Tuesday, March 24, 2009

Obama and the Press are Destroying AIG and the Economy With It (Part II)

I argued here that, among other things, the AIG brouhaha is just another example of how Obama and the Congress, goaded by the so-called mainstream media (SCMM) are destroying the economy with arbitrary laws that seek a fanciful economic and social justice. All the swirl creates uncertainty, and that uncertainty is preventing recovery and destroying the economy. I argued there is nothing wrong with letting AIG run its business the best way it knows how, including paying bonuses to retain its employees. I concluded that if the government crosses the line and enacts a special bonus tax aimed at creating 'social justice' or 'economic justice' against AIG bonus recipients then it would not stop. The witch hunt for the big incomes will be on, and it will be Game Over. The Obama policy is 'social justice at any cost'.

Others see through the SCMM created fog. Let us start with Terence Corcoran of the Financial Press in Canada, who wants to know: Is this the end of America?:
Helicopter Ben Bernanke’s Federal Reserve is dropping trillions of fresh paper dollars on the world economy, the President of the United States is cracking jokes on late night comedy shows, his energy minister is threatening a trade war over carbon emissions, his treasury secretary is dithering over a banking reform program amid rising concerns over his competence and a monumentally dysfunctional U.S. Congress is launching another public jihad against corporations and bankers.

The monumentally dysfunctional US Congress shocks the world:

As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America?
He concludes with the observation that our clueless lawmakers are ageing self-serving demagogues who have spent decades warping the U.S. political system for their own ends and our law-making that is riddled with slapdash, incompetence and gamesmanship. Well, that could be true about a lot of places, but we cannot afford it, nor should we tolerate it. It is arguably still the golden age of Rome in the US, but for how long? Corcoran does not believe we have long, as he is tuned into the the end game of the Obama domestic policy:
Expansion of government spending, plunging the U.S. into unprecedented deficits, is without parallel. In economic policy, through regulation and control of energy output, financial services and monetary expansion, the U.S. government has embarked on a fundamental reshaping of America. It is designed, in short, to bring on the end of America.

Powerline sees the incompetent bumbling and wonders if we still even have a constitution: Are We A Banana Republic?

I'm stupefied to find that some people are defending the constitutionality of Nancy Pelosi's discriminatory, confiscatory and retroactive tax on people who receive bonus income from companies that got TARP money. I would have considered it a bright line rule that the government can't identify a class of unpopular people and impose a special tax on them. What's next? A 100% income tax on registered Republicans, retroactive to last year? If Pelosi's bill passes muster, why not?
If the Pelosi bill is actually enacted into law (which I still think is doubtful) and upheld by the courts, there is no limit to the arbitrary power of Congress. In that event, we have no property rights and there is no Constitution--no equal protection clause, no due process clause, no impairment of contracts clause, no bill of attainder/ex post facto law clause. Instead, we are living in a majoritarian tyranny. ...--imagine, say, Congress enacting a surtax on the incomes of all homosexuals in response to a notorious case of homosexual molestation--then the idea that the Constitution affords us any sort of protection against arbitrary government power is an illusion.
Even the Vice President's Economic Adviser says the plan "may go too far in using the tax code as a tool for retribution."

On the appropriateness of the bonuses: I argued that AIG needs to retain those employees to succeed, and the economy hinges on their success. Powerline also agrees there is nothing wrong with the AIG bonuses:
  • All of these payments, as to AIG's troubled financial products division, are retention bonuses, not performance bonuses.
  • The money is not going to anyone responsible for the implosion of AIG--those people, who were in the credit default swap area, are gone.
  • These retention bonuses were promised to AIG employees who are responsible for winding down the company's financial products division. At the beginning, this division had a potential exposure of $2.7 trillion. Winding down AIG's book of business in this area was a dead-end job, and there was a great likelihood that the people responsible for the work, who knew the most about the products involved, would take jobs elsewhere.
  • In late 2007 or early 2008, AIG made a deal with these employees: if they would stay at AIG until specified conditions were met, i.e., either certain business was wound down or a given period of time had elapsed, they would receive a specified retention bonus.
  • As to all of the employees involved, they satisfied the terms of the bonus by wrapping up a portfolio for which they were responsible and/or staying on the job until now. As a result of the efforts of this group, AIG's financial products exposure is down from $2.7 trillion to $1.6 trillion.
Krauthammer on the appropriateness of the bonuses: he sees no problem with the bonus money going to "the only ones who know how to defuse the bomb they themselves built."

