Friday, March 20, 2009
Torches and Pitchforks
It's getting ugly out here. The very mention of A.I.G. or Timothy Geithner can cause normally mellow folk to begin frothing. In fact, some folks remain in a constant state of froth, e.g. Barney Frank and other lesser known bulbs in the House of Representatives. (You would think, Barney being openly gay and all, that he would be a snappier dresser but the constant frothing does go well with the rumpled appearance.)
I recently read an "outraged, outraged, I tell you," essay by no less a financial maven than the ever-popular and ever-present Jesse Jackson. Try this yourself: stand on your front lawn and whisper "social injustice" into the wind and chances are that within 24 hours, Jesse will be at your home with an entire cadre of indignant, placard-bearing and out-of-work protesters eager to shout slogans for your cause. Now, what was your cause, exactly? Can we create a brief chant with hackneyed rhymes?
Anyway, Jesse was predictably railing about the way A.I.G. shoveled taxpayer money out the door to such scumbags as Goldman Sachs, Citibank, Deutsche Bank of Germany, (Germany for chrissakes!) et al. He referred to this process as "injury" to which A.I.G. then added "insult" by paying $165 million in bonuses to its own employees.
The populists and their mob of followers have swooped in and are pulling the guillotine out of storage. Similar to the French experience of the eighteenth century, when heads begin to roll, the crowd gets less and less discriminating about whose heads, as long as the show goes on. If he wasn't currently dead and headless, you could ask Robespierre about the way that these mobs eventually eat their own.
Excuse me while I clean the spittle from my keyboard. All this talk of railing, raging and indignation has created quite a lather. There, I've calmed a bit.
I wasn't sure who Jesse thought that A.I.G. should pay the bailout money to if it wasn't to the firms to whom it owed the money. I soon learned.
Believe me, I am not defending A.I.G.'s business model, wherein they created unfunded insurance products and called them "Credit Default Swaps" so that they could avoid the established rules of insurance regulation. Anyway, they did, sold barrels of them to Goldman Sachs, Citi, Deutsche Bank, et al, all while the regulators shuffled papers for several years. Well, when the credits "defaulted", A.I.G. owed these bank customers barrels of settlement money. Because they hadn't established a fund to pay off claims (as legit insurers are required to do), A.I.G. was in deep doo-doo (a technical financial term, that). And, because the banks had bought these swaps to protect themselves from the eventuality of credits defaulting, they were getting no money from defaulting borrowers nor money from A.I.G. to cover the losses. Deeper doo-doo.
Timothy Geithner to the rescue with $170 billion for A.I.G. Now, A.I.G. may well be run and overrun with avaricious, scheming, soulless jerks but, by law--you remember the law--they were required to use the money to pay their obligations. I hope that they negotiated some cents-on-the-dollar deal but I know nothing about the terms. Their obligations were owed to the banks that bought the credit default swaps.
Jesse apparently thinks that A.I.G. should have taken the $170 billion, ignored the law and used the funds to pay off student loans. Actually, he says, the government should never have given A.I.G. money in the first place and instead, just wipe student loan debt off of the books as an "investment in our future". No doubt, the Rainbow/PUSH Coalition will print up bumper stickers, "Students Don't Pay and Save the Day."
Addressing student loan issues is a worthy endeavor; I know because my oldest is a struggling surgery resident with a whopping student loan debt clouding his future. However, Jesse's solution is the same as pouring money into more firefighter training when the house is ablaze.
Here's a handy tip: If a solution to the current international financial crisis can be put on a bumper sticker it is not the solution. The populist mob may think so, may give a "thumbs up" as they pass by on their way to the next beheading, but they'll be wrong. In this instance, solving the current banking crisis has nothing to do with solving student loan issues.
As for the $165 million in A.I.G. bonus money, which is .001 percent rounding error of the $170 billion in taxpayer money that A.I.G. has sucked up, it's a public relations disaster but it has also created a populists legislative reaction that is way over the stupid line.
There are thousands of bank employees in the tub of TARP bathwater, a very tiny percent of whom had any hand in creating sub-prime loans, derivatives based on securitized debt, credit default swaps, and all the other creative products that built the house of sticks that is now burning brightly. Even so, blustery Barney and a whole posse of do-righters wants legislation to impose a 90% tax on bonuses of employees of any institution that was asked by the government to take TARP money. The populist solution is this: the greedy bastards are in there somewhere, throw out the entire tub.
There will be some game-changing unintended consequences if this legislation passes and unfairly punishes thousands of hard working financial executives whose primary reward for their long hours and honest effort is a lump of coal. These folks vote and so do their families and friends. I have first-hand knowledge of this issue, up close and very personal (by way of full disclosure).
For those readers who have already decided that the only good banking executive is a headless banking executive, I challenge you to a spit-wad duel at ten paces--make that eight paces--and bring your own drinking straw and spit-wads. The first one to lose temporary vision in one eye, loses.
Observoid of the Day: It's really strange that flammable and inflammable mean the same thing.