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?
Posted by Marc Hodak on under Politics, Scandal |
Congressional inquiry of AIG retention payments
I put “bonuses” in quotes for two reasons. The first is a technical objection. This use of the word bonuses is quite different from the idea of bonuses as most people are used to hearing it. My mother-in-law in Missouri says it’s ridiculous for people who destroyed a company to be rewarded for doing so. That’s an understandable interpretation of what is happening here, if one simply takes the headlines literally. The story would be a lot less compelling if the headline were, “Executives collecting fixed payments from old contracts.” Those are payments from contracts, by the way, that the government has known about, and protected in the recent stimulus law.
The second reason for the scare quotes is that this frothing by the government has nothing to do with bonuses, however they’re characterized. This has to do with fear. Congress is afraid that if they are seen as bad stewards of our money, the public will become less willing to let them grab another trillion of it. Obama is afraid that if his administration is seen as rewarding failure, then his popularity will suffer, which will endanger the rest of his agenda. In other words, our goverment officials are afraid the people will know the truth about what they are really doing.
Read more of this article »
Posted by Marc Hodak on March 16, 2009 under Revealed preference |
“How do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama asked. “This isn’t just a matter of dollars and cents. It’s about our fundamental values.”
That’s President Obama on his increasingly hysterical strident attempt to force AIG to renege on its contract to it managers.
For me, this the most telling moment in Mr. Obama’s presidency. Here is where he gets to show us his fundamental stripes. This is his teaching moment to the nation. His choice is as simple as it is inescapable: A or Not A:
A: The AIG executives whose irresponsible, short-sighted behavior pushed their firm to the brink of insolvency, and who forced our nation to bail them out at an unconscionable cost, are now in a position to reap the rewards of a contract that was put into place long before anyone suspected that their mistakes would lead to disaster. The media has been calling the payments from this contract a “bonus.” It is not a bonus. A bonus is something you earn for performing. It is, in theory, forfeitable if you fail to earn it. This contract guarantees payment. This is like salary that has been deferred, to be paid in installments. Calling it a bonus twists the word beyond recognition, and serves to needlessly inflame passions.
As distasteful as it to see these people receive this payment, whatever it’s called, this nation is built on people honoring their agreements. Children learn about the basic requirements of civilization on the playground when they are rebuked for reneging on their promises, or welching on a deal. Americans don’t welch. Americans don’t look for excuses to welch. We know how easy it is to find them. Americans don’t encourage welching.
Besides, we don’t need to encourage the abrogation of a legitimate contract, no matter how ill-conceived or inopportune, in order to restore a sense of fairness in this particular situation. The CEO of AIG, a man appointed after its collapse to help bring things under control, has determined that the people in this group, the group that destroyed the company, have many non-contractual elements to their pay. The non-contractual elements do not have to be paid. For the 25 top executives, their salaries, ranging from $270 thousand to $500 thousand, will be reduced to $1, largely counteracting the value of their bonuses. Every other manager in the group will have their bonuses largely counteracted by a 10 percent reduction in their salaries. These managers are free to leave, whereby they will forfeit their remaining bonuses. Or they may stay on, to try to apply their talents to remedy the destruction their unit has wrought, and be paid a fair wage for doing so.
Not A: We don’t want the company to pay these people, regardless of any agreements. We’re angry. We can’t let individuals who have harmed us hide behind a contract. Paying these people would offend our sensibilities. We will use all our power to prevent it.
A is the rule of law. Not A is the rule of men. This, Mr. President, is where you clarify for the young people who supported you what kind of country you want them to inherit. Which is it?
UPDATE: This morning I added a little to his “A” speech. He won’t mind. We just feed it into the teleprompter…
One of the more unfortunate slurs heaped upon our Native Americans is the term “Indian giver,” which is opprobrium for someone who takes back what they give or promise to another. It is particularly ironic that we apply it to a group to whom we have violently broken so many promises, using their rebellion and occasional crimes as an excuse, and taking shameful advantage of their political vulnerability.
Posted by Marc Hodak on under Executive compensation, Scandal |
You have to hand it to AIG. I teach a History of Scandal class to warn my dear MBA charges how to learn from past mistakes, avoid trouble, sidestep the pitfalls. It’s as if AIG senior executives took my class, then reversed all of the lessons in order to more efficiently get embroiled. Today, they find themselves on the front pages for not one, but two separate scandals. One of them has to do with bonuses:
President Barack Obama voiced outrage on Monday over large bonus payments awarded to top employees of insurer AIG and ordered his treasury secretary to legally block them if possible.
I understand the outrage, really, even though I cleanly lost the race of first to be angry, partly because my understanding of “bonus” doesn’t include guaranteed, fixed compensation, which appears to be the subject of this report.
So, when the President of the United States says he doesn’t want you to get your money, what does that mean? The article was careful to include “legally block them if possible,” which suggests that Big O, who taught constitutional law, is a bit more mindful of the subtleties of this situation than, say, the average Kos commenter. But no one wants the president gunning for them. The government simply has bigger guns and a hair trigger.
Now, people will note that if the government gives you money, they have a right to call the shots. Sure, but they still don’t have the right to break a contract. Especially when they don’t have to (see UPDATE) in order to obtain a fair solution.
Alas, one of the things I let my students know is that once your private situation blows up into a public scandal, the mob will have their own idea of fairness.
