The Guardians

Victor Davis Hanson talks about guilt and the blame game at the National Review. He was commenting on Barney Frank’s public outrage over the payment of bonuses to AIG execs at a time when the company was receiving taxpayer subsidies. Dr. Hanson argued that since guilt over AIG’s condition was shared, why not the pain? What gave Barney Frank the moral authority to float above the fray?


Quite aside from his former partners (the gigolo fellow who used Frank’s facilities for illegal activities, and the other boyfriend Herb Moses — self-described as part of the “congressional gay-spouse caucus” — who, as an exec, was helping to make Fannie policy at the very time Frank was voting on its appropriateness), Frank received more than $40,000 in campaign contributions from the bankrupt Freddie and Fannie, despite his own role as supposed fiscal watchdog on the House Financial Services Committee.

A modest suggestion? Let us agree on the following:No more corporate fat cats partying, jetting, and bonusing around after their tottering companies got federal cash; and all congressional-people and senators who took any contributions from any corporate or quasi-government entity that is a recipient of federal bailout money, must pay that money back, plus interest, to the government. After all, as in the Madoff mess, these congressional-people usually got the cash at a time when their benefactors were already in trouble, albeit hiding their fraudulent or unethical practices through cooked statements and high living. So please, Representative Frank, Senator Dodd, and all the rest — give back all that campaign cash to our government, and then in silence endure what you helped to conceive.

The role of government in corporate decision making will only expand. The TARP bill under consideration (see the Thomas catalogue) will manage the behavior of institutions which receive money from the government to a significant degree. The CRS summary of the bill is here and confirms the outlines of Heritage’s observation that TARP will increase government involvement in the corporate boardroom, and it “expands the program into consumer loans, student loans, commercial real estate, and municipal securities”, bails out the auto industry and institutes a program to prevent foreclosures. Whatever you think of more government intervention, it is hard to argue that there will be more of it. Given that increasing role, what are the odds that Hanson’s plea for both the public officials and private executives to keep their hands off the money will be heeded?


The odds of the plea being heard are not very great, I think. Huge industries and their regulators have an urge to expand their scope, often at the expense of the principal, the people, who remains the nominally the object of their concern while retaining fewer and fewer real prerogatives. In that kind of society the guardians do everything “for the children” while simultaneously exerting every effort to keep them that way.

Bill Dalton described the dance between the leaders of huge institutions in which only one thing is constant: the customer or the taxpayer always winds up paying for everything.

“We’ve asked the car dealers to restructure their organization, including workers restructuring their union contracts in order to save the auto industry,” said Sen. John Cornyn, R-Texas. “We ought to be asking the leadership at AIG to make the same kind of concessions to save AIG and the taxpayers’ dollars.”

But experts in executive compensation say those contracts, written before the government stepped in to bail out AIG, would be difficult, if not impossible, to break. Challenging those contracts might end up costing AIG and the government even more money including legal fees, according to attorney Aliza Herzberg of Olshan Grundman Frome in New York.

“These are contracts from a year and a half ago,” she said. “We have to live by them.”

The employment contracts became so complex, with pay packages consisting of stock options and other forms of deferred compensation, largely because of Congress’ attempts to control soaring executive salaries.

In 1993, Congress limited the tax deduction companies could take for cash payments to $1 million. The result was a cottage industry of lawyers, consultants and advisors who structure even bigger pay packages with creative legal strategies that now make the AIG bonuses difficult to rescind.


But never fear. The dance will go on. Just where micro-management taken to its ultimate conclusion leads is illustrated by this set of videos. Kim Jong Il as the Great Fashion Designer and …

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Update: Just One Minute has a much more granular look at the AIG situation. He basically argues that public attention is being focused on its credit derivatives losses than its securities operation, where far more money was lost.

AIG FP was supported on credit derivatives, some municipal investment agreements, and maturing debt. Of a total of $52.4 billion in support for that unit from Sept to Dec 2008, $27.4 was related to credit derivatives.

On the last page of the filing (insufficiently glamorous to get its own pie chart) are the payments made in support of AIG’s security ending, handled in a different division. The amount: $43.7 billion. Without benefit of a calculator I can assure you that $43.7 billion is much larger than $27.4 billion, yet I note that public outrage is much less.

So que pasa? Well, bashing highly paid Wall Street financiers peddling products no one understands is a lot more fun than bashing a bunch of collateral clerks doing something or other about which no one cares.

That misdirection allows politicians to focus the spotlight on parts of the regulatory regime where they want more power, without necessarily addressing the parts of the regulatory regime which failed badly and with which they don’t want to be identified. It’s old and hoary story of using a position of power to CYA. The basic takeaway is that things are not as clear-cut as they seem; and in the blame-game we are now in, just as in a situation where the cops have suspects in different rooms, the classic Prisoner’s Dilemma suggests it is a race to lay as much on the Other Guy as is possible. The astute detective must decide who to believe and to what extent. But one thing is probable: the suspects are spinning their stories to look good. And there is this wrinkle: the cops may be involved in this caper too. Who plays the role of internal affairs in this mess? The public via the ballot box? Maybe.



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