As the Senate takes up its version of the violation of Article 1, Section 9 of the Constitution, also known as the bill to tax the hell out of the AIG bonuses, one note of sanity sounds through. Sen. John Kyl:
“I don’t believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences,” he said.
“Frankly, I think that’s how we got into the current mess,” he added.
Heh … ya think?
Not that it matters – this will most likely pass the Senate as well and be signed into law by “Constitutional Law Professor” and President Barack Obama, but when it ends up in court and is declared unconstitutional, it shouldn’t come as a surprise. The Constitution always takes a back seat to populism and CYA.
So much for I only knew about this last Tuesday”. And this was the guy Democrats said we had to have beceause his brilliance was such that we should over-look his tax problems?
Treasury Secretary Timothy Geithner told CNN Thursday his department asked Sen. Chris Dodd to include a loophole in the stimulus bill that allowed bailed-out insurance giant American International Group to keep its bonuses.
In an interview with CNN’s Ali Velshi, Geithner said the Treasury Department was particularly concerned the government would face lawsuits if bonus contracts were breached.
Geithner told Velshi Thursday he takes full responsibility for the situation.
After spending most of a week denying he even knew about it prior to last week. I don’t think Geithner understands what taking “full responsiblity” really means (or should mean). Oh, and see Goodwin’s quote below.
Al Qaeda having difficulty establishing sleeper cells in the US? Not a problem – let the Attorney General help:
European justice ministers met with Mr. Holder earlier this week and pressed for details on how many Guantanamo prisoners the U.S. planned to release domestically, as part of any agreement for allies to accept detainees. Mr. Holder said U.S. officials would work to respond to the questions European officials have over U.S. Guantanamo plans.
For “people who can be released there are a variety of options that we have and among them is the possibility is that we would release them into this country,” Mr. Holder said. “That process is ongoing and we’ve not made any determinations or made any requests of anybody at this point.”
Seriously, anyone – sound like a better option than keeping Gitmo open and these prisoners there until and unless another country can be found to take them?
Even AP seems to be figuring it out. Here’s an analysis by AP’s David Espo discussing the AIG debacle:
Which goes to the crux of the Democrats’ current political problem.
Gone are the days when they could merely bludgeon the Bush administration and promise to seek bipartisan solutions to the nation’s economic problems.
Now, in control of the White House and Congress, they are struggling to come up with an explanation for what no one in either party seems moved to defend.
You can’t help but snicker a bit, can you?
Here’s about as succinct a summary of the Obama administration to date that I’ve seen:
President Obama still enjoys the popularity that comes with not being George Bush, especially in a city top-heavy with Democrats. But his initial response to the global calamity that he found on entering the Oval Office has not inspired popularity’s more sober elder brother, confidence. Large constituencies, notably business, are voicing their scepticism openly. The President’s much-vaunted $787 billion stimulus package is being widely interpreted, even by some of those (such as Warren Buffett, America’s second-richest man) who openly supported Mr Obama for the presidency, as a serious failure.
And I don’t foresee it getting much better. Of course the summary comes to us via the British press (Simon Heffer) who have the luxury of being once removed from the situation and therefore have the ability to be somewhat more objective than much of our own media.
For instance, the much more perceptive analysis of the AIG mess:
Conscious that he has made mistakes, and conscious especially of the increasing perception that he is simply throwing cash at unreformed institutions in the hope that something will happen, Mr Obama is trying to raise his game. He had a soft target two days ago, when he joined in America’s outrage at the paying of bonuses to executives of AIG, the sinking insurance giant now buoyed by public money. This provoked further attacks on him from the Right. Why was he using US taxpayers’ money to bail out a company whose main investors were French, German, Swiss and British banks? And wasn’t he merely jumping on the bandwagon of attacking the bonuses to distract attention from his own policy failings – creating a bogeyman in the same way that Gordon Brown and Harriet Harman did with Sir Fred Goodwin last month?
And of course, we’re witnessing how poorly that’s turning out (you know there’s a political problem when the CEO of AIG comes off as a more sympathetic figure than Barney Frank and Chris Dodd).
