me:
"The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved."

***

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

I am not so sure Krugman alone makes me question any hope, or is it Krugman and reading the headlines at Financial Markets Crisis Blog, or those two and Obama too sunny? from The Atlantic?

Our sister publication asks analysts whether the administration's economic forecasts are too optimistic. They would have gotten a more interesting discussion if their query had been "Is the Pope Catholic?" Of course they're too optimistic. In fact, the word optimistic is too optimistic. A better choice might have been "insane". Like Greg Mankiw, I would love to find a sucker investor who is willing to take the other end of a bet that both growth and revenue will fall short of the administration's predictions.


Having defended Obama's candidacy largely on his economic team, I'm having serious buyer's remorse. Geithner, who is rapidly starting to look like the weakest link, is rattling around by himself in Treasury. Meanwhile, the administration is clearly prioritized a stimulus package that will not work without fixing the banks over, um, fixing the banking system. Unlike most fiscal conservatives, I'm not mad at him for trying to increase the size of the government; that's, after all, what he got elected promising to do. But he also promised to be non-partisan and accountable, and the size and composition stimulus package looks like just one more attempt to ram through his ideological agenda without much scrutiny, with the heaviest focus on programs that will be especially hard to cut.

The Government has already begun taking over the banking industry but not in a showy way that seems not to have cuaght the eye of mainstream media.

And then there was the Cramer-CNBC sideshow to the AIG sideshow. Richard Cohen wrote what I think was the best piece with his Don't Blame Jim Cramer:
"The acclaim visited on Stewart for spanking Cramer tells you something. In the first place -- and by way of a minor concession -- he's got a small point. CNBC has often been a cheerleader for the zeitgeist -- up when the market's up, down when it's down. This is true of the business media in general.

But the role that Cramer and other financial journalists played was incidental. There was not much they could do, anyway. They do not have subpoena power. They cannot barge into AIG and demand to see the books, and even if they could, they would not have known what they were looking at. The financial instruments that Wall Street firms were both peddling and buying are the functional equivalent of particle physics. To this day, no one knows their true worth."
Worth taking a look at but too hard to summarize is The Nation's Enough With Cramer's Apologies; Fix CNBC!.

Andrew Sullivan grasps towards some sort of silver lining in his post The Depression And The Environment. Since I cannot help but believe that it is truly an ill wind that blows no good, I close with Mr. Sullivan.

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