Bailout Nation: Freddie, Fannie, and more

[TheNiche]

The rest of it is so wacked I won't ever bother responding to it.

I win.

[Rammer]

Put it together people.

Who connects 1)Enron, 2)to Investment Banks, 3)to Wall Street, 4)to Congress, 5)to the SEC, 6)to Foreclosures, 7)to UBS, 8)to AIG???

PHIL GRAMM!!!

1) Wendy Gramm took down Enron via her commodity rule changes as chairperson of the CFTC.

2) The Gramm-Leach-Bliley Act (GLBA) allowed heavily regulated commercial banks to merge with lightly regulated investment banks.

3) Gramm's 'Commodity Futures Modernization Act' turned Wall Street into Vegas with derivatives & credit default swaps.

4) Gramm served in the Senate from 1985-2002.

5) Gramm served as chairman of the Senate Banking Committee - he underfunded the SEC so that they were unable to properly police Wall Street. Just ask Senator Carl Levine.

6) Read Mother Jones article entitled 'Foreclosure Phil'.

7) Served as vice chairman of UBS starting in October of 2002...the exact time period the IRS is currently investigating for 20 billion of hidden assets.

8) Today it was announced that UBS of Switzerland was owed $5.5 billion from AIG, thus benefitting from the AIG bailouts.

TIME magazine is probably shocked that Phil Gramm is #1 on their '25 People To Blame For The Financial Crisis' online poll...since the media is still ignorant of Gramm's dirty deeds.

[Mark F. Barnes]

ROTFLMAO!

[crunchtastic]

It is really creepy quiet at the office today. We're betting on when the protesters show up again outside the building-- our version of March Madness brackets.

Apologies to my HAIF friends if I have been rude on the boards lately. Bad case of bailout fatigue. I notice that the top 2 headlines on the NYTimes homepage are both about AIG. I wonder if that's a record?

[Subdude]

Yes, but winding down their financial products division is a little more complicated than someone coming over the PA system exclaiming "lights out", followed by a flick of a switch. AIG has not declared bankruptcy and agreements that were made previously are still in effect. Those individual employees that were involved with originating these deals are going to be valuable when renegotiating or divesting the CDS's. That is a critical function, and even (or perhaps especially) if it is a temporary function, AIG is going to need competent, experienced people in order to do this. And if you don't give them some kind of a meaningful incentive to stick around until the job is done, they're going to do just like crunchtastic is and preemptively look for employment elsewhere; nobody wants to be the last guy on a sinking ship. And if you have to replace them on this kind of a job, that's even worse. Not only would AIG end up paying a premium on highly-skilled temp labor, but they'd be bringing in people that aren't familiar with the business; that doesn't help anybody.

Guilty until proven innocent, eh? How do you know what sort of pay is adequate? How do you know that this is excessive? Besides which, I thought that the core of this issue was that AIG was honoring contracts that stipulated the payout of bonuses. If AIG doesn't pay out according to the contracts, they get sued. This should be a no-brainer. They have pre-existing liabilities; those liabilities have to be paid or else those liabilities just get transferred from one account to another on their balance sheet, then start incurring legal expenses. Why is this issue perceived as debatable?

Do you think that the back office employees manage themselves, whether strategically, as a matter of setting business policy, or from day-to-day? Is there no hierarchy? Are there no critical paths? Is there not a single person whose compensation should be at least in part based upon performance?

The bonuses at issue are as small as $1,000. Are you also telling me that for some reason bonuses in the amount of $1,000 are being contested in the court of public opinion because the employees set to receive it are big shots that are already excessively paid? Well if that's the case, then I must be a big shot. Hate me. Send a press team to interview and deride me. Send protesters to wave around signs in front of my one-bedroom domicile. Then try and convict me; send me to jail--I made incredibly too much bonus money last year. I must be scum.

I would agree that certain executives should be held accountable (probably just a handful of people in total), but is there anybody more qualified to fix AIG than the people that followed the wrong orders competently? Serious question.