Heffer says that instead of concentrating on what ails us financially, Obama has another much broader agenda:
Instead he has been trying, on a broad front, to fulfil the reformist ideal that informed his election campaign. Rather like a would-be government in Britain that talked of “sharing the proceeds of growth”, the candidate who wanted to redistribute wealth now, as President, has no wealth to redistribute. A $3.6 trillion budget showed little sign of addressing the problem of stimulating demand. Both big corporations and small businesses feel overtaxed, their competitiveness hampered, and incapable of creating jobs at a time when they are desperately needed. Mr Obama’s green agenda, which was also a significant part of his election promises, entailed higher taxation that will retard the economy just when it needs to grow. His greatest ambition – of starting a national health service – seems impossible in the present climate. As he seeks to move forward on this broad front Warren Buffett himself has attacked him, saying that his first three priorities should all be the economy. Paralysed by inexperience and a Blairish desire to be liked, and hampered by inadequate senior staff, he is now finding that even some of his own party in Congress feel he has gone too far in the socialist experiment. Mrs Pelosi admitted at the weekend that a second stimulus package – which leftist Democrats are calling for, to the horror of much of the rest of America – was not yet on the cards.
Dead on right. The line “paralyzed by inexperience and a Blairish desire to be liked, and hampered by inadequate senior staff”, strikes home. It is a particularly lethal political combination which we’re seeing displayed in spades. It is no longer a comedy show, it has become a horror show. And with the move by the Fed to buy back long-term bonds, the horror is only deepening.
And we’re stuck looking to Timothy Geithner, Barack Obama and Chris Dodd for salvation? Lord help us all.
[HT: Joel C.]
Our congratulations go out to the Obama administration on their latest foreign policy and trade triumph. Last week, apparently without consultation, they did away with a NAFTA pilot program which allowed Mexican trucks to deliver goods to certain areas of the US. Mexico has responded:
Mexico has released the list of U.S. products that will see tariffs of 10 percent to 45 percent. The move is in retaliation for the U.S. scrapping a test program allowing Mexican trucks to deliver goods beyond a U.S. border zone.
Among affected goods are certain fruits and vegetables, wine, juices, sunglasses, toothpaste and coffee, according to a government statement. Most tariffs are 10 percent to 20 percent, with unspecified fresh products subject to a 45 percent charge. The tariffs will apply to $2.4 billion of goods and take effect today.
Just what you need in a down economy – punitive tariffs for political stupidity. And there won’t be a solution anytime soon:
Talks to diffuse the first [self-inflicted -ed.] trade dispute of President Barack Obama’s administration can’t begin until the U.S. has a Commerce Secretary, Economy Minister Gerardo Ruiz Mateos said.
So far I’m really not at all impressed with the status of the “better relations” throughout the world promised by the Obama administration.
Oh, and for an encore, how about this little goodie:
Energy Secretary Steven Chu on Tuesday advocated adjusting trade duties as a “weapon” to protect U.S. manufacturing, just a day after one of China’s top climate envoys warned of a trade war if developed countries impose tariffs on carbon-intensive imports.
Mr. Chu, speaking before a House science panel, said establishing a carbon tariff would help “level the playing field” if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one President Barack Obama plans to implement over the next couple of years. It is the first time the Obama administration has made public its view on the issue.
“If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost,” Mr. Chu said.
Jennifer Rubin at Commentary magazine’s blog rounds up the latest info on who knew what about the AIG bonuses. It’s not pretty, but, of course, we knew it wouldn’t be.
The bottom line: Dodd, after denying it, now admits he and the administration cooked up the language which afforded AIG some protection ( until the firestorm hit) to grant the bonuses.
Time magazine also reports:
Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG’s impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is 10 days before Treasury staffers say they first learned “full details” of the bonus plan, and three days before the Administration launched a new $30 billion infusion of cash for AIG. [Emphasis mine.–EDF]
It’s such a relief to have the “best and brightest” running the show, isn’t it?
