Questions and Observations

Free Markets, Free People

Newspeak: Pelosi Style

Up is down. In is out. Billions in earmarks are no big deal, but millions in “bonuses” merit extreme outrage. And now, per Speaker Nancy Pelosi, illegal aliens represent the height of patriotism, but enforcing American laws is “un-American”:

No I can't!

No I can't!

House Speaker Nancy Pelosi recently told a group of both legal and illegal immigrants and their families that enforcement of existing immigration laws, as currently practiced, is “un-American.”

The speaker, condemning raids by Immigration and Customs Enforcement agents, referred to the immigrants she was addressing as “very, very patriotic.”

“Who in this country would not want to change a policy of kicking in doors in the middle of the night and sending a parent away from their families?” Pelosi told a mostly Hispanic gathering at St. Anthony’s Church in San Francisco.

As some might say, that’s muy estúpido. But the Speaker wasn’t done:

Referring to work site enforcement actions by ICE agents, Pelosi said, “We have to have a change in policy and practice and again … I can’t say enough, the raids must end. The raids must end.

“You are special people. You’re here on a Saturday night to take responsibility for our country’s future. That makes you very, very patriotic.”

Our country? Perhaps Pelosi is unclear on the concept of illegal immigrants? Do you think she realizes that they are not part of our country?

And the idea that enforcing our immigration laws is somehow “un-American” is beyond ludicrous. Although, when you consider this is coming from the party that seems to think paying taxes is a only a patriotic duty if you aren’t working for the Democrats, then I suppose it makes sense.

In the spirit of Pelosi’s newspeak, may I just say that the Madam Speaker is clearly a thoughtful and intelligent lawmaker who is doing a fine job at her post.

[HT: HotAir HL]

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AIG: What Did They Know And When Did They Know It?

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.

~McQ

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Iran, Hezbollah and the Americas

Iran isn’t just fomenting unrest in its home region, it has found a new area to spread the revolution and fund it:

Iran is increasing its activity in Latin America and the Caribbean, including actions aimed at supporting the Lebanese militant group Hezbollah, a top U.S. military commander said on Tuesday.

Navy Admiral James Stavridis, who oversees U.S. military interests in the region as head of U.S. Southern Command, also said Hezbollah was linked to drug-trafficking in Colombia.

“We have seen… an increase in a wide level of activity by the Iranian government in this region,” Stavridis told the Senate Armed Services Committee.

“That is a concern principally because of the connections between the government of Iran, which is a state sponsor of terrorism, and Hezbollah,” he said.

The U.S. State Department lists the Lebanese-based political and military movement as a terrorist organization.

Stavridis said Hezbollah activities in South America have been concentrated particularly in the border region between Brazil, Paraguay and Argentina, but also in Colombia.

“We have been seeing in Colombia a direct connection between Hezbollah activity and narco-trafficking activity,” the commander added, without providing specifics.

Of course, one of Iran’s NBFs in the area is Venezuelan strongman Hugo Chavez. And he’s not the only one as reported by Todd Bensman:

But with the exception of my own coverage, there’s been hardly a peep about the fact that Iranian President Mahmoud Ahmadinejad planted the Iranian flag so far north in Nicaragua as soon as the time-tested American nemesis Daniel Ortega took office in January 2007. In fact, Ahmadinejad considered Ortega’s ascension so important that he was in Nicaragua to attend the inauguration. Within months, Iran was promising hundreds of millions in economic projects — and quickly set up a diplomatic mission in a tony Managua neighborhood where it could all supposedly be coordinated. Now Iran is extending its reach even further north, right into Mexico City with equally under-covered proposals to vastly expand tenuous ties to America’s immediate southern neighbor.

Hey, we mess around in Iraq and Afghanistan, they mess around in Mexico. Of course all we have to do talk to them and we can straighten this all out, right?

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Government Health Care, Please

Another anecdote that makes you want government run health care so badly you can just taste it:

The full extent of the horrific conditions at an NHS hospital where hundreds may have died because of ‘appalling’ care was laid bare yesterday.

Dehydrated patients were forced to drink out of flower vases, while others were left in soiled linen on filthy wards.

Relatives of patients who died at Staffordshire General Hospital told how they were so worried by the standard of care they slept in chairs on the wards.

The ‘shocking’ catalogue of failures was released yesterday after an independent investigation by the Healthcare Commission.

It found Government waiting time targets and a bid to win foundation status were pursued at the expense of patient safety over a three-year period at Mid-Staffordshire NHS Trust.

The commission’s report – revealed in yesterday’s Daily Mail – said at least 400 deaths could not be explained, although it is feared up to 1,200 patients may have died needlessly.

Nice. And I’m sure, somewhere, some politician or bureaucrat will claim that the problem, naturally, is “lack of regulation”.

And by the way, if you’re wondering how much the American version will cost, here’s the first estimate.  Remember, when looking at it, how often these sorts of estimates are so low they’re not worth the paper they are written on – figure anywhere from 2 to 4 times the figure once the government gets done being “efficient”:

Guaranteeing health insurance for all Americans may cost about $1.5 trillion over the next decade, health experts say. That’s more than double the $634 billion ’down payment’ President Barack Obama set aside for health reform in his budget, raising the prospect of sticker shock at a time of record federal spending.

Thus the nice “downpayment” with money we don’t have. 

~McQ

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Russia: The New Military and The New Currency

Russia is our friend. Don’t believe it? Well let’s look at a couple of things.

Just as the US starts talking about cutting defense spending and axing weapons systems and programs, what are our friends in Russia doing?

President Dmitry Medvedev on Tuesday announced a “large-scale” rearmament and renewal of Russia’s nuclear arsenal, accusing NATO of pushing ahead with expansion near Russian borders.

