Posted by Marc Hodak on March 29, 2009 under Politics | 
President Obama talking to bank CEOs about bonuses:
Show some restraint. Show that you get that this is a crisis and everybody has to make sacrifices.
That must have been a little confusing for many of the CEOs in that room. JP Morgan’s Dimon didn’t take any bonus. Morgan Stanley’s Mack didn’t get one, either, for the second year in a row. Citigroup’s Pandit didn’t get a bonus, although it’s difficult to consider how he could have justified one. Goldman Sach’s Blankfein didn’t take any bonus, plausibly leaving about $20 million on the table.
In fact, President Obama, did anyone in the U.S. make a bigger sacrifice in dollar terms than Lloyd Blankfein? Did any one you know give back $20 million? Or any group that gave up the $200 million sacrificed by his peers? Back in November, I suggested that the politicians would take credit for this sacrifice. I was wrong. They aren’t even acknowledging it.
So, what sacrifices is Obama talking about, then?
It’s very difficult for me as president to call on the American people to make sacrifices to help shore up the financial system if there’s no sense of mutual obligation.
Funny, last I checked, the only people of whom President Obama was asking sacrifices was the “wealthy.” The sacrifice he was asking them to make was to accept a higher taxes on their earnings. If he’s now asking the wealthy to accept lower earnings, isn’t he asking the rest of Americans to be making a sacrifice?
Posted by Marc Hodak on March 26, 2009 under Scandal |
Whenever a scandal involves a group, reporting about the scandal immediately erases distinctions about people within the group. We do the same thing with enemies of the state (or church, or whatever). That’s why it’s dangerous to be part of an out of favor (or even rotten) organization, even if you’ve got nothing to hide, or had nothing to do with the rot.
A purported AIG insider has released a letter that attempts to provide some relevant distinctions regarding the scandalous AIG FP bonuses:
1) On October 22nd 2008 (one month after bailout) Andrew Cuomo
reaffirmed our right to payments under the retention plan.
2) On October 9th Bill Dooley, the head of financial services at AIG,
restated that the treasury and AIG were committed to payments under the ERP.
3) AIG reduced the value of our deferred compensation to zero,
effectively cutting the value of the contracts under the ERP by about 30-50% depending on the amount due to each employee.
4) AIG wiped out the value of our previously earned deferred
compensation, costing me, for example, about half my saving and many others in the company the same.
5) At no time did AIG ask to renegotiate the contracts or plead
extenuating circumstances. Many of us would have worked for much less or for nothing just to clean things up.
6) AIG prepaid 30% of the ERP amount in December with their hearty thanks for a job well done. The treasury knew of and had to approve this.
Is it really fair of them to try to renegotiate after we have
performed on our half of the contract? It would have been fair in
september during the bailout, or in october. Those were extraordinary circumstances. But is it fair of them to come to us after the end of the contract and then ask for the money back after many of us have made personal and professional sacrifices based on these contracts? I, along with many of my colleagues, have expressed a willingness to give the money to charity. But under no circumstances will we accept that we did not earn the money. Is it fair or criminal that Cuomo would threaten us with the release of our names if we don’t return the money? That is blackmail. It is a crime of the most despical nature. Hopefully Cuomo will meet the destiny of the last New York Attorney General to mess with AIG, Spitzer.
Consumers of scandal news simply don’t have the bandwidth to make those distinctions. The MSM, whose own rot is carefully hidden from view, profits from blurring them in the pursuit of a good “story.” Distinctions undermine “the story,” which is inherently more interesting when the facts are selected and interpreted in a particular way.
Unfortunately, no matter how much clarity we begin to get as the details come into sharper focus, the original story is already out there. The people have finished it, put it down, and moved onto the next one, like the consumption of chips and dip–empty calories that never fill you up.
HT: John Carney
UPDATE: Jake DeSantis piles the shame.
Posted by Marc Hodak on March 25, 2009 under Unintended consequences |
Not for the children
Obama’s new tax bill reduces the amount that the ‘wealthy’ (any couple making over $250K) can deduct for charitable contributions. The intent is, in effect, to net the government more money at the expense of wealthy donors. The predictable effect will be that each extra dollar the government gets will more or less come directly from the charities, leaving the putative donors with the same after-tax wealth. Martin Feldstein does the math.
