But the verdict was not at all what the prosecutors were looking forward to when they tried a pair of Bear Stearns traders in the press, using what we now know to have been highly selective leaks. Once the jury saw the leaked material in context, in a forum that consisted of more than soundbites and press outrage, they came to their own conclusion:
In the indictment, the prosecution quoted from a note Mr. Tannin sent in April 2007 from his personal Gmail account to Mr. Cioffi’s wife. The government made much of the fact that Mr. Tannin chose not to send it to Mr. Cioffi himself or from his Bear Stearns’ e-mail account, suggesting he was trying to hide something. “The subprime market looks pretty damn ugly,” Mr. Tannin wrote, adding that if a recent financial report was correct, “I think we should close the funds now …. The entire subprime market is toast.”
But the jury eventually saw the entire message, in which Mr. Tannin ruminated at length about various courses of action and seemed to be striving to make the soundest financial choice. In other words, it was just what you would hope your fund manager would be worrying about in a precarious time. In the end, he concluded he was feeling “pretty damn good” about what was happening at the funds and that “I’ve done the best possible job that I could have done.” Any wonder the jurors came away with reasonable doubt?
The Bear Stearns executives are smiling now, but that’s what one does when the authorities threaten to take your life away, and you suddenly get it back. The jury made it clear this case was not close:
“They were scapegoats for Wall Street.”
“The entire market crashed,” one juror explained. “You can’t blame that on two people.”
But you can try if you’re a young prosecutor with the press, public, and political bosses cheering you on. And unlike these traders who lost their jobs, their firms, and much of their personal fortunes on their gamble, the prosecutors lost nothing personally on their gamble. Like the traders, though, the prosecutors did lose millions of dollars of other people’s money–ours, the taxpayers.
And even now, most commenters are assuming that this an unfortunate outcome, that the prosecution was merely incompetent rather than opportunistic.
It should, according to the logrolling that got the vote of the lone Republican, freshman congressman Rep. Anh “Joseph” Cao:
Mr. Cao wants the Department of Homeland Security to forgive $1.27 billion in disaster loans in the wake of Hurricane Katrina; officials said they would try… Mr. Cao said in a statement that he won a commitment from Mr. Obama to address issues involving Louisiana hospitals and the disaster-loan forgiveness.
There may be good reason to forgive disaster loans to New Orleans residents or businesses. But doing so in exchange for committing the nation in a decisive step toward nationalized health care seems like a weak and profoundly cynical bargain, not to mention naive.
Ex-Brocade CEO Greg Reyes was the example that prosecutors wanted to make out of a greedy CEO backdater, i.e., someone who schemed to inflate his compensation in stock options. The prosecutors surveyed the field for the perfect poster child for their prosecutorial campaign, the perfect trophy for their case. They passed over Steve Jobs, and settled on Greg Reyes.
The first problem they had to overcome was that Reyes, unlike Jobs, didn’t agree to the backdating of his own options–only those of certain people who worked for him. Never mind that he didn’t personally benefit from the backdating; the prosecutors wanted their conviction.
The next problem was that Reyes claimed he didn’t know that the disclosure he signed off on was improper. Backdating is, in fact, perfectly legal as long as it’s properly disclosed; then it’s just an in-the-money option, which is like an at-the-money option plus cash, both of which are commonplace (as were backdated options in Silicon Valley public companies of that time). But never mind that he didn’t know his firm’s disclosure was improper; the prosecutors wanted their conviction.
The next problem was that the prosecutors knew Reyes didn’t know the illegality of his actions, and they held back that evidence from the jury. That’s what bugged out the eyes of Ninth Circuit when they overturned the conviction.
The record demonstrates that the prosecution argued to the jury material facts that the prosecution knew were false, or at the very least had strong reason to doubt…
Deliberate false statements by those privileged to represent the United States harm the trial process and the integrity of our prosecutorial system. We do not lightly tolerate a prosecutor asserting as a fact to the jury something known to be untrue or, at the very least, that the prosecution had very strong reason to doubt.
I’m grappling with what the Court meant by “not lightly tolerate.” If a CEO fails to disclose an otherwise legal award of options to his employees, we should not tolerate that by threatening his liberty and property to the tune of a 21-month jail sentence and $15 million fine. If a prosecutor lies to a jury in order to deprive a man of 21 months of his freedom and $15 million of his cash, we should not tolerate that by…telling him it was a bad thing to do? Help me out here.