Good grief. I suspect you're not actually reading before responding, so I'll just repeat myself.

1. I agreed that contracts should not be abrogated arbitrarily. That doesn't mean they're a good idea however.

2. AIG paid out a good bit in retention bonuses, I believe in two different tranches, to keep the right people to wind the business down. The bonuses at issue are different, and weren't intended as retention bonuses.

As for guilty until proven innocent, hey, this isn't a court of law. More to the point, don't put words in my mouth. I didn't claim that I knew what pay was adequate or excessive, only that there was no particular evidence on the matter other than the claims of management, who don't impress one as the most trustworthy bunch.

Apologies to my HAIF friends if I have been rude on the boards lately. Bad case of bailout fatigue.

Well that's certainly understandable. I'm sure nobody blames you personally.

[memebag]

Iowa Senator Charles Grassley has an interesting idea for AIG execs:

"I suggest, you know, obviously, maybe they ought to be removed," Grassley said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."

[Subdude]

Are you also telling me that for some reason bonuses in the amount of $1,000 are being contested in the court of public opinion because the employees set to receive it are big shots that are already excessively paid? Well if that's the case, then I must be a big shot. Hate me. Send a press team to interview and deride me. Send protesters to wave around signs in front of my one-bedroom domicile. Then try and convict me; send me to jail--I made incredibly too much bonus money last year.

While I do think that pay contracts should be honored barring bankruptcy, I also believe that the trial "in the court of public opinion" is absolutely the right thing to do, and I am glad to see that Geithner et al. are out there kicking these guys around. Usually I wouldn't count myself a fan of fits of populist indignation, but in this case I think the public is well-deserving of some cathartic naming and shaming in exchange for our tax dollars.

Second, and more important, is the point I made above: pour encourager les autres. It's setting an example, pure and simple. The consequences of remuneration packages that appear excessive must be so painful and shameful that any executive in a bailed-out institution will think long and hard before proceeding.

This isn't just about fixing a financial problem. It's also going to require fixing a culture in banking and finance that led us to where we are now. Taking excessive risks and paying oneself excessive rewards is fine in a private business, but once that business has to be propped up by the state the rules have to change. Yes, I'm sure the bankers and executives at AIG think it's all horribly unfair, but frankly, they're on the public dime now and they need to get that through their head, and this is what it is going to take.

[TheNiche]

Iowa Senator Charles Grassley has an interesting idea for AIG execs:

Honestly, if I were Libby, I'd resign at this point, and for three good reasons: 1) I'd want to make more than $1 per year, 2) I wouldn't want to micromanage or be micromanaged by public opinion, and 3) to force the government to pay somebody lots and lots of money to do a really crappy job, just out of spite. I'd try to take the whole executive team with me so that there's no heir apparent.

[Mark F. Barnes]

Well good ole Chris Dodd had a provision stuck into to the recent stimulus bill that had an exemption for bonus (like AIG's) agreements, basically saying any bonuses made before Feb 09, get a pass and have to be paid. Way to go Chris, you prick.......

[TheNiche]

As for guilty until proven innocent, hey, this isn't a court of law. More to the point, don't put words in my mouth. I didn't claim that I knew what pay was adequate or excessive, only that there was no particular evidence on the matter other than the claims of management, who don't impress one as the most trustworthy bunch.

If it comes down to trust, well frankly I don't trust AIG, I don't trust the government, I don't trust in the competence of the constituents of the government, and I know that there are missing details that the media hasn't shared (because those details eat up page space and aren't something that most constituents are in any way interested in). As far as I'm concerned, there's not a very compelling reason to back one side or the other, and if a case can plausibly be made that AIG has to pay out these bonuses either because they're committed to them contractually or because they need to attract or retain labor, well that's fine. It passes the sniff test. Obviously there needs to be aggressive federal oversight (by accountants, not politicians), but until they report that there's fraud going on, I don't see any reason for getting worked up over it. There are more important issues worthy of discussion.

