ScreamingEagle
Gold Member
- Jul 5, 2004
- 13,399
- 1,706
- 245
1. The surprise about the governments fury over the American International Groups bonus payments is that it is coming now. These bonuses were agreed to back in early 2008. At best, the failure of the government to act before this week is incompetence. At worst, the government was willfully blind and this is a public relations campaign. It is likely a mix.
2. The failure of the government to plan ahead allowed this to happen. The government has now bailed out A.I.G. three separate times. In each of these prior bailouts they could have structured the assistance to forestall these payments.
For example, the government could have placed A.I.G.s subsidiaries into the hands of the government through foreclosure or security on its loans and allowed for the bankruptcy of the publicly traded top company and the subsidiary which wrote these credit default swaps. The government could then have arranged for part of its $173 billion in assistance to go to counterparties to stabilize them in exchange for government recompense.
The recipients of the bonus payments would then have only had a claim in bankruptcy for the payments and the government could renegotiate them with the parties for true value (as DealBooks Andrew Ross Sorkin noted on Tuesday, we may actually need them). More importantly, this would have the greater and overriding virtue of allowing the government to put a ceiling on its support of A.I.G.
Instead, in three serial bailouts, the government has set up an apparatus in which it is still held hostage by A.I.G.
3. The A.I.G. bailout was made principally through Federal Reserve loans. These were made under an extremely broad interpretation of the Feds authority under Section 13 of the Federal Reserve Act. The troubles here show the perils of allowing the Fed unfettered discretion to arrange loans to whomever they deem appropriate.
If Congress really wanted to crack down on the bailout, it would do so by limiting these back-door arrangements. These, by the way, are now likely in excess of the $750 billion TARP bill. I talk about this more in my paper with David Zaring, Big Deal: The Governments Response to the Financial Crisis. (SSRN-Big Deal: The Government's Response to the Financial Crisis by Steven Davidoff, David Zaring)
4. The real outrage from the weekend was not the bonuses, but the disclosure that almost $60 billion in payouts had gone to European banks. This is not protectionist, but the United States should at least have had the European governments share their burden for salvaging their financial institutions.
In addition, the governments tactic has allowed these European and American banks to be made whole at 100 cents on the dollar without value to the American taxpayer except for the decaying A.I.G. businesses.
5. The even greater outrage (yes, there is more) is that the government repurchased at notional value $62 billion worth of securities to unwind A.I.G.s now infamous book of credit default swaps. This was despite the fact that these were collateralized at about 57 percent of that value.
This represents a pure wealth transfer from U.S. taxpayers to these banks. Goldman Sachs alone received approximately $5.5 billion in excess value. These payments were another back door bailout that the government should justify.
As an aside, A.I.G. was quite clever to release this information on Sunday so it would be masked by the outrage over the bonuses.
6. Two of three persons responsible for these arrangements (Ben S. Bernanke and Timothy F. Geithner) are still in government. We are outraged at the investment bankers who cost their shareholders billions.
Until they give us a valid explanation for the $173 billion in payments, shouldnt we demand the same of Mr. Bernanke and Mr. Geithner? The transfer in value may have been necessary to stabilize the financial system, but their failure to justify their tactics and the giving of cost-free subsidies to the banking industry is troublesome at best.
It may indeed be that they are justified in what they have done, but we just dont know right now.
7. The travails of A.I.G. and its back-door arrangements should give people further pause to giving greater regulatory oversight functions to the Fed. There is talk of giving it new regulatory powers as both a systemic risk regulator and a bank and hedge fund capital reserve regulator.
In the latter instance in particular, the Feds opaqueness in general and its conduct with A.I.G. in particular raise the question of the organizations overall competence and suitability for such a necessary and important role.
Seven Sad Truths About A.I.G. - DealBook Blog - NYTimes.com
2. The failure of the government to plan ahead allowed this to happen. The government has now bailed out A.I.G. three separate times. In each of these prior bailouts they could have structured the assistance to forestall these payments.
For example, the government could have placed A.I.G.s subsidiaries into the hands of the government through foreclosure or security on its loans and allowed for the bankruptcy of the publicly traded top company and the subsidiary which wrote these credit default swaps. The government could then have arranged for part of its $173 billion in assistance to go to counterparties to stabilize them in exchange for government recompense.
The recipients of the bonus payments would then have only had a claim in bankruptcy for the payments and the government could renegotiate them with the parties for true value (as DealBooks Andrew Ross Sorkin noted on Tuesday, we may actually need them). More importantly, this would have the greater and overriding virtue of allowing the government to put a ceiling on its support of A.I.G.
Instead, in three serial bailouts, the government has set up an apparatus in which it is still held hostage by A.I.G.
3. The A.I.G. bailout was made principally through Federal Reserve loans. These were made under an extremely broad interpretation of the Feds authority under Section 13 of the Federal Reserve Act. The troubles here show the perils of allowing the Fed unfettered discretion to arrange loans to whomever they deem appropriate.
If Congress really wanted to crack down on the bailout, it would do so by limiting these back-door arrangements. These, by the way, are now likely in excess of the $750 billion TARP bill. I talk about this more in my paper with David Zaring, Big Deal: The Governments Response to the Financial Crisis. (SSRN-Big Deal: The Government's Response to the Financial Crisis by Steven Davidoff, David Zaring)
4. The real outrage from the weekend was not the bonuses, but the disclosure that almost $60 billion in payouts had gone to European banks. This is not protectionist, but the United States should at least have had the European governments share their burden for salvaging their financial institutions.
In addition, the governments tactic has allowed these European and American banks to be made whole at 100 cents on the dollar without value to the American taxpayer except for the decaying A.I.G. businesses.
5. The even greater outrage (yes, there is more) is that the government repurchased at notional value $62 billion worth of securities to unwind A.I.G.s now infamous book of credit default swaps. This was despite the fact that these were collateralized at about 57 percent of that value.
This represents a pure wealth transfer from U.S. taxpayers to these banks. Goldman Sachs alone received approximately $5.5 billion in excess value. These payments were another back door bailout that the government should justify.
As an aside, A.I.G. was quite clever to release this information on Sunday so it would be masked by the outrage over the bonuses.
6. Two of three persons responsible for these arrangements (Ben S. Bernanke and Timothy F. Geithner) are still in government. We are outraged at the investment bankers who cost their shareholders billions.
Until they give us a valid explanation for the $173 billion in payments, shouldnt we demand the same of Mr. Bernanke and Mr. Geithner? The transfer in value may have been necessary to stabilize the financial system, but their failure to justify their tactics and the giving of cost-free subsidies to the banking industry is troublesome at best.
It may indeed be that they are justified in what they have done, but we just dont know right now.
7. The travails of A.I.G. and its back-door arrangements should give people further pause to giving greater regulatory oversight functions to the Fed. There is talk of giving it new regulatory powers as both a systemic risk regulator and a bank and hedge fund capital reserve regulator.
In the latter instance in particular, the Feds opaqueness in general and its conduct with A.I.G. in particular raise the question of the organizations overall competence and suitability for such a necessary and important role.
Seven Sad Truths About A.I.G. - DealBook Blog - NYTimes.com
