The collective knickers certainly are in a twist. People who had never heard of the insurance giant AIG 15 minutes ago are suddenly in a swivet over the bonuses being paid to some of its executives. According to a Drudge Report headline “AIG outrage has employees living in fear.” Meanwhile, Obama is calling for sweeping new regulation of executive pay at banks, hedge funds, and “other companies.” What an opportunity! An economic situation that features not only public fear but also public anger. Believe me, we’re going to be treated to a lot of moralizing lectures about the evils of “greed” from our elected representatives not to mention journalists from establishments like of The New York Times. The whole skit reminds me of that classic performance by Representative Maxine Waters endeavoring to grill executives from Citibank, Bank of America, et al. She was so outraged at the idea that they were paying themselves fees from the money Congress had expropriated from the taxpayers that she did not mind making a fool of herself by demonstrating beyond cavil a complete ignorance about the banking business. The best scene is four or five minutes in to the clip when the CEO of Bank of America says: “I have no idea what you are talking about.” Really, it was a choice moment.
But back to AIG. Last fall, the company got a huge government bailout worth some $170 billion. The company recently awarded derivative traders in one of its subsidiaries $165 million n bonuses. Was that a bad thing? More to the point, was it an avoidable thing? This is the question the redoubtable Edward Jay Epstein asks, and his basic answer is no, it wasn’t avoidable.
As Epstein explains, for more than a decade some 400 traders in a London-based subsidiary of AIG have managed $1.6 trillion in derivative contracts for the company. It’s an interesting story:
In 1998, this tiny group got into the newly-created credit default swap business when JP Morgan Chase came to it with a proposition to transform debt on its books into security packages that could be sold off its books. To make these bank debt packages salable to other institution, they needed credible insurance against default to get Triple-A rating. So the AIG financial product group, seeing no risk of default, sold it in the form of credit default swaps. Soon afterwards, with the support of Treasury Secretary Lawrence Summers (now President’s Obama’s economic advisor), the Commodity Futures Modernization Act was passed, which excluded credit default swaps from being considered a “security” under the jurisdiction of the SEC or any other government agency. This act allowed these swaps to be deployed on a massive scale to convert all kinds of debt, including even subprime mortgages and car loans, into triple A securities and turned AIG’s arm, now headed by Joseph J. Cassano, an aggressive Brooklyn-born alumni of Drexel’s back office operations, into a multi-billion dollar profit center for the insurance behemoth. Even though the unit’s 400 or so traders constituted less than one-third of one percent of AIG’s loyal employees, it produced close to twenty percent of its total operating profits. While Cassano kept the list of his counter parties in the credit default swaps a closely held secret, he bragged at a conference in 2007 that they included a global swath of “investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.” By 2006, his group was raking in nearly $4 billion in profits, and, as is the tradition in the derivative game, he and his traders got a rich cut of the loot, which on average amounted to roughly $1.1 million a trader.
So far, so good, right? No complaints then. These guys were coining money and a lot of people got rich, spent their money, and made a lot of people happy.
“Moralistic outrage can be a delicious emotion. But it is worth making sure that you have the right target before going to town with it.” Do you think the sheep herded by the media, will take the time to find the proper enemy?
Roger doesn’t include the link to Epstein’s article. Does anyone have it?
Sorry for the broken link: now fixed.
The bigger question at work here is whether the “too big to fail” mantra was actually sound economic philosophy. If AIG had gone bankrupt it probably would have created total economic collapse. Yet people would have figured out a way out (necessity works wonders). Now we’re dealing with the same thing, but with a government completely out of money and options. We may never know the answer, but whether or not the reaction to the AIG bonuses is justified rage or ignorant populism is simply a sideshow to this concern.
Thx, Roger. You are a top choice each AM, along with M Steyn.
But in a liberal society, moral is a private matter, isn’t it? In the public affairs what is suposed to count is to fulfill the compromises or contracts.
Obama’s “all spending is stimulus” sure didn’t last long, did it?
“…one of its subsidiaries $165 in bonuses.”
Niggling point, but shouldn’t the above read $165 million in bonuses? I get the intent, but it’s just the teacher in me.
I do enjoy your work.
#9: Yes, $165 million: now fixed. Thanks.
The AIG Bonus Millionaires
————————-
The fact that many of the “AIGBonus Millionaires” have now returned their bonuses speaks volumes.