A substantial body of economic research shows that, on average, each 10 percent reduction in the cost of giving raises the amount that a person gives by about 10 percent…
Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent. That deduction would reduce the individual’s tax bill by $3,500. Limiting the deduction to 28 percent would lower the individual’s tax saving on a $10,000 gift to $2,800.
This is where things get interesting: If the 10 percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government’s revenue loss would be reduced by $980 (from $3,500 to $2,520). The person’s gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.
In other words, the $980 hit that the government is expecting the wealthy taxpayer to take is likely to be taken entirely by a hospital, church, or school. And that, Mr. Obama, is a lesson in tax incidence.
HT: Greg Mankiw
Posted by Marc Hodak on March 24, 2009 under Invisible trade-offs, Unintended consequences |
Shall we dance?
The market reacted to Geithner’s asset sale plan yesterday the way you would expect, if you expected a massive transfer of wealth from taxpayers to large publicly-traded banks. The banks are basically waiting to sell assets at above-market valuations, and Mr. Geithner is delivering the buyers.
But how good of a deal is this for the buyers of the assets? Consider a casino advertising a new game that pays out 2-1 for a game with odds of 4-1. That’s a lousy game on a straight bet. But this guy with a high forehead and curly hair is offering to loan you money on the bet. And you don’t have to pay all of it back if the bet goes sour. So your willingness to play this game depends on how much Curly is willing to lend you.
Now, Curly seems like a reasonable guy. But standing behind Curly are a couple of big guys who just recently beat the sh*t out of a recent winner, shaking him upside down until his winnings dropped out of his pocket.
Now, how willing are you to play with Curly?
“If it’s structured correctly, it could really be a very attractive opportunity for private investors, but it also could actually have the government get its money back,” Canning said.
The heavy criticism by lawmakers of the compensation at giant insurer American International Group (AIG.N), which was bailed out by the U.S. government, is the reason he would prefer to avoid public-private partnership.
“I don’t need the government’s help in structuring my compensation,” Canning said. “I get all the help I need from my partners.”
…says the partner in a $5 billion fund.
Posted by Marc Hodak on March 23, 2009 under Scandal |
Hey Barney, read between the lines
That’s the most likely interpretation of this news about JPMorgan Chase promise to upgrade its corporate jet fleet:
The financial giant’s upgrade includes nearly $120 million for two Gulfstream 650 planes and $18 million for a lavish renovation of a hangar at the Westchester Airport outside New York City….
Joseph Evangelisti, a spokesman for JP Morgan Chase, said no TARP money would be used to make payments for the new jets or hanger improvements…and that JP Morgan Chase will repay all TARP money before it makes any payments for new planes or renovations.
The critics are apoplectic.
HT: Dealbreaker.
Posted by Marc Hodak on March 22, 2009 under Invisible trade-offs |
They’d better be good. They will have to induce private investors to risk investments in assets so toxic that they threatened to bring down the entire global financial system. Are these assets worth 60 cents (bankers wish)? Thirty cents (closer to the market)? Twenty-two cents?
Here is the game the government is playing: the lower the bids, the more likely the banks all go “boom” since they will have to recognize the low bids on their books, revealing most of them as insolvent. The higher the bids, the fewer banks will be seen as insolvent, but the more likely taxpayers will get sodomized, yet again. Is there a fair price that threads the spread?
Unfortunately, the government has been working overtime to keep that spread wide by compounding the uncertainty that will be faced by investors. That uncertainty significantly reduces the value of those “bad” assets to them. Will the loans have to be paid back according to the contracts that were written? Or will the contracts be modified by judicial fiat? Will Treasury and the Fed provide sufficiently clear rules for their participation? Will they then change the rules? And then, there’s the newest and biggest uncertainty: What does the winning investor get to keep? Joe Wiesenthal plays the rest of the tape:
Picture it: John Paulson makes $500 million buying distressed assets, after only putting up $10 million of his own cash, while the government puts in $90 million. The bet works out. Some newspaper reporter explains what happened, and next thing you know, Barney Frank is talking about how those are the “people’s profits” and how this is no time for hedge funds to be feasting off our carcasses — even though that’s the exact point of the TALF.
Will the profits get confiscated via some clever spread-the-wealth tax scheme that non-hedge-fund public wildly applauds? How does an investor build that risk into their decision-making?
That’s what Obama and Geithner are sweating out right now.
Update: Obama is seriously backpedaling from governing out of anger.
Read more of this article »
Posted by Marc Hodak on March 20, 2009 under Collectivist instinct, Politics |
Can't you hear the barking?
