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Hurricane AIG
As I've pointed out the last couple days, I worry that the whirling dervish of AIG's bonuses might be diverting our attention from issues more critical to the economic recovery. So I'd like to veer your attention for a moment to an article written by Eliot Spitzer.
Yeah, I know. Who cares what this guy has to say? Still, it's a bad idea to dismiss an opinion based solely on the character of the person who's giving it.
In a Slate column, Spitzer says the real question we should be asking about AIG is this: "Why are AIG's counterparties (like Goldman Sachs and other banks) getting paid back in full, to the tune of tens of billions of taxpayer dollars?"
Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars--that is, our dollars--flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
I think Spitzer's spot on. We have been given no reason or explanation other than, it's necessary. Here's what AIG CEO Edward Liddy says in a Washington Post column today:
Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company's troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that's why we're winding down this business.
Taxpayers should know that the government's assistance to AIG has had a beneficial effect. The assistance has provided stability to the company and to the entire financial system.
But exactly how has it helped and where? I want transparency. Answer the questions, Mr. Liddy (and Mr. Geithner). Why did Goldman have to get 100% of its money back? Shouldn't the bank share the risk and the failure, considering the taxpayer bailout?
What did the banks know about AIG's condition when they took out insurance on credit default swaps? Was there any due diligence? Is there any now, by the government, about these transactions?
Seems to me this is like the aftermath of Hurricane Katrina. Thousands of people were denied claims because the insurance companies said they had the wrong kind of coverage. They had insurance, it just didn't do anything for them. In that case, like in this one, the government stepped in financially, but those people weren't made whole by any stretch.
These banks shouldn't be either. We need to think of this as a comprehensive solution. I like Time's article this week on why AIG could be allowed to fail:
Regardless of the details of the various swap contracts, they all represent potential transfers of wealth between financial institutions. If we consolidated the entire financial sector, all these debts would effectively vanish.
Tonight on Marketplace, what else we're missing because of all the attention on AIG's bonuses.
I think we need to remind the public that a great deal of them are not actually taxpayers, at least not in any real sense of the word. Therefore, they have no skin in the game and nothing to be indignant about when it comes to AIG bonuses.
Friday's Marketplace ran a segment that included information about who pays taxes, and 50% of people pay only 4% of the total federal income tax dollars and 1% pays 40% of all federal income tax dollars.
Ben Stein was on Larry King and made a statement to the effect that hard working people in Kansas are being taxed to pay a hedge fund manager in Zurich. Not true when you look at who pays federal taxes.
The real damage will likely be the inflation that will likely result from the need to borrow or print money for all the bailouts and stimulus. This is a more equitable tax and the one ordinary Americans should be upset about.
Tom has an excellent point. It will be the rich bailing out the rich. So why not crank up the top tax rate to 90% to speed up and improve the efficiency of the process? Don't forget to reinstate the estate tax.
While we are at it we can reinstitute the draft, no exemptions, and and let the rich fight for the country they are paying to support. Surely, patriotism runs as deep as wealth.
I am disturbed way more at the fuss being made over the bonuses than the bonuses themselves. There has been no revelation on what the bonuses were paid for. Were the bonuses the result of the recipients meeting Key Performance Indicators (KPIs)? For example, the HR Manager may have a KPI of less than x% sexual harassment claims during the evaluation period. If he meets that goal, he gets a bonus. A retention bonus could be tied to a person's staying on the job instead of bailing out (leaving) or it could be tied to meeting certain measurable goals. Even if the company is not making a profit.
In my opinion, the whole AIG Brouhaha is either a Wag the Dog ploy to detract from the rest of the mess our govenment is getting us in to or, it is the means to create an environment of fear and disgust which will permit the Administration and Congress to institute draconian measures to tax and confiscate any group of people and gain more and more control.
This whole thing with AIG has me very very worried about the ability of our form of government and economy to survive.
We have heard. I believe I heard either a Marketplace correspondent or Gretchen Morgenson (on Fresh Air) assert that at least some of the bonuses paid to AIG-FP employees were retention bonuses ... and those people are no longer working there. I guess I need re-education in what a "retention bonus" is supposed to be.
Check Scott's blog for more revelations about the nature of the AIG bonus contracts.
I guess since Joe Six Pack, does not pay taxes, he need not worry what our Federal Government spends their money on or who they bail out. He does not have any skin in the game.
These types of comments display that there are two groups of folks in the US. The "haves" and the "have nots". Of course, eight to ten years from now, when the government and economic climate has changed again, and all the baby boomers retire; where will Social Security be? Where will all the institutions that poor Joe Six Packs rely on be?
When retired folks go to the grocery store to cash there $100 Social Security check and pay $10 for a gallon of milk? Maybe they can look back to this time and think,
"Hey, when the government had money to spend and it had a value, why did they blow it all on folks that did not deserve it or need it?"