Krauthammer also weighs in on the looming disaster for our country as well and believes our "$14 trillion economy hangs by a thread composed of (a) a comically cynical, pitchfork-wielding Congress, (b) a hopelessly understaffed, stumbling Obama administration, and (c) $165 million." On the imminent failure of AIG under continued pressure:

...we are going to poison the well for any further financial rescues, face the prospect of letting AIG go under (which would make the Lehman Brothers collapse look trivial) and risk a run on the entire world financial system?

And on the legality of AIG's action, and the arbitrary and capricious nature of Congress:

And there is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?

Well said, and Krauthammer also agrees that Obama has "been far more interested in his grand program for reshaping the American social contract in health care, energy and education" than the economy."

Tom over at OpinionForum says it better than I do:

These bonuses are a small issue compared to the totality of the economic crisis. Yet we have the President and Congress seizing on it to whip up the public because, it would seem, they don’t have a clue what else to do. Our leaders are playing a mass violin concerto while the economy burns.

There’s no excuse for the ignorance that characterizes the people sending threats to AIG and the people lobbing firebombs across the blogosphere, not to mention the politicians instigating them. All the information necessary to understand what’s really happening is readily available in the media, including media outlets not normally considered to be pro-business.

In a separate article, published at the start of the circus on March 17th Tom had already accurately captured the salient facts:

President Obama is outraged, Senator Chris Dodd is threatening to tax the people receiving those bonuses at a 90 percent rate, Representative Barney Frank is mumbling something unintelligible, New York Attorney General Andrew Cuomo wants to subpoena AIG’s records, Senator Chuck Grassley suggested that AIG executives commit suicide, and the company is receiving threats.

The AIG bonuses are meant to keep key executives, and we probably need that to happen. The bonuses are provided for in contracts that were in place and known to exist before the bailout took place. The legislation itself provides that existing contracts will be honored. The amount of money involved is a minuscule percentage of the bailout money AIG received, and it’s small compared to the AIG bailout money that’s going to other businesses, some overseas (money laundering, anyone?).

All of this information is available in the media. Does the Obama Administration and Congress think we just won’t notice–that we won’t pay attention to anything other than their histrionics?


I argued that perhaps we should never have bailed out AIG, that bankruptcy would have been preferable. Not only are bankruptcy proceedings the usual method for dealing with situations like AIG's, but they routinely approve retention bonuses. But now that we have bailed them out, we must not let Congress meddle or let the SCMM goad them into meddling, as continued harassment of AIG will only lead to its failure. The position that I argued the government should take is:

‘We knew about these bonuses. We explicitly gave AIG the bailout money with that knowledge. Moreover, we are not going to retroactively tell AIG how to run its business. If we had any doubts about AIG’s success, we would not have bought the company.’

If Obama and Congress had doubts about AIG, its management or future, but still mortgaged our grandchildren to the tune of $200 Billion, then why do we still leave Obama and the other 'tards in power? Throw them out. Every one of them.

I also dragged the CRA into the morass: I implied then and say now that the outrage, both genuine and invented, about how AIG is running its business is misplaced. I implied that bonuses do not reward the people who caused AIG's problems, and -- Carl and I may differ on this point, but -- I blamed the government forced (CRA) lending to unfit borrowers as the cause of the current economic decline. I enjoy Mark Perry as he expands on this argument.

Bobn disagrees on the CRA responsiblity for the economic decline. I am unmoved by Bobn's analysis. Bobn essentially argues that the bad debt is not overwhelmingly sub-prime, so the CRA isn't the cause of the problem. I say that it is irrelevant whether the bad debt is sub-prime, the bad-debt was created by the bursting of the real estate bubble caused by wild speculation. The speculation was fueled by, among other things, the CRA. The tipping point phenomena applies. However, I have opened my eyes to the myraid of causes for the recession, and so I put CRA in the category of 'significant contributor' for the time being.

Finally, here OBAMA is on Leno; this is why the SCMM loves him:

MR. OBAMA: And, you know, the immediate bonuses that went to AIG are a problem. But the larger problem is we've got to get back to an attitude where people know enough is enough, and people have a sense of responsibility and they understand that their actions are going to have an impact on everybody. And if we can get back to those values that built America, then I think we're going to be okay.

Obama is king of the 30 second soundbite. A vague statement about a problem and says we need to change our attitude. You could drive a truck through that. However I agree with this one -- we should get back to the values that built America. They are based on freedom and opportunity, not tax and spend.