I know this will come as a complete surprise, but some Democrats have been lying to you. But before we get to that, let’s review.
AIG was deemed dangerously insolvent a few months ago, so insolvent that it required the government to step in and save it. It was one of the “too big to fail” companies. It got TARP funds. Then, as a part of the “stimulus” bill, signed into law under the Obama administration, an attempt was made to add a provision to strictly limit such payments as those now causing the faux outrage:
Around the same time, Congress and Obama’s team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout. In February, the Senate voted to add such a proposal to the economic recovery bill that cleared Congress, but in final closed-door talks on the measure, that provision was dropped in favor of limits that affect only future payments.
“There was a lot of lobbying against it and it died,” said Sen. Ron Wyden, D-Ore., who proposed the measure with Republican Sen. Olympia J. Snowe of Maine. He said Obama’s team is sending mixed messages on what will and won’t be tolerated on bonuses, with the president coming out strongly against excessive Wall Street rewards but top officials not following through.
“The president goes out and says this is not acceptable, and then some backroom deal gets cut to let these things get paid out anyway,” Wyden said. “They need to put this to bed once and for all.”
They also need to “put to bed once and for all” this nonsense that they “didn’t know” until a couple of days ago. And, of course, had anyone actually read the bill that they claimed was too important to delay, they’d have actually caught this, one assumes. But it appears, at least initially, that reading legislation before it is signed is just not a priority for this administration or Congress.
And surprise, surprise, we’re finding what they did pass sucks.
While administration officials insisted Tuesday that neither Obama nor Geithner learned of the impending bonus payments until last week, the problem wasn’t new. AIG’s plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored.
A November SEC filing by the company details more than $469 million in “retention payments” to keep prized employees.
Back then, Rep. Elijah E. Cummings, D-Md., began pumping Liddy for information on the bonuses and pressing him to scale them back.
“There was outrage brewing already,” Cummings said. “I’m saying (to Liddy), ‘Be a good citizen. … Do something about this.’ ”
Around the same time, outside lawyers hired by the Federal Reserve started reviewing the bonuses as part of a broader look at retention and compensation plans, according to government officials who spoke on condition of anonymity. The outside attorneys examined the possibility of making changes to the company plans — scaling them back, delaying them or rescinding them. They ultimately concluded that even if AIG’s bonuses were withheld, the company would probably be sued successfully by its employees and be forced to pay them, the officials said.
In January, Reps. Joseph E. Crowley of New York and Paul E. Kanjorski of Pennsylvania wrote to the Federal Reserve and the Treasury Department pressing the administration to scrutinize AIG’s bonus plans and take steps against excessive payments.
“I at that point realized that we were going to have a backlash with regard to these bonuses,” Kanjorski said in an AP interview. In a meeting with Liddy later that month, he said he told the AIG chief that “all hell would break loose if we didn’t find a way to inform the public … and that we should take every step to put that information out there so we wouldn’t have the shock.”
And of course, Kanjorski is right. This is a “distraction”, as Rahm Emanuel is labeling it, that the administration could have avoided had the Treasury Secretary been on top of it and the President had exerted even a bit of leadership. Instead, both are in extreme cover-up mode. And as more and more info comes out, the time-line of events they issued has less and less credibility.
This wasn’t something that just emerged as a problem last Tuesday as Geithner is attempting to claim. This has been known and waved off for months. And that includes the provision that was going to be inserted in the “stimulus” package but died due to apparent Democratic lobbying.
Edward Liddy, CEO of AIG, has a piece in the Washington Post today. It is useful for a couple of reasons, one of which is to try to nail down the timeline in this dustup.
But first, this from another Washington Post article:
Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward.
A point or two to remember. One – $55 million had already been paid out under the very same plan in December of last year with little or no coverage. This wasn’t something new nor should it have been a surprise. This was a plan that was already in place and one has to assume, unless they weren’t doing their jobs, known to the appropriate people in the administration (not necessarily Obama, but at least Geithner).
