Economics

I make no comment. Here is AIG’s CEO Edward Liddy in today’s Washington Post:Edward M. Liddy – Repairing AIG and Repaying the Public

Wow.

AIG is some organization. Is it me, or is there nothing else going on? All the newspapers want to focus on is AIG all the time. It has become to poster child of the chaotic collapse of the Reagan era of deregulated, free-wheeling, Wall Street obsessed, ‘anything goes’ economics. Given the enormity of the errors made there I suppose it is fitting that AIG assumes this role. But let’s not forget that stupidity and hubris are the common denominator linking the entire web of financial companies, some of whom – Goldman Sachs for instance – still try to cultivate an air of superiority quite unbefitting to their record in their supposed area of expertise.

They all failed. The entire intellectual underpinning of what they were doing for twenty odd years has been exposed as an illusion. They all thought they had discovered the magic potion of perpetual risk management nirvana, and they were all wrong. Hopelessly and irretrievably wrong. This is one of those historic moments when we can look at people who previously had flaunted their expertise and the wealth it allowed them to accrue and chortle quietly to ourselves. They actually knew nothing. There pompous airs and graces – still much in evidence here in New York City I might add – are a hollow chimera. They traded and lived in what has been exposed as a delusion. Their much ballyhooed skills were so much vapid nonsense. As an elite they have proven to be worthless, their leadership, to borrow from Shakespeare, ‘signifying nothing’.

But what damage they did.

To you and me.

Their overly compensated dreamworld produced and drove asset price inflation: apartments here in New York soared in price as silly young traders flaunted their ‘wealth’. The rest of us ran faster and faster just to stay in place. I suspect a whole raft of social novels is already in production lambasting these people. None of which will wipe away the incredulous look we see on their faces as they slowly absorb the enormity of their incompetence.

There are the defiant ones of course.

Like Cassano, the former head of AIG’s toxic waste department, formerly known as it Financial Products Divisions of London and Connecticut.

This as we know was the center of the delusion. It entered into all sorts of hopelessly unnecessary financial arrangements – e.g. those ‘Credit Default Swaps’ we’ve been reading about – in order to generate vast fees for itself and the ‘traders’ who worked there. The provision of a solid business service was, it now appears, simply a flimsy excuse to justify bonuses for employees. The central business model of AIG’s toxic waste department was purely the enrichment of its employees. Satisfying a customer need or building wealth for their own shareholders were entirely secondary – if they were considered at all.

The problem with picking on AIG is that this mentality pervaded the entire system. Traders made trades to make money for themselves, not to satisfy some fundamental business requirement or to solve a problem.

On the surface Credit Default Swaps [“CDS’s”], while complicated, look as if they serve a purpose. They act as insurance policies against the loss of capital due to default by other forms of financial assets. They were one of the reasons the sub-prime mortgage mess grew unchecked: everyone thought they had insured themselves against the losses they all knew were there. CDS’s were a main plank upon which traders stood when they claimed to have solved one of finance’s great problems: how do you convert bad assets into good assets? They genuinely thought they had succeeded.

Hence the crestfallen looks.

This was case of being smart, very smart, but not thinking. In the end all they did was shift risk about a bit and, meanwhile, get paid huge fees for their efforts. As risk managers they were extraordinarily bad. Never has so much incompetence been concentrated in so few minds – in the guise of brilliance worth vast remuneration. But as illusionists they were massively successful. Never has such an act been applauded and rewarded so copiously.

The whole sad story rumbles on:

Today the New York Times gets snitty over the horrible revelation that some of the money paid to ‘bailout’ AIG actually flowed straight through to its counter-parties. In effect we were bailing them out, not AIG.

Some of those counter-parties should now wipe the smirk off their faces – I’m thinking of Goldman Sachs in particular – since they have now been exposed as stupid too. They would have suffered huge losses had the taxpayers not written the checks to AIG. They were all dumb to be involved in the illusion.

Massively and collectively stupid groupthink dominated Wall Street for decades. But the counter-parties were right to try to protect themselves. They were stupid to be in this business, but they had every right to make a claim against AIG. The story is their dumbness, not their receipt of cash.

Here’s the New York Times getting all breathless today:A.I.G.’s Bailout Priorities Are in Critics’ Cross Hairs

This is a silly story.

