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At the corner of uncertainty and anger
It feels like we've reached an important crossroads in the economic recovery. Many people are fed up with the bailouts of companies like AIG. The markets are confused by the government's "plan." The question now is: Is there a road that leads us past this intersection of uncertainty and anger?
Bill Frezza at Real Clear Markets writes:
Populist democracy may be wild and capricious but there is hardly an abuse or distortion government can serve up that the market can't figure out how to live with once the rules of the game are set. That's because nothing is more important to the functioning of capitalism than the rule of law. Even crappy law will suffice, which may be the best we can hope for.
Give us a date-certain when the Congressional circus and its media handmaidens will turn off the uncertainty machine so we can get back to work under whatever set of rules, subsidies, taxes, bailouts, and regulations they choose to saddle us with. Then freeze the plan and shut up.
But Fed Chairman Ben Bernanke keeps talking. In a 60 Minutes interview last night, Bernanke fed the uncertainty machine by saying this:
"It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery."
Bernanke says there's a plan, but who's in charge of it? AIG is now 80% owned by the taxpayers, but the government seems to have little say about what AIG is doing with its $170 billion in federal aid. Over the weekend, we learned that AIG is giving $450 million in bonuses and retention pay to employees. Treasury Secretary Tim Geithner protested, and AIG agreed to restructure some of the payments. But AIG's CEO said he had "grave concerns" about the company's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
But the government owns you! This is what happens when the taxpayers give money to financial institutions without stipulations. Once the money is handed out, all Geithner can do is write a letter saying, hey, you aren't supposed to do that. Further illuminating the lack of control, AIG disclosed where much of the bailout money has gone: to banks and other financial institutions, including hedge funds.
"These are extraordinary times," AIG spokeswoman Christina Pretto said yesterday in explaining the company's decision (to release the information). "And we and our partners at the Fed thought this was right thing to do." Fed spokeswoman Michelle Smith agreed, saying, "We commend the company for finding a balance between its concerns with confidentiality and the concerns of the public interest."
Our "partners at the Fed?" It's an 80-20 partnership, and the minority has the power. Henry Blodget at Clusterstock vents over the bonus payments:
This, needless to say, is outrageous: If AIG had gone bankrupt (in an orderly fashion), these bonuses would not be paid. The executives holding the contracts would just get in line with AIG's other creditors. And U.S. taxpayers would not be out $170 billion and counting and enduring insult after injury every week from the national embarrassment known as AIG.
Which brings me to the anger part of this. The natural reaction for anyone feels a lack of control is to lash out. And I'm not just talking about bloggers and taxpayers. The head of the President's National Economic Council, Larry Summers, also called the AIG bonuses "outrageous." From Dealbook:
Even as Mr. Summers was denouncing A.I.G. for the bonuses, he suggested that there was little if anything the government could do to stop them, seconding the conclusion of Treasury Secretary Timothy F. Geithner.
Then what's the use of having a "plan" if you have no control over how it's being implemented? President Obama must put his foot down or he, too, will face the wrath of the angry, confused masses:
"The change now is you have a free-floating economic anxiety that has expressed itself in a kind of lashing out at those being bailed out and people who are bailing out," Michael Kazin, a professor at Georgetown University who has written extensively on populism. "There's not really a sense of what the solution is.
The solution is for somebody to take charge of the solution. Otherwise, we're stuck at the intersection of uncertainty and anger without a phone and without a drop of gas in the tank.
I hereby tender my application for CEO Of AIG. Their present leaders can now take a hike, no bonuses and a refund of salary is expected.
As for credentials: I have never bankrupted a corporation (but I'm a fast learner. I have never taken US government money and paid foreign banks with it. I have never lost billions on bad loans. A daughter took me for a couple of thousand once so I do have some experience.
I do think I am your man even though I have some remaining scrupples. I promise to work on that. Honest, integrety, and common sense can be overcome.
I do hope that I will be considered. I don't have enough experience to screw things up this bad
As correspondents E. Scott Reckard and Jim Puzzanghera reported in a story for The Los Angeles Times on March 15, 2009, "The economic stimulus legislation that President Obama signed into law last month includes strict new limits on bonuses and other compensation to executives of companies that received money from the $700-billion Troubled Asset Relief Program. But the provision specifically excludes any bonus payments 'required to be paid pursuant to a written employment contract executed on or before February 11, 2009.'" Based on this, it would seem to me that the Congress itself was complicit in creating the very environment that allows such bonuses to be paid out. Additionally, it would appear that the current adminsitration did nothing to preclude this from happening either, and yet representatives of this administration are now crying foul. Hmmmmmmm. Who is fooling who here? Why is there not reporting on both the Congress' and the Administration's role in this? The time for saving face should be over; the Administration and Congress owe it to the American people to own up to their mistakes in creating this fianancial miasma, and need to stop pointing fingers at just AIG. To be frank, I am simply amazed that more safeguards were not put into place to prevent this sort of thing from occurring, specifically after the lack of conditions placed on the initial TARP money. As the famed Chinese proverb says, "Fool me once, shame on you; fool me twice, shame on me."
Kathryn, I think it's very destructive to the national psyche for the administration to scold AIG in public, after the fact. What possible good comes out of that, except to make people more upset? At 80% ownership, the government should know about this beforehand and make a plan to deal with it. AIG claims these executives have contracts, and the company would face lawsuits. Well, lots of contracts get rearranged in bankruptcy court. There's a workaround. In fact, now Congress is talking about taxing these bonuses at a rate close to 100%. But these things should've been sorted out before the money went to AIG. To your point about the current administration, I'll add that the first TARP money was allocated without strings by the previous administration.
I have a suggestion that may both get government funds back and help stimulate the economy.
Looking at this from the IRS side, Congress could pass a special bill, taxing executives at selected Wall Street banks and insurers (it's not like we don't know who these companies are now) over say $50K threshold 100% on all bonus money connected to federal bailout money.
This law could be retroactive to say 2007 so the Feds can really go after those responsible in the only area of their life that seems to matter to these guys - money.
Oh yeah, and the stimulus part, well that would be the army of tax lawyers that would be on retainer by these executives helping to put a whole sector of the economy back to work.
I don't know why we are so outraged to hear that AIG "spent" much of the bailout money with huge companies, many of who are also getting finds. That is what we bailed them out TO DO. It was clear they were going to have to pay out on so many claims they risked bankruptcy, and that their claimants would in turn risk bankruptcy. Paying bonuses on contracts that did not require GOOD performance -- that makes sense. The anger you are talking about here is real, and its making people reach for anything to pin it on, anything to direct it toward. Thank you for writing this. It helped me a lot.
JB, I think you're right in questioning the outrage over where the money went. As you say, that's what we bailed them out to do. But my point is that the anger comes from a feeling of helplessness. Maybe AIG did the right thing with the money. Maybe not. The gov't doesn't seem to have a choice either way, despite owning 80 percent of the company.
After I wrote this entry, I saw that the President has asked Geithner to use every legal means possible to block the AIG bonuses. It's like the old saw: it's easier to ask forgiveness than permission. Why does it have to be like this? How about putting stipulations on the money BEFORE it goes out? These after-the-fact blowups are doing nothing but fueling more populist anger.
I also saw that Robert Reich wrote something similar about this, if you want to check it out: http://robertreich.blogspot.com/
He says:
"The scandal is that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money."
