Remember during the election campaign when John McCain "suspended" his campaign, flew back to Washington, and suggested that the Presidential debate be cancelled so that Washington could deal with the pending $700 billion Wall Street bailout proposal? Candidate Obama, on the other hand, kept his "cool" and waited to see in what direction the wind was blowing before saying too much of anything. Remember how impressed everyone was with Obama, and how critical they were of McCain? Obama was so measured, thoughtful and in control - so "presidential", they thought. It was the more experienced McCain who seemed to them to be the one who was flustered, rash and intemperate. Some say that one incident lost McCain the election.
My, how things have changed! President Obama is the one who is now fulminating, literally foaming at the mouth, over the AIG bonus payments. AIG "is a corporation that finds itself in financial distress due to recklesness and greed", declares the President. "How do they justify this outrage to the taxpayers who are keeping the company afloat", he asks rhetorically. "I've asked Secretary Geithner to use [the bailout] leverage and pursue every single legal avenue to block these bonuses and make the taxpayers whole", he promises. This is not "just a matter of dollars and cents. It's about fundamental values", he observes. The President is mad like hell and he isn't going to take it any more.
Temperate? Reasoned? Helpful? "Presidential"? I think not. This sounds more like a "Lou Dobbs rant" than a measured Presidential statement on a complicated issue. It is an issue which has provoked the anger of the American taxpayer, their emotions inflamed by the angry denunciations of AIG executives by politicians and commentators. The mob has been incited. One Republican Senator has even suggested that AIG executives should resign or commit suicide. Others have suggested that US tax laws be changed retroactively so that 90% of the bonuses which have been paid out can be recovered. The American taxpayers have been provoked and they are looking for answers. They are looking to their President to provide them.
I guess one should never let the facts of a problem get into the way of a good tantrum. Fact - it was the bailout itself which allowed and maybe even required that these bonuses be paid. If the Bush administration supported by Congress and President-elect Obama, had allowed AIG to go into bankruptcy protection, rather than keeping it afloat with taxpayers' money, the issue of the contractual obligations of AIG would have been legally and appropriately resolved. Fact - these were not performance bonuses, but retention payments. They were made to retain certain AIG employees and were not based on the current or future profitability of the company. If a star athlete is paid a "signing bonus" to induce him to sign a contract, the team cannot ask for the money back if the player does not perform well or if the team later on runs into financial difficulties. Fact - these contractual agreements were entered into before the bailouts were approved. How far back in time does Obama and the public want to go in retrieving money paid pursuant to the the terms of pre-bailout contracts? Fact - the Bush administration, backed by Congress and approved by Obama, negotiated these bailouts. Why didn't they think about these issues in advance and work them in as conditions of the bailouts before AIG was given its money? Incompetence? Or is the anger of all of those who either passed these bailouts or approved them now just a feigned one, necessitated by the fact that public is furious and no-one in power seemed to see this train wreck coming?
President Obama, the campaign is over. You won. Let the "cable chatterers" do all the screaming and yelling. Your rhetoric is unbecoming, unconvincing, and unhelpful.
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This letter appeared this morning the NYTimes. . thought you'd like it:
ReplyDeleteTo the Editor:
President Obama may not realize it yet, but his Katrina moment has arrived.
This is a defining moment for his presidency, and how he responds will determine the trajectory of his term. He needs to deal with the excesses within the financial industry with the same toughness and conviction that President Ronald Reagan brought to bear during the air traffic controllers’ strike. To date, he is sorely wanting.
We are not interested in the level of outrage the administration is feeling, but in the effectiveness of its response. So far, it has come across as hapless and completely ineffectual. This Obama voter would like to be spared the speeches and the posturing on the Sunday morning shows — action is what is needed.
Paulette Altmaier
Cupertino, Calif., March 17, 2009
- sam.
Lewis,
ReplyDeleteYour comments are entirely correct, as far as they go. I always appreciate your continuing anti-bandwagon critique of President Obama.
But the AIF bonuses reveal a broader contradiction in American society.
Walter Matthau once said the game of poker embodies "all the worst aspects of capitalism that made America great." Well, I'm a poker player and I think he's slandered my game!
Here's the contradiction: America is the most capitalist nation on Earth, with a sustaining myth that unfettered capitalism is good for everyone -- notwithstanding political and economic inequality that many other nations would deem as unconscionable. But America also is a populist society, where "the little guy" carries a big chip on his shoulder, vis-a-vis big business and big government.
When the AIG bonuses were disclosed, Americans didn't want to be confused by facts such as contractual obligations. They just wanted to vent their frustration and display the same unreflective, combative alienation that drives American juries, in lawsuits reported by supermarket tabloids, to award ridiculously large punitive damages against big insurance companies.
Politicians, whether Republican or Democrat, in Congress or in the White House, predictably will side with that sentiment. They must describe the AIG bonuses as outrageous -- for otherwise they'd have to awaken their politically-unconscious public by explaining that such behaviour is simply business as usual in capitalist America.
Ron Chalmers
Good points pundit! While the AIG execs seem solely concerned with the "us" in bonus, Obama needs to spend a little more time thinking about who bears the "onus".
ReplyDeleteProf. Klar,
ReplyDeleteI agree on the basics, but let's take a step back and look at the big picture. AIG has received nearly 200 billion dollars in taxpayer money, of which the disputed bonuses amount to less than one tenth of one percent. The lion's share of the cash is being delivered to the counter-parties in AIG's credit-default swaps (CDS); mainly the German and French central banks, and Goldman Sachs.
