Posts Tagged ‘the bailout’
The company claims any failure by the government to [back all of AIG's obligations] would have catastrophic consequences. This claim is exaggerated. Serious consideration should be given to forcing AIG’s partners in derivative transactions — which are mainly buyers of credit default swaps from the company — to take a substantial haircut.
These are derivatives, in many cases high-stakes bets on underlying assets the purchasers did not themselves own. So, you insure your house for fire damage. And I insure it too, even though it’s not my house. Your house burns down and you get the policy payout to rebuild your house. But I just want my money because a deal’s a deal. I have no problem with old-fashioned gambling. And if people want to play with their money this way, I’ve got no problem with that. But if the casino itself goes bust, don’t come to me and talk about having moral claim on your winnings that I need to cover.
Let’s start off with xkcd’s lesson in how numbers lie.
As I’ve been saying both up top and in the comments the significance of this AIG bonus outrage is being badly overblown. The bonuses are a nice red-meat issue for the media circus but they’re basically a rounding error with regard to the scale of the bailout as a whole. Nate Silver is basically right here precisely because, as the cliche goes, “hard facts make bad law”—though his comparison to the Terry Schaivo case flounders at the fact that this silly thing the Congress is doing has wide popular support. (Nate and Josh Marshall both have more on the possible unintended consequences of this poorly thought-out new tax.)
As I’ve been trying to argue, the only relevant consideration regarding the bonuses is whether they were legal contracts, negotiated in the proper way and not predicated on fraudulent accounting or other illegal activity. Andrew Cuomo and Eric Holder should be investigating the bonuses, in other words, not Barney Frank. If they were legal, and their terms were met, pay them out; if they were fraudulent or predicated on fraud, arrest people.
What angers me about this situation is the widespread assumption that of course the bonuses are legal (just ill-advised), just like of course everything AIG did was legal but ill-advised. See, for instance, Ezra Klein on Madoff:
Madoff knew his investment scheme was a fraud. Wall Street should have known their investment schemes were a fraud.
Give me a break. Plenty of people on Wall Street knew their investment schemes were fraudulent. Those people are crooks, not dupes, and criminal prosecutions are the way we find out who they are.
(EDITED TO ADD: You can draw a distinction between AIG and Madoff, but it’s the distinction between two separate categories of crime, not between the guilty and the innocent.)
Repeating what I wrote in answer to Shankar’s question “Criminal Prosecution for what?” last night:
Well, that’s the job of state and federal prosecutors to determine. But there’s plenty of reason to think that (say) underwriting
billionstrillions of dollars in insurance obligations you know you have no capacity to pay out on is an abrogation of your fiduciary obligations — just for starters. Fraud and dishonest account methods were rampant in the banking industry, which has strict rules about this sort of thing that plainly weren’t followed. It’s not *just* stupid — in many cases it was stupid and illegal. Or so it seems to me.
…To add the obvious disclaimer, I’m not a lawyer, much less a prosecutor. But the treatment of the issue in the media tends to frustrate me on this point. Generally speaking the operative assumption seems to be “Oops, and they all got away with it” — that what they did was obviously legal, just slimy, and so we’re all just going to have to swallow our anger and move on. I don’t know that it *was* legal in all cases, and if CEOs and CFOs broke the law in chasing these bogus returns then DOJ and state AGs absolutely need to get involved. It’s a much higher priority for me than retributive taxation of contracts that are obscene (but probably legal) in an industry where the payment of obscene salaries is already (and still) an unchallenged norm. The bonuses are peanuts compared to the amount of money that’s already vanished.
Meanwhile, the situation at AIG may be much, much worse than anyone is admitting, while Kos and Josh Marshall are making sense: the real issues remain immediate triage of the economy, long-term systemic reform, and criminal prosecution of the widespread malfeasance throughout the financial sector. The bonuses suck, but they’re really secondary. Let’s not lose focus.
New York Attorney General Andrew Cuomo is apparently going after the AIG bonuses. He’s already got some details on who got paid:
The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses between $1 million and $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.
Meanwhile, Josh Marshall has been looking into various claims that failure to pay the bonuses could constitute a “default event” under the ISDA Master Agreement that would trigger AIG’s trillion-dollar liabilities immediately. Sounds as if that’s not probably not the case, though Geithner may have been fooled. (Or “fooled.”)
When are these people going to jail?