Those who decry the AIG bonuses are missing the real outrage: Obama's 'social and economic justice' agenda, and his willingness to drive the country to depression to achieve that end. Indeed, if he didn't not have a crisis to address, there would be no opportunity for his 'social and economic justice' reform. If the crisis didn't exist, he would invent one. He loves the SCMM for priming the AIG bonus pump, and the SCMM loves him. And they are willing to do anything to protect him, as Fred Barnes notes in the March 30th Weekly Standard:
His allies are moving to protect the president. In a political emergency, this is the highest obligation of everyone in the administration. The president must be distanced as far as possible from decisions that led to the problem, even if he is made to look out-of-touch or actually incompetent.

In the AIG case, Obama is like a cuckolded spouse, portrayed by administration officials as the last person to learn about the bonuses, though he signed the economic stimulus legislation with a provision assuring they'd be paid. A front-page account in the Washington Post played along, absolving the entire administration of blame. Attributed to "government and company officials," the story said Federal Reserve officials were at fault, having failed to alert anyone in the administration, much less Obama, in a timely fashion.
The Wall Street Journal correctly worries this isn't a trivial issue:
When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930, but it led to retaliation and a collapse of world trade. The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment.
Sobering thought.

15 comments:

OBloodyHell said...

Good piece.

OBloodyHell said...

> Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?


Hrm. I still have problems with this argument. I agree, for the most part, with your general principle as to this. I will agree that the issue here is largely the public perception that bonuses are for a "job well done", and, while that may apply to these individuals that's not how the public SEEs it, and that is VERY important.

I also concur that this SHOULD be the job of the NEWS MEDIA to inform the public about this, so that they see the facts you are showing people.

Needless to say, they are failing at this job. Are we surprised? Does the Pope s*** in the woods?

I would still argue (though I don't support the action) that Congress, in taking over a company, nominally DOES have the right to perform some of the actions associated with Ch.11. The goal of the "rescue" in this case was to soften the blow of AIG's failure, more than to prevent every possible bit of fallout from going in the same direction.

If AIG was not in defacto receivership, I'd say that Congress had no such right. As-is, though, I think an argument can be made that Congress can handle its default-rescuees differently from other companies.

I tend to concur with you, given the details of who is getting these bonuses, that it's wrong and that they presumably actually do deserve them, I disagree with the basic assertion that there is no moral or legal status on which this action can be based at all.

Bob in Los Angeles said...

Thank you OBH --

I believe it was Jefferson that said "I'd rather have newspapers and no government, than no newspapers and government." It is easy to see why he would say that -- and how close we truly are to that scenario.

On a different point, I disagree with you on the notion that the bonus recipients actually deserve a bonus. Only rarely do very few of us actually get what we deserve. We get what we can negotiate, or what the market will pay us. When the government interferes with the negotiations or the market price, then we fail to earn the market price. Their interference is backed up with the threat of force, or violence.

Let us never forget that the Obama gets his way in the US only through the ultimate threat of incarceration or civil war.

OBloodyHell said...

> I disagree with you on the notion that the bonus recipients actually deserve a bonus.

LOL, I thought that was YOUR position.

I'd state that I agree, perhaps (mainly from your description) with the notion on the basis that they performed as agreed upon to receive the bonus in question,and were not a major part of the process of screwing things up, so they are "entitled" to it. That a better word?

bobn said...

Bobn essentially argues that the bad debt is not overwhelmingly sub-prime, so the CRA isn't the cause of the problem.

Obviously you weren't paying attention, or you prefer to kick a straw man. I argue that: the bad debt is overwhelmingly not CRA, so CRA is not the issue. The fact that beyond subprime we have Alt-A and, worst of all, Option ARM disasters is a separate issue.

I know indicting CRA is an Objectivist's wet-dream, but the facts simply are not there.

OBloodyHell said...

> Obviously you weren't paying attention, or you prefer to kick a straw man. I argue that: the bad debt is overwhelmingly not CRA, so CRA is not the issue.

LOL, you just rephrase pretty much EXACTLY what I said, and claim it's a refutation...? Great logic, bob. You have a great future as a government accountant open before you.

You ignore the point that NONE of the debt -- zero, zip, *NADA* -- in question would even exist if it were not for the CRA and the GSEs making it LOOK as though it could pay out good money. This led the lemming money managers to push for their own chance to obtain gold Gold GOLD!!! the exact same way. And they got their wish.

Unfortunately, the businesses in question have to use GAAP, unlike the GSEs, and thus don't get to make up "profits" out of whole cloth.... well, unless your name is "Madoff", anyway.

> the facts simply are not there.

And yet you never, ever refute the above except by mindless naysaying (with the occasional segue into pointless untruths, like asking "Where was Bush with OFHEO?").

