OK, I have had enough of these temper tantrums, these "cut your nose to spite you face" Congressional and public rampages.
There are two choices re AIG and the other bailouts. And both are nothing but bets.
1. Let all these companies (AIG, Citi, BofA, the auto companies, etc.) go bankrupt and just hope that the world doesn't collapse. You want to risk a global depression? A stock market down to 0? You think these are exaggerations? If the financial world collapses, not even the full faith and credit of the U.S. is likely to save you. If you're right and I'm wrong, well, you can say "I told you so".
This is what can also be thought of as one side of the "sunk cost" decision. Yes, we've invested multi billions of dollars but that's no reason to send good billions after bad billions.
2. Monitor, regulate, exercise strong oversight and help all of these companies to recover. The consequences? The economy improves and all the taxpayers get paid back. It's possible that one or more of these companies will fail no matter what we do but, at a minimum, the money we've invested will have given us the time to wind them down in a more orderly fashion. Will this take time? Yes. The economy isn't going to recover tomorrow and none of these companies can fully recover until the economy does. But only children should expect things to happen tomorrow. So what if it takes 4 or 5 or 6 years to full unwind everything? In the history of the country, that's about the length of the Revolutionary War, the Civil War or WWII. And it's a lot shorter period than the Great Depression.
This is partly much the other side of the "sunk cost" assessment: I've already put so much money into this hole, I might as well keep going and hope for the best.
Me, I'm the cautious and optimistic sort. I prefer choice #2.
Showing posts with label AIG. Show all posts
Showing posts with label AIG. Show all posts
Wednesday, March 18, 2009
Media Missing in Action: AIG Bonuses and Loans
OK, Liddy's 3/18/09 testimony has been illuminating - although many of the members of the committee don't seem to be listening.
The Bonuses
These are NOT performance bonuses. They are retention bonuses for people in AIG-FP, the source of most of the problems. The purpose of the bonuses was to pay people to stay until they had wound down their positions. The people who have left, who signed the contracts in Jan. 2008, left because they had wound down the positions they were expected to wind down. And they got their retention bonuses because they had fulfilled their contractual obligations. Those still working are being paid their retention bonuses because they have not yet wound down their positions but are still working to do so.
This division had, at the start of 2008, as I understand it, 2.3 trillion in notational value of positions. Today, 50% has been wound down - so now it's about 1.2 trillion. In short, progress has been made. Each contract is complex and, sad to say, the people who made the contracts probably know more about how to wind them down than somebody new. Think about the effort requried for a new employee, from outside the company, to replace you in your job.
What Liddy feared is that if he failed to pay the retention bonuses, the people required to wind down their positions would simply have walked out the door. And these are positions that must be managed daily. Given the 50% decrease in the value of these positions since Liddy took over, they seem to be doing their jobs.
If you've ever been employed by a company that went bankrupt or was acquired by another company (as I have), you know that people are still needed to wind down the company: to fire employees, to work with the acquiring company to integrate systems, etc. - people who know they will lose their jobs when the integration is completed or everything has been sold (think about Circuit City employees who stuck around to sell every last item they could before they, too, lost their jobs). A bonus can keep them from walking out the door and making the bankruptcy or acquisition that much more difficult.
Yes, the dollar amounts are huge, but so are the salaries at companies like AIG. All you free-marketers out there, all you wealth-defenders out there, shouldn't be upset about the size of the bonuses.
Loans
To say that the American taxpayers have loaned the company 170 billion dollars misstates the case. AIG owes the Fed and the Treasury about 80 billion dollars. There is, I think I heard, a 30 billion dollar line of credit that has not yet been tapped. The rest consists of assets separated off into something called Maiden Lane 2 and 3 which are now assets on the Federal Reserve's balance sheet. These assets were bought for 30-40 cents on the dollar. Today, according to Liddy, their market value ranges from about 30 cents to 75 cents on the dollar. They are all performing assets. When the market improves, the Fed will sell these assets and the money will be repaid. If I understand this correctly, it is the equivalent of my accepting your house in payment of a debt. I pay you less than it is worth based on the conviction that, since I am rich enough to just hold it (and rent it out to cover ongoing expenses), I will be able to sell it some years in the future and make a nice profit.
All of this seems rather reasonable, if unpalatable, to me. But neither the media nor a lot of people on the committee grilling Mr. Liddy (all of whom precede their often vicious attacks with statements of praise for taking on a thankless job for $1/year and no stock options) do not seem to have either heard or understood Mr. Liddy's explanations.
In short, as far as I can tell from Mr. Liddy's statements, the company has made significant progress in winding itself down - in such a way so as not to create financial chaos.
The AIG mess should not have occurred in the first place, but one plays the cards one has to the best of one's ability. And I think that Liddy has done that.