27 Ways of Looking at the Financial Crisis. At FlowingData.
John Kenneth Galbraith wrote that embezzlement is “the most interesting of crimes” for an economist. Embezzlement is almost always eventually discovered, but for a time results in “a net increase in psychic wealth,” when the embezzler “has his gain” and the victim doesn’t miss it. Galbraith called the undiscovered and therefore unfelt loss “the bezzle.”
According to Krugman, the stock in banks that are solvent only by virtue of an “optimistic” valuation of their assets “isn’t totally worthless,” but the stock’s value is “entirely based on the hope that shareholders will be rescued by a government bailout.” The “huge gift to banks shareholders at taxpayer expense,” Krugman said, was likely to be “disguised as ‘fair value’ purchases of toxic assets.”
So maybe insolvent banks are stalling for time, hoping that the economy turns around, that home prices will go back up, or that sick borrowers will get well and unemployed borrowers will find jobs. Maybe they want to enjoy the “psychic wealth” of paper solvency for as long as possible.
And maybe they’re hoping we’ll buy their bezzle.
Son of news roundup.
* Burger King is pushing the viral marketing hard lately, following up its gag body spray with a Facebook application that gives you a free hamburger for every 10 people you unfriend.
* Speaking of body spray, here’s an interesting study suggesting it’s not about the smell.
And a new study in the U.K…found that men who used Lynx deodorant, Axe’s British-brand cousin, were seen as more attractive by females than men who used a “placebo” deodorant with no fragrance.
But: the women just saw videos of the guys in the study—they couldn’t smell them. Meaning that Axe actually works by making you feel more attractive. If you feel more attractive after soaking yourself in an aerosol version of car air freshener, you may not be the most urbane man to begin with, which leads to the second part of the study’s results:
Women rated the fragranced men as more attractive when the sound on the videos was off, but had no statistically significant preference when the sound was on.
* Obama to team up with Spider-Man. Which wanted criminal will he pall around with next?
* The cell-phone novel, or keitai shosetsu, is the first literary genre to emerge from the cellular age. For a new form, it is remarkably robust. Maho i-Land, which is the largest cell-phone-novel site, carries more than a million titles, most of them by amateurs writing under screen handles, and all available for free. According to the figures provided by the company, the site, which also offers templates for blogs and home pages, is visited three and a half billion times a month.
* It took me almost another decade after graduate school to figure out what writing really is, or at least what it could be for me; and what prompted this second lesson in language was my discovery of certain remaindered books—mostly of fiction, most notably by Barry Hannah, and all of them, I later learned, edited by Gordon Lish—in which virtually every sentence had the force and feel of a climax, in which almost every sentence was a vivid extremity of language, an abruption, a definitive inquietude. These were books written by writers who recognized the sentence as the one true theater of endeavor, as the place where writing comes to a point and attains its ultimacy. As a reader, I finally knew what I wanted to read, and as someone now yearning to become a writer, I knew exactly what I wanted to try to write: narratives of steep verbal topography, narratives in which the sentence is a complete, portable solitude, a minute immediacy of consummated language—the sort of sentence that, even when liberated from its receiving context, impresses itself upon the eye and the ear as a totality, an omnitude, unto itself. Gary Lutz on the sentence, via the too-sporadically-updated Black Garterbelt.
* And will The Dark Knight win Best Picture? Eli Glasner says it just might.
How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.
And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.
Krugman in the New York Review of Books explains what we need to do.
The morning news.
* The bailout has cost more than “Marshall Plan, Louisiana Purchase, moonshot, S&L bailout, Korean War, New Deal, Iraq war, Vietnam war, and NASA’s lifetime budget — *combined*!” But think of all we have to show for it!
* Marginal Revolution casts some cold water on wind farms, points (where else?) to nuclear energy instead. Isn’t the problem here our poor energy infrastructure? The sort of redesigned, rebuilt grid Obama talks about would make these wind farms much more efficient than just about any other source of power, including, I’m given to understand, solar.
* Cory Doctorow is looking to change the world.
* Confidential to Mac users: an update for Handbrake has been released.
* And Wendy Whitaker is today’s poster child for obscenely stringent sex offender laws: because she had oral sex with a 15.9-year-old boy when she was 17, she’s a sex offender for life and is currently being forced to vacate her home because it is too close to a church that runs a daycare service. A judge, unbelievably, just upheld this order. Via MeFi.