The current problems did not spring from nowhere. They required time to develop -- a lot more than a mere "couple years". From whence did they grow?

You don't spontaneously generate, what, 50 trillion in bad paper. You don't push it off on people overnight. People would notice if you suddenly start handing them a new type of (unobviously bad) debt instruments. Thy'd be suspicious, and rightly so, and reject them.

In order to wend their way through the system, to become accepted paper, they have to have a background against which those debt instruments appear to be worthwhile. Where did this flowering growth take place?

A fertile field of government tomfoolery called the CRA and the GSEs -- that is where -- beginning in the mid-1990s.

Take away that field and the whole set of notions on which it is based never, ever come to pass.

That does not abrogate the idiot greedy lemmings from their part in the collapse, but it's far more crucial to understanding HOW it happened, in order to work to prevent it from happening again.

Because those idiot greedy lemmings aren't going to change. When the government tells them "HEY, there's GOOOOOOOLD over here!!!" they tend to be stupid and rush straight towards that spot, intervening cliff or no.

And that's not going to change, bob. EVER.

So one obvious thing to do to prevent it in the future is to prevent such chicanery on the part of the government.

Figure it out, stop trying to blame business for being exactly what it is and will always be. Grasp instead what government is and will always be, which is untrustworthy and always subject to unmitigated abuse and manipulation. While it's necessary, it pays to keep it small and stunted, and things like the GSE are NOT something the Fed has any business, of any kind, getting involved in.

Bob in Los Angeles said...

Bobn says >I argue that: the bad debt is overwhelmingly not CRA, so CRA is not the issue.

I didn't set up a straw-man... the argument is the same -- just because CRA debt may not be the overwheliming portion of the bad debt does not mean it had nothing to do with the bubble.

If your argument is the CRA had nothing to do with the real estate bubble, then I simply disagree.

OBH's argument is that CRA allowed irresponsible people to make unwise purchases that went sour.

I'm saying that the responsible ones are still paying to bail out the irresponible dolts -- and I'm not pleased.

bobn said...

I said:

I argue that: the bad debt is overwhelmingly not CRA, so CRA is not the issue.

Then bobinLA said:

I didn't set up a straw-man... the argument is the same -- just because CRA debt may not be the overwheliming portion of the bad debt does not mean it had nothing to do with the bubble.

God damnit, if you are going to write in blogs, learn how to read.

What I said and what you say I said are completely different.

I said "the ovwerwhelming part of the bad debt is not CRA". I will now repeat that, using smaller words to help you out: "The CRA was at most a tiny part of the bad debt." Read that twice for meaning.

You turn that around to alleging that I only said: "just because CRA debt may not be the overwheliming portion of the bad debt does not mean it had nothing to do with the bubble" - that would have been a completely different statement, leaving open the possibility that CRA was much or or even most of the bad debt, but still letting CRA off the hook. That is nothing like whaty I said, hence the straw man reference.

I don't know what's worse - your reading skills or your logic.

And OBH, that goes for your comments on this topic too.

bobn said...

Powerline also agrees there is nothing wrong with the AIG bonuses:

* The money is not going to anyone responsible for the implosion of AIG--those people, who were in the credit default swap area, are gone.
...
...
Krauthammer on the appropriateness of the bonuses: he sees no problem with the bonus money going to "the only ones who know how to defuse the bomb they themselves built."


If you are going to quote multiple sources in your overly-long rants, can you please choose sources that don't explicitly contradict each other?

As to all of the employees involved, they satisfied the terms of the bonus by wrapping up a portfolio for which they were responsible and/or staying on the job until now. As a result of the efforts of this group, AIG's financial products exposure is down from $2.7 trillion to $1.6 trillion.

As noted in the graphic at Where AIG Bailout Money Went, nothing has been unwound - government money has just been funnelled through AIG to Goldman Sachs, UBS, Deutsche Bank and the like through the mechanism of "paying off" fraudulent insurance contracts called CDS. Any monkey with a keyboard could do that. I suggest you apply - just make sure you get a salary and not bonuses.


If Obama and Congress had doubts about AIG, its management or future, but still mortgaged our grandchildren to the tune of $200 Billion, then why do we still leave Obama and the other 'tards in power?

How quickly we forget. The AIG bailout was done in, oh, Sept, (Oct?) 2008. The President was one G.W. Bush. Congress was not consulted. You cannot get even the most basic facts correct. Shame on you.