[TheNiche]

This isn't just about fixing a financial problem. It's also going to require fixing a culture in banking and finance that led us to where we are now. Taking excessive risks and paying oneself excessive rewards is fine in a private business, but once that business has to be propped up by the state the rules have to change. Yes, I'm sure the bankers and executives at AIG think it's all horribly unfair, but frankly, they're on the public dime now and they need to get that through their head, and this is what it is going to take.

The definition of what is "excessive" is debatable, and under no circumstances do I believe that the general public should be the entity providing debate. I'd doubt very much if 1% of them understand the basic principles of how labor markets work.

As for excessive business risks that became so commonplace throughout the culture of financial institutions, yes that does have to change. More accurately, it already has. I suggest you go out and try to get a loan on a speculative deal. One isn't available.

[Subdude]

Well, if you're going to get called out as being totally, indisputably wrong, who could deny that the best strategy is to get out ahead of the thing, admit the error, make the mea culpas, perhaps hang the ol' bean or giggle apologetically, and then move on?

Well, apparently I'm not much of one to learn from experience, for once again I have been caught out by the news. I'm beginning to think I should just bail out from this thread and stick to the "safe" topics. Obviously I have no head for the mysterious workings of high finance. Read up a few posts, and I was mouthing off to the Niche about how the AIG bonuses couldn't be justified on grounds of retaining employees, since they had already paid out a couple rounds of healthy retention bonuses.

But once again I was wrong. You see, they did pay out retention bonuses, but it turns out that they paid them to some employees who subsequently left anyway. I just assumed that retention bonuses were paid to retain people. That's where I made my mistake. So of course AIG must continue to pay out multi-million dollar bonuses. What was I thinking?

Mr. Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.

[RedScare]

This brings up the equally sticky problem of giving a bonus large enough that the employee can afford to quit anyway. But I'm quite sure that there is an economic theory that applies here, one that mered salaried employees would never understand. I must admit I completely understand the theory behind quitting immediately after receiving a multi-million dollar bonus.

[TheNiche]

You see, they did pay out retention bonuses, but it turns out that they paid them to some employees who subsequently left anyway. I just assumed that retention bonuses were paid to retain people. That's where I made my mistake. So of course AIG must continue to pay out multi-million dollar bonuses. What was I thinking?

The article states that 11 out of 73 employees who were in the retention bonus pool and that received bonuses of at least $1 million are no longer at AIG. So within one week of payout, there was 15% turnover. Yeah, clearly what Red describes is what happened; people stuck around just long enough to get the big lump of cash that was contractually promised to them and then they left. I hardly blame the folks that left, but then again, those people probably would've left a lot sooner if there were no bonus. Perhaps that was AIG's definition of success. I wouldn't know, and neither would you or Red.

New York's Attorney General has said that the bonuses might be able to be recaptured from AIG, but only if the State can prove that 1) A.I.G. was undercapitalized when it paid the bonuses and 2) that the people who received the bonuses did not earn them. Part one can probably be justified by one means or the other. Part two depends on each individual's contract. If an individual's contract very simply stated that the person still be an employee of AIG as of last week, then the bonus was legitimate. If an individual's contract simply stated the aforementioned and also that AIG be considered a going concern, then that contract is legitimate. The government may have had to bail out AIG to preserve that status, but government does stuff that has unintended consequences or that creates perverse incentives all the time, and this is only one more example, barely a footnote in the annals of the subject. If an individual's contract required both of the aforementioned clauses and also that the individual's department met a sales quota, and they did, then the contract is legitimate (and perhaps it should be in principle, too, if their efforts are counteracting the damage done in other departments). Honestly, I wish the New York AG luck in finding something that slips through the cracks. This is definitely an investigation that needs to happen--though I think it probably should be independently spearheaded by the federal government, since they're actually the owners and need to provide the oversight. And frankly, the federal oversight should've been conducted before bonuses were issued. If the New York AG can find a way to rescind a significant amount of money, it seems to me that not only should certain individuals in AIG be terminated or even prosecuted, but the federal government deserves some criticism for not catching it in the first place.