Under the terms of the CDS master agreement all counter-parties have certain rights. One of which is to ask AIG to put up more collateral if its credit rating goes down. This is normal. Last September AIG was downrated. Counter-parties asked for more collateral. AIG ran out of cash. And the rest is history. So in reality any taxpayer money going into AIG last year was exactly and completely for the single purpose of making payments out to the counter-parties. Many of whom are foreign banks.

There is no news in this. None. The whipped up hysteria that the bailout somehow wasn’t really to ‘save’ AIG, but to bailout, say Goldman Sachs or Societe Generale is just silly. It was those counter-party claims, made because of collateral calls, that precipitated AIG’s collapse and thus triggered the need for a bailout. Where else was the money going to go?

And the notion that the bailout was poorly targeted because some of the money went to foreign banks is even more silly.

Banking is global. It has been for decades. That AIG did business with Deutsche Bank, Barclays or Societe Generale is not exactly a shock. That it had contractual obligations abroad is perfectly normal. The suggestion that somehow these foreign claimants should get bailed out by their own governments is plain stupidity. This was an American company that collapsed. It owed money all over the place. Tough.

The populist surge against AIG and the other banks is natural enough, but I hope it isn’t allowed to lap over into xenophobic folly. The idea that the French taxpayers should bail out Societe Generale because AIG, of New York, failed is preposterous.

The US has lived off of borrowing from abroad since Reagan set us on the path of deficit spending. It is hardly in a position to boss foreign lenders about. If it owes money is must pay it back. If one of its companies is bailed out it must fulfill its obligations.

Populist rage has to be channeled and dissipated. For Congress to work itself into fury over AIG is understandable, but should produce sensible regulation, legislation and firm leadership, not a backlash against foreign banks who were once a source of the cash we needed to keep our binge going.

What a mess. I will be glad when AIG finally goes away.

OK guys I have a plan.

Don’t laugh.

The problem with this whole AIG mess is that the management there is hanging onto profitable parts of the company so that they can resurrect AIG after the taxpayers have helpfully paid off all the rotten stuff. Or at least that seems to be what’s going on because not much of the company has been sold off so far despite the rumors that there are plenty of interested buyers floating around. Meanwhile the political angst builds over those obnoxious morons in AIG’s ‘Financial Products Division’ – the epicenter of the crash – getting retention bonuses.

Some of our esteemed leaders are now floating the idea that we allow the bonuses to be paid, but that then we legislate a special excise tax against companies who both receive TARP or other bailout money and pay bonuses. This way we recoup the bonus money cash. The problem is that this might stop AIG paying well earned bonuses to employees of its good businesses.

So: we have AIG being slow to dismantle itself in the hope of surviving. And we have the need to free the good businesses so the employees there can go ahead and get paid their due. Both problems point to the need to accelerate the selling off of the good bits of the company.

So here’s my plan:

The government should stop immediately any further injections of capital to offset the losses of the rotten business. Instead it should give out loans to companies willing to purchase divisions of AIG. This will grease the skids and accelerate sale. The cash still ends up in AIG’s hands, but only once they’ve started an honest effort to dismantle themselves. The companies who receive the acquisition loans will have to repay the government over time – I would peg the repayment periods and amounts to the cash flows of the good AIG businesses being acquired. At the end of repayment the acquiring companies are left with healthy profitable divisions, and the taxpayers have been repaid the capital that was funneled into AIG. The whole system benefits from the reallocation of capital away from the lunatics of AIG.

Meanwhile: this would leave AIG as a rump of toxic waste [aka the Financial Products Division] we would still have to clean up. But at least the punishment would fit the crime. As the derivatives chaos is wound down AIG would slowly shrink away to nothing and would eventually pass into history where it belongs. In effect this plan is the opposite of a ‘bad bank’ plan since it leaves the rotten stuff on the balance sheet rather than removing it.

The advantages of my plan?

It forces the elimination of AIG. It enables the redistribution of AIG’s good businesses into more capable management hands. It accelerates the disposition of AIG’s assets. It puts a ring around the rotten stuff. It enables but limits capital inflows into AIG only for constructive purposes. It allows the taxpayers to be repaid the acquisition capital component, and thus reduces the burden on future Federal deficits. And it allows the employees of the good businesses to return to normalcy more quickly. Oh and it lets us hammer the lunatics in the asylum for the repayment of those awful retention bonuses.

The downside to my plan?

It is my plan not Tim Geithner’s. So it won’t see the light of day.

Oh well.

At least I tried.

The financial system is in tatters. It deserves to be. Yet scarcely a day passes without some key figure within the banking or broader financial world saying something breathtakingly arrogant. These people are truly nasty and disconnected from reality.