That brings us back to the Liddy piece. Liddy joined AIG in September of 2008 to begin the difficult task of saving the insurance giant and structuring it so it was again profitable and able to pay the taxpayer funded bailout money back as quickly as possible. There’s a very telling paragraph in Liddy’s piece which makes the point that the plan which is such a huge surprise to the Treasury Secretary and President shouldn’t have been a surprise to anyone:
To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high.
In the meantime, AIG has restructured its 2009 compensation system (note the use of the word “compensation” by Liddy and not “bonuses”) and made all the cuts and changes I noted yesterday.
The fact that this is just another part of the same plan that paid out $55 million last year without a peep, was in place, per Liddy prior to his assuming the Chairmanship and has been in place for at least a year strongly argues one of two things – A) someone is not telling the truth about when they “knew” this latest payment was going to take place or B) someone was not doing their job and is now trying to cover that up like a cat covering crap.
Obama aides defended Timothy F. Geithner’s handling of the situation yesterday, with White House press secretary Robert Gibbs saying the president has “complete confidence” in the Treasury chief.
Sounds like a “heck of a job, Brownie” moment to me.
The other shoe concerning the AIG “bonuses” and the administration’s knowledge of them is beginning to drop. The Politico reports that all of the outrage from both Congressional and administrative officials is simply a front. All of them knew.
Watching the coverage the past 24 hours, it would seem AIG just made public its plans to give top employees big bonuses. Wrong.
AIG disclosed its retention-bonus program more than a year ago, including bonuses directed to those handling the exotic derivatives that got the company and the country into this mess.
The bonuses were essentially a nonissue when AIG got its initial bailout money, almost $150 billion under President Bush in the two months surrounding the presidential election. Joe Biden, then the vice presidential nominee, came out strongly against the bailout. Obama did not.
Timothy Geithner, then at the New York branch of the Federal Reserve, was a huge proponent and architect of the AIG bailout. So if Obama had strong private opposition to the idea it did not affect his pick for the person who would oversee all bailouts.
In fact, if you look at the first line in the letter AIG CEO Liddy wrote to Geithner, it is clear he at least knew about all of this before last Friday:
Thank you for the open and frank conversation on Wednesday regarding the compensation arrangements at AIG Financial Products and AIG generally. I admit that the conversation was a difficult one for me.
And there’s more:
You have also asked AIG to rethink our 2008 corporate bonus proposals. The proposals AIG originally submitted to you are part of a deliberate process, recommended by me and supported by the independent compensation committee of AIG’s board of directors.
So what you’re seeing out of the Obama administration is demagoguery at its worst. This was a plan being worked with the previous administration and the present administration, and when AIG payed those monies out last week Friday (they were required by law to do so prior to March 15), it was with the full knowledge and apparent acquiescence of the Obama administration, and, one assumes, key members of Congress.
As to the “why” of the situation, some reading of the AIGFP Employee Retention Plan – written last year - makes it clear that none of this was being hidden from anyone. And it makes for some very interesting reading – here, for instance, is the portion which details the impact of their failure to pay these “bonuses”:
Details Regarding Business Impact of Failure to Pay
AIGFP’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments therefore could have very significant business ramifications. For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million.
In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
There are also substantial risks related to the hedging of AIGFP’s various books. Although we view the large-market risk books at AIGFP as generally well hedged, the hedging is dynamic – that is, it must be monitored and adjusted continuously. To the extent that AIGFP were to lose traders who currently oversee complicated though familiar positions and know how to hedge the book, gaps in hedging could result in significant losses. This is driven to some extent by the size of the portfolios. In the interest rate book, for example, a move in market interest rates of just one basis point – that is 0.01% or one-100th of one percent – could result in a change in value of $700 million dollars if the book were not hedged. It has virtually no impact on the hedged book. There are similar exposures in the foreign exchange, commodities and equity derivatives books.
AIGFP’s books also contain a significant number of complex – so-called bespoke – transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale. Personal knowledge of the trades and the unique systems at AIGFP will be critical to an effective unwind of AIGFP’s businesses and portfolios.