I'm quite sure that there is an economic theory that applies here, one that mered salaried employees would never understand. I must admit I completely understand the theory behind quitting immediately after receiving a multi-million dollar bonus.

You're absolutely, positively correct (except where you were being sarcastic, where you are so very ironically wrong)! Here's a personal anecdote. I was salaried, but mine was only a five-figure bonus which for all intents and purposes acted like a retention bonus. I knew that my job wasn't long for this world so I stuck it out as long as I could. They gave me the bonus, then laid me off and thusly qualified me for unemployment benefits; if they hadn't laid me off, I probably would've found a new job and quit anyways, soon thereafter. It worked out for me well enough, eventually and with a lot of luck, but that series of events had been determined over a year and a half ago when the salary by itself wouldn't have been even remotely acceptable to attract decent talent, and that was when that industry was still able to do business. At the time, I was concerned that I might not be getting a good enough deal, and at various junctures during my employment, I was much more exposed to the financial repercussions of a layoff than was ultimately the case.

It just happened to work out for me--not unlike it just happened to work out for AIG folks who I'm sure at certain points were questioning whether either their jobs or AIG itself would still exist by this time.

There are just so many factors that go into a compensation plan, and nobody on HAIF knows enough to be able to prove that it has been mismanaged in any way, shape, or form. My own experiences (as a salaried employee who is not a millionaire) only add to my conviction on this matter.

[N Judah]

I don't mind AIG paying out what they were contractually required to do but they should not receive any more taxpayer money and even the taxpayer money promised them which they have yet to receive should be redirected elsewhere.

[musicman]

Well good ole Chris Dodd had a provision stuck into to the recent stimulus bill that had an exemption for bonus (like AIG's) agreements, basically saying any bonuses made before Feb 09, get a pass and have to be paid. Way to go Chris, you prick.......

remember that he is AIG's top money recipient in congress ($103,100)

[Rammer]

Edward Liddy served on the Goldman Sachs Board of Directors from June 2003 to September 26, 2008. He resigned from the Goldman board to join AIG just DAYS before the first bailout!!!!

Yet, none of the first 16 congressmen(CNN telecast) asked or mentioned his Goldman connection at his AIG hearing! Goldman Sachs received 13 billion from AIG.

Former Goldman Sachs employees head/headed:

1)The New York Stock Exchange(Niederauer)Wants to keep derivatives.

2)The World Bank(Zoellick)Ever wonder where that 'green' talk started?

3)The U.S. Treasury Department(Paulson/Bush)The first Bailout put the Banksters firmly in charge.

4)The White House Chief of Staff(Bolten)Under Bush

5)Citigroup(Rubin)Left 01/09/09....where will he go?

6)Merrill Lynch(Thain)Ousted for his million dollar office bathroom.

7)Under Secretary for Economic, Energy and Agricultural Affairs(Reuben Jeffery)WAS head of CFTC

8)Commodity Futures Trading Commission head/Obama(Gary Gensler)Needed to keep rigging oil commodity price.

9)Interim Assistant Secretary of the Treasury for Financial Stability-(Kashari)Controls the TARP handouts.

10)Governor of New Jersey(Corzine)

11)Chairman of the President's Foreign Intelligence Advisory Board(Friedman)

12)Treasury Chief of Staff (Mark Patterson)So much for Obama's 'no lobbyists' talk

13)President of the New York Fed(William Dudley)Recently appointed.

14)Edward Liddy AIG (Resigned from the Goldman Sachs Board of Directors on September 26, 2008!!!)

The head of Goldman Sachs, Lloyd Blankfein, received a $67.9 million dollar bonus in 2007, a $26.9 million dollar bonus in 2008(largest in America).

Who was the 2nd largest political contributer to Obama's campaign? Goldman Sachs

Who controlled oil commodity prices (along with Morgan Stanley) all summer? Goldman Sachs

Goldman Sachs runs our government.

[Gooch]

Obama on 16 MAR 09:

"I've asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."