Larry Ribstein offer his usual, insightful coverage
Probably not. No one knows which of the many elements contributing to the meltdown of last September were necessary or sufficient to be labeled a cause, but Larry Ribstein connects the dots in an intriguing way.
Treasury Secretary Paulson was obviously willing to let Lehman go down. But he saved AIG in order to “mitigate broader disruptions” in the economy. AIG was simply too big or too connected to fail, and their book of credit default swaps was the focus of Paulson’s concern.
So, why did their CDS exposure get so completely out of hand? Larry refers to a piece Michael Lewis had written about AIG:
Lewis blames everything on Joe Cassano, head of AIG Financial Products, whom Lewis dubs “the man who crashed the world.” According to Lewis, Cassano was not a financial wizard – just a back office guy with “a real talent for bullying people who doubted him.” He became ascendant when the man who put him in power, and who could control him (Hank Greenberg), was forced to resign by Eliot Spitzer (so, hey, let’s blame all this on Spitzer).
And so he does, first by referring to a WSJ item:
More than four years later, the federal government has decided that it cannot even make a civil case for fraud against Mr. Greenberg, never mind a criminal one. The SEC has essentially settled with Mr. Greenberg on the charge that he was the CEO at the time that “material misstatements” in earnings occurred.
Yet even if one accepts the SEC’s view of events, it may be a stretch to call them material, as they add up to less than 1% of AIG’s net income during the period at issue. The accounting items in the SEC charges, which Mr. Greenberg neither admits nor denies, represent less than 10% of the restatement AIG filed to justify the Greenberg firing demanded by Mr. Spitzer. The impact on retained earnings was roughly $250 million, when AIG’s total retained earnings at the time were approaching $70 billion.
So Larry concludes:
The bottom line: if Joe Cassano was the “man who crashed the world,” Spitzer was the guy who gave him the keys to the car. And all this for his supposed non-fraudulent responsibility for a barely material (if that) accounting mistake, plus, of course, the boost to Spitzer’s then career.
Missouri state's HR department
The nice people at MOSERS, the Missouri state pension fund, had a bonus plan. They beat their targets, earning their bonus. The Governor and legislature denied them their bonus.
Governor Jay Nixon called $300,000 in bonus payments to the 14-member staff of the Missouri State Employees’ Retirement System (MOSERS) “unconscionable.”
Unconscionable? What happened?
MOSERS’ incentives are based on a five-year cycle. The bonus payments paid this year were based on fund performance from January 1, 2004, through December 31, 2008. In that period, says [Executive Director Gary] Findlay, MOSERS had an overall return of 3.9% compared with its benchmark of 1.8%. (the benchmark is the performance of the asset allocation if it were invested passively).
The difference to MOSERS between a 3.9% rate of return and a 1.8% rate of return over that period, points out Findlay, is $600 million. So, the MOSERS investment staff added $600 million in value to the fund’s assets for bonus payments of $300,000, which is 5/100 of 1%.
So, tell me again, why did the politicians hose the MOSERS fund managers?
[Chairman of the legislature’s pension committee, Senator Gary] Nodler argues that payment of bonuses makes no sense in any year in which the fund experiences no actual growth. When the fund loses money, he says, then there is no money from which to pay the bonuses except to go into current assets. And that, he says, is a misappropriation of funds and a breach of fiduciary responsibility.
Makes no sense, indeed.
I give Nodler points for creativity, however. I have never heard a “breach of fiduciary responsibility” allegation used to cover up a breach of contract and a breach of good faith. You have to have a highly cultivated sense of mendacity to make this stuff up while summoning outrage for the cameras.
If the politicians had a shred of integrity, they would have told their pension fund managers five years ago that they would under no circumstances get any bonuses when absolute returns were negative. That way, the managers could have evaluated their compensation fairly versus their other opportunities, and decided whether they wished to stay or take their talents elsewhere. Given that the pols agreed to a bonus plan, their ignorance of its terms, or difficulty in explaining to the public why they are making payouts, is not a reason to stiff their employees. At best, if they decided after the fact that they wanted to pay for absolute performance rather than relative performance, then they should recalculate the bonuses earned in past years under this plan on an absolute basis, and pay them consistently. As it stands, the Missouri politicians were content to pay bonuses based on relative performance when peer fund returns were positive, but for absolute returns when the funds are negative.