Obama is wrong to continue the policies of the Bush administration regarding the Financial services industry. He is as 'bought and paid for' as Bush, or he has been convinced by those who are, and continues the biggest ripoff of the American people in history. But don't forget for a moment who started that fiasco.

Bob in Los Angeles said...

Bobn:

You point to a gun (the CRA bad debt indicator) that you say isn't smoking and you conclude therefore that CRA isn't related to the economic crisis.

I say -- so what if it isn't smoking? I say it is irrelevant.

Do you deny the existence of a false demand of lower-income higher-risk buyers created by government fiat?

I believe the CRA was a significant contributor to the current economic decline because it falsly created demand among lower-income higher-risk home buyers. See The Roots of 'Economic Challenge' in One Picture for a good summary.

So, pointing to a needle that measures something that didn't move isn't going to sway me, no matter how much it didn't budge. LOL

Bob In Los Angeles Out.

Bob in Los Angeles said...

If Obama and Congress had doubts about AIG, its management or future, but still mortgaged our grandchildren to the tune of $200 Billion, then why do we still leave Obama and the other 'tards in power?

>>How quickly we forget. The AIG bailout was done in, oh, Sept, (Oct?) 2008. The President was one G.W. Bush. Congress was not consulted. You cannot get even the most basic facts correct. Shame on you.

Obama signed the legislation giving the bonuses to the AIG employees. If he had doubts about AIG doing the job, why did he sign the legislation? If someone is going to argue he didn't read the bill he signed, then I feel even sorrier for all of us.

If you are going to quote multiple sources in your overly-long rants, can you please choose sources that don't explicitly contradict each other?
Some people at AIG hung AIG out to dry with an unhedged position -- those people are gone. The ones that remain we need on the job. They may not have put AIG on the line, but they did construct derivatives based on mortgages.

That is the way that I understand it went down. I dont see the Krauthammer quote contradicts Powerline in the way that you do. There is a difference between constructing a bomb, and dropping one.

bobn said...

Obama signed the legislation giving the bonuses to the AIG employees.

Of $200 Billion given AIG, at least $170 was done by GWB. And yes, Obama was a moron for signing off on the bonuses. And you are missing that big picture: So I ask AGAIN: why are we paying off fraudulent insurance contracts? Why is it OK to give The swindling Banksters TRILLIONS, yet you'll rail against payments to indiviudals? Why is corporate welfare - aka fascism - OK, but not individual welfare? Where is your consistency? Objectivism demands consistency.

I dont see the Krauthammer quote contradicts Powerline in the way that you do.

None are so blind as those that won't see.

There is a difference between constructing a bomb, and dropping one.

And in world war II, to take your tortured metaphor to its limit, we shot at the bombers and bombed the bomb-makers.

bobn said...

Do you deny the existence of a false demand of lower-income higher-risk buyers created by government fiat?

Regarding CRA, yes, at least in any significant numbers. I showed where CRA loans differed from subprime in in one or more of: lender regulation, borrower location, type of loan, default rate of loan, date of loan. Further, I noted how CRA couldn't have anything to do with SEC negligence allowing AAA rating on toxic sludge, massive insurance fraud known as CDS, and the Alt-A and Option ARM bombs that are ticking and/or going off now.

You just keep ignoring those facts while trying to come to the conclusion your ideology requires. Good luck with that.

Bob in Los Angeles said...

Bobn --

1. You say "Why is it OK to give The swindling Banksters TRILLIONS, yet you'll rail against payments to indiviudals?" The central thesis of my write up is that perhaps we should not have given AIG anything, and it should be in bankruptcy. Your tirade is misplaced. I wish you would channel your anger in a useful manner. I might even join you.

2. Regarding CRA -- I find your arguments unpersuasive. I depend on and defer to M. Perry's and related analysis. I suggest you try to persuade him or his peers. However, as much as you rail against payments to individuals, it mystifies me why you are such an ardent CRA supporter.

Are you pining for USENET? I'm not interested in a flame war, or joining you in petty bickering.

Fair warning: I will not respond to any more of your profanity laced tirades or your personal attacks.

bobn said...

The central thesis of my write up is that perhaps we should not have given AIG anything, and it should be in bankruptcy.

I agree - along with the other criminal enterprises on Wall Street - Goldman Sachs at the top of the list, as they had the most to lose from AIG's downfall and in fact were very involved with the bailout.

it mystifies me why you are such an ardent CRA supporter

I'm not - it's just that it's aggravating to see deregulationists - of any political stripe - try and blame the products of their work on something that so clearly was not involved.

Are you pining for USENET? I'm not interested in a flame war,

Just wait until OBH decides he doesn't like the part of your hair.