March 20, 2009

Excerpts from:

Bonfire of the Trivialities
By Charles Krauthammer
Friday, March 20, 2009; Page A19

A $14 trillion economy hangs by a thread composed of (a) a comically cynical, pitchfork-wielding Congress, (b) a hopelessly understaffed, stumbling Obama administration, and (c) $165 million. That's $165 million in bonus money handed out to AIG debt manipulators who may be the only ones who know how to defuse the bomb they themselves built.

For this we are going to poison the well for any further financial rescues, face the prospect of letting AIG go under (which would make the Lehman Brothers collapse look trivial) and risk a run on the entire world financial system?

And there is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?


Democracy Lover said...

Krauthammer does come up with a good title here, but what follows is rather convulted nonsense.

There is such a thing as law and contracts between a company and its employees, however if that is a contract between an employer and its unionized workers, Krauthammer is all for re-negotiating and forcing concessions. When it is for highly-paid executives who are personally responsible for making incredibly stupid and risky investments, we have to let those contracts stand. Hypocrisy.

The economy does not hang by the thread of the $165M in AIG bonus money, that's a pittance compared to the billions in taxpayer dollars that have been tossed into AIG, not to mention the other financial giants that have lined up at the TARP trough.

The problem here is with the Obama economic team that seems intent on repeating the mistakes of the Bush team and throwing money at the problem with no accountability or oversight. There is absolutely no reason why the executives and managers who made this mess should be given the responsibility of fixing it. The people who made risky investments should lose their shirts - isn't that what free-market capitalists like Krauthammer claim to believe?

Muggins said...

There's a slight difference between re-negotiation, and claw back or retroactive taxation. I agree that the economy does not hang on $165m, and I am definitely not one of those who are outraged. We don't know where the exact blame lies at AIG, and to assume that the execs who were given the bonus' were the ones responsible for "this mess" is not based on anything but assumption. We don't know where exactly in the AIG hierarchy the decision was made to become over-leveraged. I doubt it was middle managers. Our first priorities are to avoid a depression, and later to re-regulate. We need less Barney Frank harping about compensation and corporate jets.

Democracy Lover said...

When you are CEO of a corporation, you are responsible for everything that happens in that company. If you are VP or Director of a division of a company, you are responsible for everything that happens in that division. If you aren't doing your job, you should be fired and if you don't know that your subordinates are selling ridiculous crap like CDO's and Credit Default Swaps that are openly traded then you are one hell of a dumbass.

Let's not kid ourselves. The AIG executives knew what was going on and they didn't care because they were making a pile of money. Like any businessman, they took risks and like any businessman, if those risks turned out to be bad ones they should bear the cost not the taxpayers.

Krauthammer and others in the Washington elite are hot to squash any popular discontent by telling us that the management of these companies are really smart people who are the only ones who can fix things. Trouble is, we know they aren't that smart or they wouldn't have got into this mess in the first place.

Muggins said...

I don't know about squashing, but populist movements are subject to criticism just like everything else.
The point made by the AIG CEO, Ed Liddy, in the congressional hearings this week was that the execs who were responsible for the strategic decisions to take too much risk were gone, and the ones receiving bonus' were not those people. But the people are furious, so we have to blame more AIG people? Or they're furious because the taxpayers are footing the bill for the bonus', or they think that the people getting the bonus' are the ones who created this mess. Or all of the above.
It's true that the compensation system in corporate America is broken and needs fixing, but I would rather we fix the low velocity of money, and in the case of AIG, sell off much of it's assets thereby reducing the size of that outfit. And then without fury, fix Wall Street, which means rewrite some regulations, and invest in a more
effective oversight system. The Congress should think twice before they go to blame city on the problems facing our economy, especially Barney Frank.

Democracy Lover said...

I would agree that the focus on the bonuses is stupid petty politics. The real issue is the trillions of dollars that the Treasury and the Fed are pumping into corporations with no conditions, no oversight, and no controls.

We got into this pickle because governments of both parties fell for "voodoo economics" with its deregulation, privatization, and weakening of government. That system could work only if all the players were prudent, honest and rational - not bloody likely.

Now that we are here, it makes little sense to put the foxes in charge of the hen house. The idea that these are smart trustworthy guys who are going to do the right thing with our tax money is absolutely ludicrous.

Muggins said...

I don't think Ed Liddy is one of the culprits, since he's working for free. According to Liddy, AIG is in the process of selling off assets to pay back the govt., and resolving the more riskier investment vehicles while keeping AIG solvent. It is in the taxpayer's interest for AIG to remain solvent. Down the road, we need regulation, transparency and oversight to ensure that excessive risk by banks, and firms that act as banks, do not endanger the economy. The compensation issue is difficult. I don't like most of the hair brained suggestions I've heard to regulate compensation. I think that the problem lies with states like Delaware that provide corporate boards with virtual isolation from the stockholders. We need to review those state laws in places like Delaware and clean up this problem so that the stockholders have more power in corporations.

Democracy Lover said...

The government has spent $170 Billion to keep AIG afloat because a division of AIG invented a type of investment/insurance that is little more than a complicated Ponzi scheme. I agree that had to be done because AIG's scheme was far too successful and the entire financial system could have been brought down if they went bankrupt.

What I don't like is seeing shareholders and executives who either went along with the scheme or accepted the risk involved in owning stock rewarded or even made whole by the government. Businesses and investors who take risks should get the rewards and accept the losses.

The other problem is that without regulation, this problem will happen again. Executive compensation is really incidental here. It's not even 1% of the total received by AIG.

The important issue here is that insurance companies should not be permitted to be securities firms or banks and they should be subject to reasonable capital reserve requirements. When new investment derivatives are created, they should be subject to approval by regulators in order to determine whether they are sound and whether investors are being properly advised of the risks.

Better corporate governance would be a good idea, but it's not enough. We have to realize that depending on people to do the right thing when they stand to make millions by lying, cheating and stealing is just dumb.


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