The Bonuses
These are NOT performance bonuses. They are retention bonuses for people in AIG-FP, the source of most of the problems. The purpose of the bonuses was to pay people to stay until they had wound down their positions. The people who have left, who signed the contracts in Jan. 2008, left because they had wound down the positions they were expected to wind down. And they got their retention bonuses because they had fulfilled their contractual obligations. Those still working are being paid their retention bonuses because they have not yet wound down their positions but are still working to do so.
This division had, at the start of 2008, as I understand it, 2.3 trillion in notational value of positions. Today, 50% has been wound down - so now it's about 1.2 trillion. In short, progress has been made. Each contract is complex and, sad to say, the people who made the contracts probably know more about how to wind them down than somebody new. Think about the effort requried for a new employee, from outside the company, to replace you in your job.
What Liddy feared is that if he failed to pay the retention bonuses, the people required to wind down their positions would simply have walked out the door. And these are positions that must be managed daily. Given the 50% decrease in the value of these positions since Liddy took over, they seem to be doing their jobs.
If you've ever been employed by a company that went bankrupt or was acquired by another company (as I have), you know that people are still needed to wind down the company: to fire employees, to work with the acquiring company to integrate systems, etc. - people who know they will lose their jobs when the integration is completed or everything has been sold (think about Circuit City employees who stuck around to sell every last item they could before they, too, lost their jobs). A bonus can keep them from walking out the door and making the bankruptcy or acquisition that much more difficult.
Yes, the dollar amounts are huge, but so are the salaries at companies like AIG. All you free-marketers out there, all you wealth-defenders out there, shouldn't be upset about the size of the bonuses.
Loans
To say that the American taxpayers have loaned the company 170 billion dollars misstates the case. AIG owes the Fed and the Treasury about 80 billion dollars. There is, I think I heard, a 30 billion dollar line of credit that has not yet been tapped. The rest consists of assets separated off into something called Maiden Lane 2 and 3 which are now assets on the Federal Reserve's balance sheet. These assets were bought for 30-40 cents on the dollar. Today, according to Liddy, their market value ranges from about 30 cents to 75 cents on the dollar. They are all performing assets. When the market improves, the Fed will sell these assets and the money will be repaid. If I understand this correctly, it is the equivalent of my accepting your house in payment of a debt. I pay you less than it is worth based on the conviction that, since I am rich enough to just hold it (and rent it out to cover ongoing expenses), I will be able to sell it some years in the future and make a nice profit.
All of this seems rather reasonable, if unpalatable, to me. But neither the media nor a lot of people on the committee grilling Mr. Liddy (all of whom precede their often vicious attacks with statements of praise for taking on a thankless job for $1/year and no stock options) do not seem to have either heard or understood Mr. Liddy's explanations.
In short, as far as I can tell from Mr. Liddy's statements, the company has made significant progress in winding itself down - in such a way so as not to create financial chaos.
The AIG mess should not have occurred in the first place, but one plays the cards one has to the best of one's ability. And I think that Liddy has done that.
Kanjorski's AIG Hearing - Mar. 18, 2009
I've been watching these financial hearings for months and have concluded that Rep. Bachus, while perhaps the quintessential Southern gentleman, understands banking and finance no more than I do. But I was impressed by his opening statement for its lucid commonsense assessment of the issue (AIG's bailout and bonus payment) at a time when the media, the talk shows, the web, and, above all, Congress, has been whipping up hysteria equivalent to that which usually precedes a country's going to war.
And if Hypocrisy has a pantheon of heroes, surely Congress must rank at the top. I haven't done a count, but I suspect that many of the Representatives and Senators who opposed the bankruptcy cramdown for first-home mortgages (allowing, for the first time, a bankruptcy judge to write down the principal) on the grounds that mortgages were sacred contracts now consider contracts to be in, I think, Ackerman's words, "legal technicalities".
And, from the part of the hearing I've seen, I was more than a little bemused to see a Republican ask the GAO to investigate the conference committee hearing on the stimulus package which specifically exempted employment contracts from being abrogated. He apparently is unaware of the separation of powers. Or perhaps he thinks the executive branch should routinely investigate Congressional hearings and deliberations.
And if Hypocrisy has a pantheon of heroes, surely Congress must rank at the top. I haven't done a count, but I suspect that many of the Representatives and Senators who opposed the bankruptcy cramdown for first-home mortgages (allowing, for the first time, a bankruptcy judge to write down the principal) on the grounds that mortgages were sacred contracts now consider contracts to be in, I think, Ackerman's words, "legal technicalities".
And, from the part of the hearing I've seen, I was more than a little bemused to see a Republican ask the GAO to investigate the conference committee hearing on the stimulus package which specifically exempted employment contracts from being abrogated. He apparently is unaware of the separation of powers. Or perhaps he thinks the executive branch should routinely investigate Congressional hearings and deliberations.
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