It seems not enough for them to have destroyed the various companies they run. Or to have threatened the livelihoods of countless innocent fellow citizens. Or to have extorted billions of dollars of taxpayer money. No. They still appear on television or in print spouting about how the world ‘needs’ a healthy banking system; about how upset they are about their current image; or about their disgust at the strings the government is attaching to the bailout money they have all eagerly accepted.

Enough.

Shut up people.

You are manifestly stupid. Or else you would not have driven your companies onto the rocks. You are lucky still to be employed. Your credibility is shot. Your personal opinions about the state of affairs has become an embarrassment. So please be quiet and let the grown ups fix the problems you have created.

Banking is the epicenter of our economy. By its nature it involves taking risks. Banks take short term deposits and other funds and turn them into longer term loans and other assets. They make profits by absorbing this risk. They grease the wheels of industry by making funds available for factory and office construction. They enable regular citizens to borrow so that they can own cars and homes. They act as guardians of our cash and savings for retirement. This is an immensely important set of functions. And they require skill, judgement and above all else a sense of fiduciary responsibility.

A banker should be the very epitome of solid citizen.

Which is why these people now coming out of the woodwork representing our banks are such a screaming disappointment. They took unbelievable and unsustainable risks. They undermined the public trust. They gambled in derivatives products they scarcely understood. They ran roughshod over their own risk managers whenever warning flags were raised. They lobbied to avoid being regulated. They bought political influence. They hired arrogant yahoos and gave them freedom to wheel and deal untrammeled by internal controls, or even the need for sensible business models. They concentrated rather than dispersed risks. They frittered away their shareholders wealth as if it were waste water.

In short they played at banking as if it were some fraternity house weekend orgy.

Their sense of proportion was swept away by the massive profits their traders piled up in the maze of esoteric and entirely self serving products we are now all far too familiar with. The derivatives market became a global ponzi scheme with only one reason for being: the enrichment of the children sitting at the trading desks. That business was as far from being justified as banking as a trip to the casino would be.

So stop.

Please just stop.

You have demeaned the industry. You have demeaned yourselves. There are many fine and upright banking people who are horrified at the waste you laid to the companies they have loyally built. They did not share in the riches you syphoned off for yourselves. Yet they have to share the public abuse now heaped on the industry.

So please stop.

And reflect on the enormous, almost historic, stupidity of your incompetence and failure before you utter one more word in public.

You have not one shred of credibility.

Addendum:

Jamie Dimon runs JP Morgan Chase
Lloyd Bankfein heads up Goldman Sachs
Richard Kovacevich is Chairman of Wells Fargo

All three have recently made asinine and outrageously arrogant comments about banking or how important they still are. Clearly they don’t yet ‘get it’.

The Washington Post is reporting that AIG rage has officially arrived in suburban Connecticut where AIG Financial Products Division has offices. Here’s the story:Rage at AIG Swells As Bonuses Go Out

I have no concern whatever for these ‘poor’ folks who are now receiving threatening e-mails and so on. Their behavior was sociopathic. They held the public in extreme contempt and were only concerned with a self-centered race for greed. Not only that, but they became a cancer on the company they worked for and grew so fast and malignant that eventually they destroyed it.

So while I deplore populist rage spilling over into actual physical action I cannot summon any sympathy for the traders etc at AIG. They deserve to be humiliated so that their arrogance can be exposed, and their so-called skills revealed as an illusion.

Meanwhile …

It is looking more and more likely that the government will have to cave in on those bonuses. It is sickening to learn that we have been scammed by these morons to this degree, but we seem to have no choice. Once the administration backed away from a court fight, which they appear to have done last night, there was no choice but to cave.

So we now are in a world where a rogue and demented group of sociopaths can hold the entire country to ransom for pay. They can earn a fantastic salary for ruining not just a once proud company, but an entire financial system. Apparently their manifest incompetence and earth shattering failure is of no concern to them. And, equally, we all have to suck it up and support their overly lavish lifestyles and their enormous egos for one more year.

Why?

Because they might throw a hissy fit and walk off, leaving us with the pile of muck they created.

Kindergarden children have a better sense of social comportment than these nasty people.

Still let’s look on the bright side: these pay outs are the last. We will be done with them soon. Their only job currently is to dismantle the play house they erected for themselves.

Or at least I hope so.

AIG has become a monumental stain in the history books. A rotten company. Rotten management. And a particularly virulent form of hubris.

How can you not be mad at these people?