And that is why politically run systems can’t outperform private sector ones.
Nathan Hale, a hero of the American Revolution, condemned by the British to hang as a spy in 1776, famously said that he regretted that he had “but one life to give for my country.”
Madoff’s victims, many of whom have been condemned to a life of unexpected financial struggle, probably regret that the old devil had no more than one life to give for his crimes based on his 150 year sentence.
Is there a lesson from the Madoff debacle? I don’t know. His crime was a catastrophe for everyone who trusted him, and on a larger scale than anything before perpetrated by a private individual. Several ethical codes suggest a moral:
– Common sense: Don’t put all your eggs in one basket
– Western religion: If you do put all your eggs in one basket, make certain you know what that basket is made of
– Eastern religion: Better not to have many eggs; all baskets eventually fail
I don’t know if any of these are particularly helpful, but two morals–the ones most often cited in the press–are quite unhelpful:
– Fundamentalist: Greed is evil, and must be brought under control
– Political: The government needs more money and more power to prevent these things
The fundamentalist hypocrisy is that only certain other people are greedy. It appeals to the vanity that you or I would never succumb to the sin of wanting more than we have, much more if given the opportunity. In fact, greed was on both sides of the Madoff equation. The victims experienced a certain feeling every time they opened one of the fake statements telling them how much they “made.” That feeling was indistinguishable from greed, and it was indispensable to perpetuating the Madoff scheme. Nevertheless, I would never say that the victims deserved what happened to them.
Madoff’s real sin was, in fact, theft. Among the multitudes infected by the sin of greed, I believe that most of us are morally equipped to avoid perpetrating theft.
The government’s prescription, of course, is a joke. Madoff was registered with the SEC. They were furnished specific concerns about his legitimacy. The clean bill of health given by the regulators simply helped Madoff reel in more victims.
"The report says that we might need to shore up those levees"
I have often noticed how business regulation is almost completely headline driven. If a photo of rats in a restaurant makes it on the front page of the local paper, city council members will stand up before the cameras and announce hearings the very next day. If a large business gets an offer from a foreign firm, and instead of portraying this as a vote of global confidence the press chooses to portray it as a foreign invasion, congressmen will step over each other to get to the microphones first to denounce it, even to the point of advocating law breaking. I see this phenomenon all the time with regards to compensation and governance. Serious issues get treated with populist sound bites. The intended effects of poorly conceived legislation invariably get perverted into consequences no one intended.
Given this pattern on visible issues, it should come as no surprise that we see the opposite–political neglect–on issues that could actually benefit from the attention of government, like water management.
Out of sight, water infrastructure remained largely out of mind for U.S. policymakers in the federal economic stimulus effort. The $787 billion program allotted less than $10 billion for drinking and wastewater projects.
State and local officials will not turn the cash away but they say much more is needed to fix and add capacity to the nation’s water systems.
“It’s something that concerns me, because we pay so much attention to things we see and this is something we don’t see — until it’s too late,” Maryland State Treasurer Nancy Kopp told Reuters in a recent interview.
“In Maryland and other eastern states there have been repeated episodes in which pipes carrying clean water or sewage have collapsed,” Kopp said. “Over the next 20 or 30 years, water systems are likely to hit obsolescence.”
I think that one of the reasons that Swiss government is so much more efficient in many ways is that their politicians are more anonymous than ours. They don’t have as much opportunity to jump in front of the spotlight because their society is not so politicized. (American society is relatively unpoliticized, too, compared to most of the rest of world, thank goodness, so far.)
Perhaps we should amend our Constitution to compel our legislators to remain anonymous or random, kind of like jurors, unable to discuss any issue they are working on with the press. I can’t help but think it would make the institution a little more serious. It might make the legislature less responsive to the crisis du jour, but it would prevent them from legislating about things that really deserve more than a day of contemplation. Removing the klieg lights might also encourage them to spend a little more time contemplating items that currently get less serious attention than they deserve.
Of course, nothing will get a politician to better allocate their time and attention better than value-based incentives.
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.
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.
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.