So does the fact that AIG offices world-wide have now removed the AIG logo displayed on their buildings.
Was it fear of the mobs demonstrating in their neighborhoods that prompted the bonus millionaires to return this ill-earned cash? I don’t think so. After all, with all that money, they could simply have shut the house down and gone to the Bahamas for a couple of months till everything blew over . So why didn’t they do that?
What prompted them to return the cash was good old remorse and guilt. The same thing happened to Maddof. Maddor wasn’t “caught”…..his conscience simply got the better of him and he confessed.
No one is worth $5,000,000 in “compensation” including financial traders, people who hit a ball with a stick, hurl a ball into a basket or catch a ball and run with it past a chalk line on the ground. Ditto with the Hollywood crowd and the massive compensation packages available depending on the size and public exposure of one’s mammary glands and so on.
The fact that these things do happen every day shows the moral decay of the nation.
It is a sure formula for civil disturbances and insurrections and it’s a sure formula for attracting tens of millions of young Americans into the bosom of Socialism and similar anti-capitalist causes world-wide.
A large and important chunk of the philosophical undermpinnings of Al-Qaeda and similar organizatioins is based on the moral outrage they feel towards what they perceive as the moral depravity, the outlandish social disequilibrium and the massive gaps between the haves and the have nots in American society and America’s export of these “principals” overseas into their territories.
A lot of young Americans are now too beginning to perceive things differently.
It is an ominous sign.
So the argument is that if they weren’t bribed by substantial bonuses, the traders would’ve used their inside information to trade against AIG’s positions in order to bring down the financial system?
We should’ve let the financial system collapse in that case, regardless of the damage. Never give in to blackmail.
I think I heard this explained a bit more clearly, and with less technical stuff, over the weekend. Basically, these derivatives (as you say) need to be watched. The same people who created the mess are the only ones who know where all the bodies are buried, the ins and outs of the problems they’ve created. Essentially, they put a bomb under the bus we’re all on, an if we don’t pay them the money they demand, they’ll down tools on the bus and we’ll all be blown sky-high. Is it legal to pay them these bonuses? Thanks to that idiot Chris Dodd, yes. Is it wise? Perhaps. Is it moral or ethical for them to take the bonuses? You be the judge. I wouldn’t cross the street to piss on one of these guys if he was on fire. Some of them don’t even work for the company any more, and more than a few are overseas…try justifying giving a retention bonus to someone who wasn’t retained, Roger!
Dear AIG… I Quit.
http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=1&em
For those friends of mine that stayed and got pissed on by DumBambi and CongresIdiots.
Here’s hoping the bureaucrats federal retirements go to hell in a hand basket like ours did.
Epstein: “It was not that these traders had such unique skills in managing derivative contracts that they could not be replaced by other people but that they knew the business’ crucial secrets, including the identities of he counterparties to the credit default swaps and the vulnerabilities in their positions. The implicit threat: they could use the secrets to which they were privy to trade against AIG’s positions as it attempted to unload its $1.6 trillion dollar portfolio.”
deSantis: “I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.”
So, per Epstein and Kimball, AIG Management did the prudent thing by giving in to the “implicit” blackmail and paying it’s AIGFP traders not to leave and take proprietary information to their competitors; and, per deSantis, those people left anyway before the bonuses were paid.
Kimball normally makes a lot of sense, but in this case, it looks more and more like he and many others of a conservative or libertarian bent have been taken in by the swindlers at AIG. The traders at AIGFP had to know that they were taking on irresponsible degrees of risk. They had to know that the business cycle would eventually turn and their absurd levels of leverage would create havoc. They did it for outlandish compensation knowing they could walk away when the bills came due. I’ll avoid the blind pig and acorn analogy since it might be misinterpreted, but Maxine is on the right side of the issue. Outrage is the appropriate response.
I knew I’d heard Pbama talk about these bonusses before. I found the answer in the transcripts of the 2nd Prez debate. It was the first question! Obama went first, and he specified that we must not let these CEO’s get the bonuses.
http://www.debates.org/pages/trans2008c.html
corrections: Obama; bonuses. Oops. Tired.
Anyway, looks like another broken campaign promise at the very least. He simply can’t plead ignorance after this! Someone needs to nail him with this!
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