The Focus on AIG

Many people are talking about AIG. Some are losing focus. One is Chris Dodd, who denied writing the portion of the Obama Stimulus that protected AIG bonuses, before “remembering” that he did write it at the behest of Geithner.

Another person losing focus is Barack Obama, who seems to be poorly served by both his Treasury Secretary Timothy Geithner:

The Weekly Standard
At his bizarre town hall last night, President Barack Obama joked that “Washington is in a tizzy” over AIG and the $165 million in bonuses to be paid to its executives. The New York Times yesterday quoted White House chief of staff Rahm Emanuel complaining that the whole affair was a “distraction.” At Tuesday’s press briefing, White House press secretary Robert Gibbs could not even provide a rough timeline of the administration’s handling of the AIG affair.
Yes, it’s true that the bonuses represent less than one percent of the total bailout money that has gone to AIG. And yes, there are legitimate points to be made about retention bonuses in general and (though less persuasive) retention bonuses for these AIG employees. But it has been clear for a while that something — an event, a comment, a cable news tirade, a speech — was going to focus the growing public anger over bailouts and government giveaways.

Sadly, some people losing focus on AIG are my friends. Some people even think that taking the bonus money back from AIG solves anything!

For instance, my friend Adrian writes :

And regarding the scariness of punitive tax – there’s nothing wrong with following the letter of the law. The IRS code says “reasonable” salaries are deductable for tax purposes. These bonuses are obviously not reasonable. So, don’t allow AIG to deduct them, problem solved.

Of course, Adrian is wrong. Adrian’s suggestion is as sensible as punishing a women who has been raped by stoning her, or (if your wallet is lifted) withdrawing some more cash from the ATM, and considering everything back to normal.

While some AIG stock is still held by non-government investors (about 20%), this is easily wiped out (and should be too). AIG’s largest stockholder – and largest creditor – is the US government. Making AIG pay back the bonuses, or making AIG to pay more tax, or whatever, is as sensible as responding to a theft against the federally owned United States Postal Service (USPS) by making USPS pay taxes to the federal government.

The best thing to do is to levie a 100% excise tax on these bonuses.

Of course, this will hurt AIG and similar zombie banks. It will make individuals doubt the ability of these firms to actually follow-through with contracts, and deprive AIG, zombie banks like Citi, and others of talent. Hurting AIG and zombie banks is a good thing. The TARP-funded zombies are a complete disaster, a guarantee by the federal government that as long as you have government friends, you can never go bankrupt. TARP-funded Zombies like AIG and Citi should be so eviscerated that any company thinking of a bailout will be s o afraid of arbitrary and capricious federal oversight that it will not ask.

9 thoughts on “The Focus on AIG”

  1. It’s another tempest in a teapot. The government essentially owns 80% of AIG. It should. They bought in for a song. They are highly likely to make a hefty profit on the deal as most of AIG is involved in very profitable and viable businesses. There many entities interested in buying up segments of AIG. They are all going to be wishing they had beat the government to them. I think the government should easily make 50 to 100 billion on its AIG stake, and be completely out of it within 3 years.

    C was 97 cents just recently – within the last three weeks. AIG was .47 during the same timeframe. Just now C is 3.32, and AIG is 1.77. The reason why they are going up so fast is obvious. They are not zombies. They never were zombies. Investors are starting to realize this. Paulson and Bernanke were correct. The bailout, devised by the Federal Reserve and the Treasury, is working, and will continue to work. I think Geithners stewardship of it has been better than Paulson’s. FASB has realized its horrendous and destructive role in this, and they have moved to correct it.

  2. How do we kill them and not crash the economy though? I have not seen many convincing arguments that this could be done without severely worsening the recession.
    Or is it worth it to crash the economy in order to save it for the long term?

  3. i really think you’re misunderstanding the situation here.

    “Of course, this will hurt AIG and similar zombie banks.”

    AIG is not a bank. Citi is a bank – a bad one – hence shiti. why we call it a zombie bank, is because roubini likes the term. but essentially, it is a bad bank with bad assets.

    But AIG is an insurance company, the nation’s largest insurance company. similar to AIG is no one, except other major insurers, and AIG is unique compared to them in many ways.

    my point is, but conflating the two, you actually obscure viable solutions.

    lets look at it slomo for second. say you are a bank who buys assets, some of them risky, in order to generate enough return to cover your long lending. you notice to yourself one day, “gee, i have a lot of the same type of assets… if something bad happens to that market, i’m going to take a big loss… i wonder what to do?” well, what you do is you buy some protection from your potential losses. this protection is a type of insurance, and it limits your exposure to swings in the asset classes you own the insurance on. that’s a default swap, in a simple way. so you purchase that insurance, to take a little risk out of the picture, and save that paper for a rainy day.

    rainy day comes, as they do, and it rains for a long time. you are flooded with losses, and now its time to cash in your insurance. you go the company that sold it to you and say: “i’m getting my ass handed to me. these motherf—kers have defaulted and now i need my coverage, please.” the co. you bought the swaps from says: “alright. hold on.”

    and that’s the last you hear. what’s happened to you in this picture? have you merely lost the difference between your purchase price of the asset and the current market value? no. you’ve lost a crap load more than that, because you had priced in a limit on your losses, a stop loss, so to speak, which you invested in and which a great many of your other assets are tied to. so you’re not just screwed once by a downturn, you’re screwed 2x by a downturn.

    thats what AIG has done. they are the knife in the back of the banks after a swift kick in the nuts from the broader economy. i’m surprised that everyone is so outraged about, not about the bonuses, that makes sense to me, but about the fact that AIG sent the bailout money back to the banks. THAT WAS THE WHOLE POINT. we’re trying to deleverage the system without creating a panic. if AIG had not paid out on the swaps, a real first class bank run on every financial insitution would instanteously ensue.

    so how did AIG do it? simple, they sold insurance in a totally unregulated market. had their contracts been construed as insurance contracts by state regulators, they would have had to place reserves against them. but they weren’t construed that way, even though that is exactly what they are, and so they have no reserves… enter US Govt.

    the banks were stoopid, AIG, and all CDS writers, were too clever by half. killing off zombie banks will not get rid of the insurance problem. and lets remember too that AIG has policyholders. what you think will happen if AIG renegs on those contracts? its gonna rain like you’ve never seen my friend. US Govt intervened primarily to protect the policyholders, and then to avoid a systemic collapse. so these are two separate problems: capitalization of the banks, and management of risk.