Now the Obama adminstration is seeking to subvert it's own rhetoric!

http://www.washingtonpost.com/wp-dyn/conte...9040303910.html

Administration Seeks an Out On Bailout Rules for Firms

Officials Worry Constraints Set by Congress Deter Participation

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

...

"They are basically trying to launder the money to avoid complying with the plain language of the law," said David Zaring, a former Justice Department attorney who defended the government from lawsuits involving related legal issues. "They are trying to create a loophole to ignore Congress, and I think the courts will think that it's ridiculous."

...snip...

Obama himself has called for these limits. "We've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street," he said earlier this year.

I'm confused...

[Subdude]

Obama on 16 MAR 09:

Now the Obama adminstration is seeking to subvert it's own rhetoric!

http://www.washingtonpost.com/wp-dyn/conte...9040303910.html

I'm confused...

Well after all, we certainly don't want to cause any inconvenience or embarrassment for the firms being propped up with tax money.

Just amazing..

[TheNiche]

I'm confused...

Say you managed a business and had a dozen or so underlings (to keep it simple). You have an ownership stake but not an especially large one. Your compensation agreement is renegotiated every year or so with the other owners. Now that the stage is set, let's say that business isn't going well. It is partly your fault, but is in a lot of ways well beyond your control, reflecting macroeconomic factors. It is 30/70 whether your business is going to survive the recession. The odds aren't in your favor.

The government subsequently offers to bail out the firm, but it wants you to agree to work for a miniscule fraction of your previous salary and to destroy the value of the stock. You, the manager, have personal financial obligations in excess of what the government would allow you to draw as salary, and this isn't exactly the moment that you'd want to sell your home or other durable assets. You'd lose a fortune if you had to do that. Accepting the package may save your firm and the employees' jobs, being in society's interests, but only you can choose to accept or reject the deal...and neither you or those who oversee you would benefit from the bailout. So you opt against it, gambling on the unlikely chance that you can pull your firm up by the bootstraps. Later on, you probably will find yourself with only a few dollars left in the company's coffers. If all you've got left to work with is $20 in cash, your bills are three months past due, and payroll is in two days...you do something else that would be irrational and against society's interests under normal circumstances: you go out to the corner store and buy lottery tickets. In this case, that's the only thing that'll save your neck. Nobody will lend to you. Nobody wants to invest in you. However unlikely, the only method to prevent bankruptcy (probably an out-and-out Chapter 7) would be a winning ticket.

These are examples of the strangely rational decisions businesses make under financially distressed conditions. If government wants to further society's interests by propping up financial or automotive companies, they need to make the package attractive to the person who is charged with making the decisions. And if that person thinks that he's going to stop getting paid in spite of working much hard, and even then be subject to the retroactive whims of populist anger, why should he expose himself to that?

[Gooch]

Niche, I understand all of that. What I don't understand is how the Obama adminstration says "We've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street", then helps them avoid the restrictions designed to limit excessive compensation packages... Why would they do that?

[RedScare]

These are examples of the strangely rational decisions businesses make under financially distressed conditions. If government wants to further society's interests by propping up financial or automotive companies, they need to make the package attractive to the person who is charged with making the decisions. And if that person thinks that he's going to stop getting paid in spite of working much hard, and even then be subject to the retroactive whims of populist anger, why should he expose himself to that?

While, Niche's example may be too over-simplified to be an accurate description of both the TARP or its effect on bank executives, his last paragraph, quoted above, does contain a nod toward the government's quandry. The fact is, the TARP's goal is to loan money to the banks to allow them to loan money. If the restrictions are too severe, the banks will not take the loans, or will pay them back early, not because the TARP money helped, but because the executives did not like the restrictions. The executives are not in danger of not getting paid. Rather, they may not get paid the unreasonable sums to which they have become accustomed. The bonuses and other compensation have garnered the headlines and infuriated the public. However, the problem for the government is the fact that it created the TARP to unfreeze lending. If the banks refuse the loans and guarantees FOR WHATEVER REASON, good or bad, TARP does not work, and bank lending remains frozen, deepening the recession. The government is caught in the unenviable position of attempting to respond to the outraged citizens while still making the TARP money work for its intended purpose. If the bank executives 'greediness' or 'demands for fair compensation' (however you want to look at it) cause them to disavow TARP money, the program is a failure.