In this current environment, any perceived disruption in AIGFP’s ability to conduct business, such as one that would result from the departure of a number of key employees, could also cause parties to limit or cease trading with AIGFP. Obviously, this would adversely affect its ability to continue to cost-effectively hedge its positions.
Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts and claims.
Essentially, as I pointed out this morning, the loss of key players could cost AIG and the taxpayer much, much more than the bonuses. Note the final paragraph where an example is used to point out the danger of seeing key players leave the firm while it continues to “unwind costs”. As pointed out the “personal” knowledge of the trades and transactions is critical. This isn’t necessarily about the “brightest and best”, but instead about those who know where the bodies are buried, how they got there and how to get them out of there and where they’re supposed to be. The possible downside of losing these key individuals is a potential cost of “tens of billions” to the tax payers.
Here’s something else which may interest you:
AIG has taken significant steps to limit overall compensation at AIGFP where it can and has committed to doing more. The 25 highest paid active contract employees have agreed to reduce their remaining 2009 salaries to $1. Salaries for this group ranged up to $500,000, and the average salary was in excess of $270,000. (There are apparently legal limits that may complicate the implementation of this and AIG will likely implement the lowest salary levels we can equitably put in place across the relevant jurisdictions.) The remaining 2009 salary of all other officers – anyone with a title of associate vice president or higher – is being reduced by 10% (subject to compliance with local law requirements).
In addition, other forms of non-cash compensation will be reduced or eliminated. We also believe that there will be considerably greater flexibility to reduce contractual payments in respect of 2009, and AIG intends to use its best efforts to do so. AIGFP intends to sell some of its books of business during the year. The employees related to these books will go with the sold businesses, and we intend to require the buyer to assume going-forward compensation payments.
It is also expected that, over the course of the year, employees will leave voluntarily or be terminated for cause and will therefore no longer be entitled to retention amounts from AIG. Because the plan was designed to provide security for employees, including protection against terminations without cause, AIG is required to pay the amounts owed to employees who are downsized. However, if a downsized employee finds new employment, retention amounts will be reduced by the earnings from the other employer. In addition, for employees in foreign jurisdictions who are not U.S. taxpayers, to whom the limits of Section 409A do not apply, AIG will have the ability to negotiate with employees who are downsized.
With all of these actions and other creative restructuring solutions, AIG hereby commits to use best efforts to reduce expected 2009 retention payments by at least 30%.
To review, the 25 highest paid contract employees are on a $1 a year salary for 2009. 10% salary reduction for all other officers. Non-cash compensation – reduced or eliminated. Selling some of it’s “books”. Downsizing. Retention payments for 2009 reduced by 30%.
As to the payouts themselves, this information is available:
Of the $220 million, about $165 million is required to be paid on or prior to March 15, 2009 and about $55 million was previously paid. In light of the large losses incurred last year, current and former employees will see their deferred compensation accounts reduced to the point where they will have negative balances. As a consequence there is no immediate prospect that employees will receive any payout of the at-risk piece for 2008 (about $93 million) or the remaining approximately $582 million in at risk pay earned from prior years. A senior AIGFP manager therefore worked in 2008 for about 43% of his 2007 expected level.
Did you ever hear about any of that in the phony cacophony that has blown up around all of this? AIG apparently had a plan, one has to assume it wasn’t one done in the dark, and it appears they were literally in the middle of executing it ($55 million having been paid last year and some more millions to be paid after March 15). The plan outlines how AIG planned to cut its costs while fulfilling the remaining contractual obligations they had. You and I may not like the fact that the bonuses are going out there, but if you take the time to read the retention plan, you can understand that there is a legal and financial reason for doing so.
All of this faux outrage, then, is politically calculated theater designed, as usual, to shift blame on the designated bad guy. It’s the usual reversion to populism when caught doing something unpopular. If you think a single politician, up to and including the President, is going to stand up and take blame, well, you have this example to dispel that notion. Insteadof leadership, we get demagoguery.