Barney Frank says, “Heck, why not just eliminate all TARP recipient bonuses, period.” Uh, because we want at least some return of the massive investment you forced us to make in these firms?
But a zero bonus rule would be too simple. Congress doesn’t want to keep it simple because they’re afraid of getting outsmarted by the bankers, once again. So, like inept batters who keep swinging and missing, they’re simply pulling the backstop to the plate with a catch-all prohibition on “unreasonable and excessive” compensation. Or, to use a card analogy, this would be like handing themselves a trump card. In Tarot the trump card is represented by the Fool, which the French call “L’excuse,” as in “any excuse will do.” This is quite appropriate as we move toward French attitudes about wealth creation.
The market will reasonably interpret this bill, should it make it into law as: TARP = bankruptcy…why draw out the agony? Fair enough. But there are precedents being set here.
Precedents like confiscating or eliminating all pay above a certain level would be bad enough. But precedents where the government gets to decide what is reasonable in broad compensation matters invites unlimited meddling, especially when reasonable is whatever Barney Frank thinks is reasonable. Is Barney Frank even capable of distinguishing reasonable? Isn’t reasonable kind of different from “driven purely in reaction to headlines of the moment that stoke raw, unchecked emotion?
Posted by Marc Hodak on March 19, 2009 under Stupid laws, Unintended consequences |
There are so many unintended consequences that would pop out of the 90 percent tax on bail-out bankers that it could keep this blogger busy for days. Unfortunately, I’ll probably be way too busy helping set up the management companies that will supplant every last employee at a major bank without “assistant” in their title.
One of the first drivers for this won’t be, as many suppose, the people making over $250K. It will be people married to working spouses. The $250K limit applies to household income. So, if your husband or wife is a New York lawyer, your household income is $250,000 before Morgan has paid you your first dollar. Everything above that is gone as soon as it hits your bank account. You may, in fact, owe money on your earnings.
So, sorry honey, I don’t care how much the taxpayers need you to protect what little they have in that big ‘ole bank. Our nanny now makes more than you do, so find another job, or stay home and watch the kids.
Posted by Marc Hodak on under Invisible trade-offs, Scandal |
The question originally was whether the infamous AIG bonuses hurt the taxpayers. Certainly not, at least from a bread and circus approach, the cleansing nature of the two minute hate, and all that. I’ve gotten my share of $165MM in entertainment watching the blowhards in Congress making fools of themselves, again.
But now, we’re hearing that we didn’t even need to pay these people, because…they had already completed what was required of them! Who gets worked up that a company would pay exactly what it promised to people who did exactly what they were paid to do? The Washington Post (picked up by Reuters):
The work of defusing the most dangerous bets placed by American International Group Inc was largely concluded long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown…
The most explosive contracts largely were the creations of AIG’s Financial Products unit, and employees of that division — the recipients of the controversial bonuses — worked through the fall to unwind old deals, the report said.
By the end of December, the outstanding volume of risky and highly complex derivatives had been reduced to roughly $13 billion from $78 billion, the Post said, citing the company’s financial filings.
So, at some point early last year AIG realized that this group of brilliant but clueless financial engineers, the Rain Men of financial services, had created a ticking bomb in their midst. When they saw what happened at Bear Stearns in March of ’08, AIG panicked, and offered their Rain Men fixed retention payments–what the media insist on calling “bonuses”–to stick around for a year to defuse the bomb they had created. Most of them stayed. By the end of eight months, they had largely finished that task. And–this seems to be the gist of this article–the company paid them at the end of the year anyway.
Another outrage!
Posted by Marc Hodak on March 18, 2009 under Irrationality, Politics |
You know what kind of party CEO Liddy thinks he was invited to today.
From today’s episode of “WTF?“:
But Rep. Stephen Lynch, D-Mass., angrily told the witness the contract read like “the captain and the crew of the ship reserving the lifeboats.”
Liddy replied that he was not at the firm when the contracts were negotiated, and said, as he has before, that he would not have approved them.
Lynch said the terms had been put in place in December, after Liddy arrived at AIG.
But Liddy disputed that. “I take offense, Sir,” he said.
“Well you take it rightly. Offense was intended,” shot back Lynch.
In this case, the offense is so nonsensical that a defense is hardly warranted. It was like watching Michael Scott going after his nemesis. What is it about Massachusetts that creates batshit crazy congressmen?