The government is trying to please 2 masters with wildly disparate interests...and frankly, unreasonable demands. There are the banks and corporations demanding help to weather the recession, many of whom are not interested in adjusting their compensation packages to reflect the recessionary times that we are in. On the other side are the citizens who demand that the government not hand out money to private industry, especially if the executives are not willing to endure the shared sacrifice by taking pay cuts. The government is essentially in a no-win situation, at least in the near-term. If TARP succeeds, we won't know for a few years. If TARP fails, the recession gets worse. Neither side will be happy. Both will blame the government.

[Gooch]

The government is trying to please 2 masters with wildly disparate interests...and frankly, unreasonable demands.

That is very true. It is certainly a difficult position to be in. But instead of working to craft a workable framework, the Adminstration is pursuing two separate policies. A rhetorical one displayed in front of the cameras... then acting to implement a policy that is completely opposite. It amounts to misleading the public (at best). It's Bush-esque.

[Subdude]

While, Niche's example may be too over-simplified to be an accurate description of both the TARP or its effect on bank executives, his last paragraph, quoted above, does contain a nod toward the government's quandry. The fact is, the TARP's goal is to loan money to the banks to allow them to loan money. If the restrictions are too severe, the banks will not take the loans, or will pay them back early, not because the TARP money helped, but because the executives did not like the restrictions. The executives are not in danger of not getting paid. Rather, they may not get paid the unreasonable sums to which they have become accustomed. The bonuses and other compensation have garnered the headlines and infuriated the public. However, the problem for the government is the fact that it created the TARP to unfreeze lending. If the banks refuse the loans and guarantees FOR WHATEVER REASON, good or bad, TARP does not work, and bank lending remains frozen, deepening the recession. The government is caught in the unenviable position of attempting to respond to the outraged citizens while still making the TARP money work for its intended purpose. If the bank executives 'greediness' or 'demands for fair compensation' (however you want to look at it) cause them to disavow TARP money, the program is a failure.

The government is trying to please 2 masters with wildly disparate interests...and frankly, unreasonable demands. There are the banks and corporations demanding help to weather the recession, many of whom are not interested in adjusting their compensation packages to reflect the recessionary times that we are in. On the other side are the citizens who demand that the government not hand out money to private industry, especially if the executives are not willing to endure the shared sacrifice by taking pay cuts. The government is essentially in a no-win situation, at least in the near-term. If TARP succeeds, we won't know for a few years. If TARP fails, the recession gets worse. Neither side will be happy. Both will blame the government.

Well said. And the desire to please both sides probably goes a long way explaining why the bank bailout programs have been ineffective.

It sounds though that Geithner may be coming around to the idea of being as tough on banks as with the car companies:

U.S. May Oust CEOs at Banks Needing

[sevfiv]

Freddie Mac's CFO david Kellerman was found dead of an apparent suicide today:

The Fairfax County police responded to a 911-call at 4:48 a.m. at the suburban Virginia home Kellermann shared with his wife Donna and five-year-old daughter Grace. The police would not release the exact cause of death, but spokesman Eddy Azcarate said Kellermann's body was found in the basement.

Kellermann, 41, lived in Hunter Mill Estates, a well-off neighborhood of large single-family homes with manicured lawns. County records show Kellermann's home is worth about $900,000.

Paul Unger, who lives across the street from the Kellermanns, called the family a "solid, salt-of-the-earth kind of family" that hosted the neighborhood's Halloween party. "He was just a nice guy ... You cannot imagine what kind of pressures he must have been under," Unger said.

Some neighbors said Kellermann had lost a noticeable amount of weight under the strain of the job, and some said they suggested to him he should quit to avoid the stress. The neighbors did not want to be quoted by name because they didn't want to upset the family.

http://news.yahoo.com/s/ap/20090422/ap_on_...c_official_dead