  4. FX, I pretty much agree with almost everything you’ve said.

    The risk of systemic collapse has always sort of been managed by its sheer unlikelihood. As humans we’re threatened every day by systemic infection. In just about every hospital there are people being treated for it right now. Many will die. But as for us as individuals, it’s very unlikely it will happen to our body.

    The global economy is a population of one individual, and the likelihood of a systemic collapse was always low. Along came Greenspan and the suspects, and they believed these wonderful new instruments had further lessened the risk of systemic collapse. 999,999 out of 1,000,000 they were probably right. Not because they’re so smart; because the Angel of unlikelihood was always n their shoulder.

    Were people stoopid for believing him? I guess, but conformity is what humans do best.

    Who knew 10 million certain foreclosures would be systemic risk’s equivalent to Fat Man and Little Boy’s shaped charges? Or that the accountants would fly over the smoldering debris and poor billions of gallons of gasoline on the fire?

    So was it stoopid? Obviously, but how would any CEO have been treated if he had taken some other road?

    PS – I have never owned a bank stock. I hate them.

  5. Dan,

    “any company thinking of a bailout will be s o afraid of arbitrary and capricious federal oversight that it will not ask.”

    Respectfully disagree. If it comes to that the instutions which might be saved will delay applying for help until it is too late. If that is the goal, why not scrap the thing altogether and see what happens ? Not that I advocate Russian roulette on that one but that wd be the logical outcome. Btw. if the WSJ is correct the effect described has already been observed.

    Given the degree of public hysteria at present – with BHO joining in instead of doing his job as leader – it will be interesting to watch further developements.

  6. Seerov,

    The use of violence aainst AIG is clearly disproportionate. It is not the minimal amount of force ncessary to achieve our goals at the ment.

    The use of violence against AIG by sub-state actors is also terrorism, of course.

    A 90% tax is. [1]

    fabius.maximus.cunctator,

    Respectfully disagree. If it comes to that the instutions which might be saved will delay applying for help until it is too late. If that is the goal, why not scrap the thing altogether and see what happens ?

    The problem is that given our extremely powerful executive branch, it is difficult to see how such a reversal could be actually be achieved.

    Our system knows how to operate firms that simply cannot fail. The model we want for companies like AIG and Citi is utilization.

    As to the concern that utilization would allow for creative destruction, rather than degenerative survival, that is the point.

    sonofsamphm1c,

    C was 97 cents just recently – within the last three weeks. AIG was .47 during the same timeframe. Just now C is 3.32, and AIG is 1.77. The reason why they are going up so fast is obvious. They are not zombies.

    Well, to be clear, Citi’s “profit” occured after they counted government bail-outs as income, yes?

    Given Citi’s ability to turn political connections into income, it may well be a profitable companiy. [1] But only the zombie sense, that it is leaching off the treasury.

    They never were zombies. Investors are starting to realize this.

    This would be correct if the Treasury demanded repayment in full by, say, the end of the month, and Citi and AIG continued to go up,.

    Fed. X,

    I know AIG is not a bank. That’s why I used the conjunction “and.” Both AIG and zombie banks, however, share the feature their default is feared to have risky, systemic consequences.

    That said, i agree with the rest of your comment.

    Edide,

    How do we kill them and not crash the economy though? I have not seen many convincing arguments that this could be done without severely worsening the recession.
    Or is it worth it to crash the economy in order to save it for th

    The question of whether or not the government will continue to pay off the debts assumed by AIG is important (probably as important as whether or not hte government would continue to pay off the debts assumed by the Confederacy — the answer, at that time, was “no”), but is seperate from the issue of the utilization of AIG. The technical management of a complex industry can be succssfully achieved under heavy government regulation – just no one gets rich of it.

    Unless, of course, the bad assets spontaneously become good ones, in which case we get rich anyway.

    Unless, in turn, we follow Geithner’s advice and front speculators 85% of the cash required to buy them from us [2].

    [1] http://www.tdaxp.com/archive/2009/03/22/the-90-tax.html
    [2] http://www.tdaxp.com/archive/2009/03/21/the-latest-awful-idea-from-timothy-geithner.html

  7. “The use of violence aainst AIG is clearly disproportionate. It is not the minimal amount of force ncessary to achieve our goals at the ment.” (tdaxp)

    Not sure what you meant here but it is quite telling that the media doesn’t call the anti-capitalist hysteria of late “hate speech,” when it does actually make people–who are totally ignorant of the current situation–to actually act hateful? Somehow Lou Dobbs takes part in “hate speech” when reporting on illegal immigration but Jon Steward or Keith Olbermann are not for doing the same relating to “Wall Street” or “deregulators.”

  8. Seerov,

    I’m not aware of any anti-capitalist rhetoric that’s been given national prominence. Can you provide an example of some?

    (I don’t watch either Stewart or Olberman, to perhaps I’m missing the nonsense from them…)

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