Meeting defence chiefs in Moscow, Medvedev said he was determined to implement reforms to streamline Russia’s bloated military and stressed Moscow continued to face several security threats needing robust defense capacity.

“From 2011, a large-scale rearmament of the army and navy will begin,” Medvedev said.

He called for a renewal of Russia’s nuclear weapons arsenal and added that NATO was pursuing a drive to expand the alliance’s physical presence near Russia’s borders.

“Analysis of the military-political situation in the world shows that a serious conflict potential remains in some regions,” Medvedev said.

So, new nukes and large-scale rearmament in the face of US defense cuts. As the article asks “reset” or new Cold War?

And then, just to really upset the apple cart, how about a new currency?

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community,” the Kremlin said in a statement issued on its web site.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

The Kremlin has persistently criticized the dollar’s status as the dominant global reserve currency and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia.

Now there’s not much “there” there as it pertains to this initiative, but it another indicator, among many, that the “Joe Biden Challenge” is alive and well and Russia is in the running to bring it to fruition.

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The Phony Cacophony – Congress, The President and AIG

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.

~McQ

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Community Organizing From the White House (Budget and AIG)

Once a community organizer, always a community organizer, I suppose – from an email I received recently from the Obama campaign email list:

The current debate in Washington over President Obama’s budget has made one thing clear — ensuring our long-term prosperity won’t come without a fight.

Partisan voices and special interests are showing real resistance to President Obama’s call for making the necessary reforms and investments in energy, health care, and education. That’s why we need to bring the conversation back into homes and communities across America.

Last week, thousands of you pledged your support for the President’s economic plan and encouraged your friends and family to join you in a national display of support. Now I need you to take the next step.

This weekend, supporters like you are organizing Pledge Project Canvasses to talk to people in their communities about this plan and mobilize support in neighborhoods across the country.

The eternal campaign continues with attempts to solicit the same ground support “magic” the campaign was able to solicit during the presidential campaign. However, doing that during a campaign when the focus is a person and his promises vs. attempting to do that when the person in question has gained the office and is now talking about concrete proposals which may or may not be in the best interest of the country isn’t quite as easy.

A couple of thoughts on this sort of an attempt. One – the tie that binds (getting Barack Obama elected) doesn’t necessarily extend to things like the budget or other specific issues. So the group that accomplished the former aren’t necessarily unified on the latter. That tends to promise lower turn out in the community events or, if they show up, some discord.

Two – the assumption is these events will demonstrate the will of the people and put pressure on Congress to act as Obama asks them to act, i.e. pass his budget. But there’s no direct linkage with this sort of activity and Congress like there was during the campaign when this sort of activity could be converted to votes. The Obama campaign used to brag about the “house parties” that were held at a grass-roots level demonstrating the power of his campaign and the promise of the votes to come. None of that translates into the same sort of power when aimed at Congress.

Three – it again demonstrates that the administration still hasn’t managed to get itself out of the campaign mode. Another example of that has been the AIG bonus debacle. Treasury Secretary Timothy Geithner and AIG CEO Edward Liddy discussed the bonuses on the 11th of March. Liddy sent Geithner a letter on the 14th explaining the reason for them and the possible impact of not paying them (explained in the AIGFP Employee Retention Plan). It’s not about “retaining the best and brightest”. In fact, it is a calculated method of hedging their risk and ensuring the tax payer doesn’t end up on the hook for even more billions in bailouts.

Instead of calmly explaining this in a joint press conference with AIG, Geithner and the administration chose to fan the flames of outrage and use it for political gain.  That isn’t leadership, that’s politics.  And it is also an administration in the campaign mode.  That’s a dangerous mode to be in, especially at this time and place.  When given the opportunity to have a frank and tough discussion with the public about bonuses it knew were going to be paid and explaining their necessity, the Obama administration reverted to the populist campaign mode of demonizing AIG instead of calming the emotions and fears of the public.  

~McQ

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Change means more taxes, more spending

It’s hard to imagine that government could grow as much as it did during the Bush Administration, but Barack Obama seems determined to top his predecessor:

During his presidential campaign, President Barack Obama promised the American people a “net spending cut.” Instead, he signed a “stimulus” bill that spends $800 billion, and he has proposed a budget that would:

  • Increase spending by $1 trillion over the next decade
  • Include an additional $250 billion placeholder for another financial bailout
  • Likely lead to a 12 percent increase in discretion­ary spending
  • Permanently expand the federal government by nearly 3 percent of gross domestic product (GDP) over pre-recession levels
  • Raise taxes on all Americans by $1.4 trillion over the next decade
  • Raise taxes for 3.2 million taxpayers by an average of $300,000 over the next decade
  • Call for a pay-as-you-go (PAYGO) law despite offering a budget that would violate it by $3.4 trillion
  • Assume a rosy economic scenario that few econo­mists anticipate
  • Leave permanent deficits averaging $600 billion even after the economy recovers; and
  • Double the publicly held national debt to over $15 trillion ($12.5 trillion after inflation).

H/T: Club for Growth

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Underlining “Contradictory and Confusing”

No one with any sense is going to argue that AIG should be doing what it is doing or that the insurance giant isn’t absolutely tone-deaf to the dirge playing within the economy. But the effort and the PR agenda to reclaim the bonus money pursued by our new president just underscores the “confusion and contradiction” his actions and words engender.

President Obama vowed to try to stop the faltering insurance giant American International Group from paying out hundreds of millions of dollars in bonuses to executives, as the administration scrambled to avert a populist backlash against banks and Wall Street that could complicate Mr. Obama’s economic recovery agenda.

We’re talking “hundreds of millions” of dollars here. But when confronted by a omnibus spending bill with hundreds of billions of dollars in 9,000 pork projects, meh, no biggie – “last year’s business.”

~McQ

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