Why is AIG in such CDS debt? Because the CDS market was deregulated in 2000 by Phil Gramm's Commodities Futures Modernization Act. This legislation was paid for lock, stock, and barrel by Enron-- his wife was on the Board of Directors, and was a named defendant in the many lawsuits against the company. Mr. Gramm later became a lobbyist for UBS, the Swiss bank now convicted of massive tax fraud, and the lead economics advisor to Senator John McCain's presidential campaign. It was Mr. Gramm who called the US a "nation of whiners" during the financial crisis.
I'd also like to address some of the facts you cited in your post: "Fact - these were not performance bonuses, but retention payments. They were made to retain certain AIG employees and were not based on the current or future profitability of the company."
According to investigations by New York A-G- Andrew Cuomo, many of those receiving so-called "retainment" payments are no longer AIG employees. These people have no contractual right to payment.
And there are many ways in which AIG could have denied paying, mostly based upon breach of contract for non-performance, fraud, or unconscionability-- Lawrence Cunningham, a GW Law prof discussed plenty of legal avenues for non-payment in today's Times.
As for the Senators that have suggested just taxing the money, what's wrong with that? No less than Lawrence Tribe says that such a tax would not amount to an unconstitutional Bill of Attainder. The US Government owns an 80% stake in AIG, and certainly has the right to recover their cash through taxation, if they wish.
Furthermore, if the owner of AIG-- the US Treasury-- wishes to direct its executives to fight the payment of the bonuses in court, the company should--must, even!-- comply. By the time such a case came to trial, AIG would be either insolvent, in which case the execs could get WAY to the bank of the line, as their bonuses are, according to copies of the AIG Retention Plan "unsecured subordinated liabilities," or if the market recovers, AIG would be in a better position to pay out the bonuses.
As for President Obama's "literally foaming at the mouth," I haven't seen any news clips to that effect, but I'll take your word for it. Perhaps he would be more confident in his administation if his economics advisors hadn't been held up by the GOP with procedural holds for two months, and if the Treasury wasn't virtually vacant of senior staff due to GOP blocking of confirmations.
Prof. Litman encouraged me to be fiery in my comments, so blame him!
See you tomorrow,
Scott
P.S. Here's that NYRB article on the ICRC Torture Memo that I told you about. Very upsetting stuff. It sounds hyperbolic, but you can feel the slow death of the idea of America when you read about wrapping men in full-body plastic and then drowning them. I'm not sure if you've read Jane Mayer's book The Dark Side, but I'd highly recommend it. Sober, comprehensive, and endlessly depressing.
What I think what you are essentially saying, Ron, is that it is "business as usual" both in Congress and the White House. My continuing "anti-bandwagon critique of Obama" is to a large degree based on that observation. Nothing has changed, despite the campaign rhetoric and slogans. All that has changed is that the US has a President who is clearly learning on the job, because apparently the ad for President indicated that "no experience is required".
ReplyDeleteScott, I agree that my comment that Obama was literally foaming at the mouth was, well, a bit hyperbolic. His words certainly expressed anger, although some say that he actually did not appear to really be too upset. Some might then conclude that he was being a bit disingenous in his feigned outrage, no?
What do you think of the way CEO Liddy was treated by the buffoons in Congress? And do you think the politicians' rage, whether feigned or real, is helpful, especially when we hear of the vicious statements and threats made against AIG executives and their families, some of whom are no doubt in no way responsible for AIG's problems? Do you think Obama and others now feel good about their personal attacks?
Hi Professor Klar,
ReplyDeletePresident Obama appears to be a pretty calm person by nature. I do not see how this case amounts to being disingenuous, since it comports so well with the personality on display all through the primaries, general, and the presidency. That's how he sounds when he's angry. So no, I do not think one can conclude this was "feigned outrage."
I will leave the comments about the experience required to be President to one side-- maybe I'll leave them way off in Alaska.
I think CEO Liddy was remarkably frank on the Hill, but he's still a weasel. His letter to Secretary Geithner was self-serving, obfuscatory, and willful, considering Secretary Geithner is, well, his boss. Liddy intentionally and misleadingly blurred the line between AIG's Insurance and Financial Products divisions--e.g. "honoring contractual commitments is at the heart of what we do in the insurance business." He presents facetious arguments about not being able to "attract and retain the best and brightest talent" without paying the existing bonuses, which are going to total crooks in the London Financial Products office, some of whom have already left the company, as I mentioned.
As for Mr. Liddy's woe-is-me display of the threats to AIG executives, I'm with Congressman Frank: get law enforcement involved immediately. But that isn't going to get them off the hook. Some of the AIGFP execs, particularly Joseph Cassano, may have committed massive fraud and are the target of multiple Justice Department investigations for systematically downplaying the risks of their investments. (By the way, there was a great profile of Rep. Frank by Jeff Toobin in a recent New Yorker. Not as good as Larissa MacFarquhar's profile of Judge Richard Posner, but she's the best.)
What do you think about the AIG bailout generally? If AIG would be in bankruptcy now without government aid, why should the US taxpayer be bailing out the CDS counterparties (who would be at the back of the line in a bankruptcy proceeding) at the expense of the company's overall health, it's bondholders interests, &c &c? Should they be bailing out the hedge funds on whose behalf the foreign and domestic counterparties are receiving the money?
-scott
In answer to your question, I do not support bailouts.
ReplyDeleteIt appears that it was the Obama Administration itself, through Geithner, that actually made the bonus payouts part of the bailout. They specifically put it in. Now they say it's an "outrage" that these bonuses should be paid out? What are these guys up to? They are either totally incompetent or completely disingenous, but more probably both.
I agree with Scott and with Barney Frank about the threats. Members of Congress routinely receive threats and, as Rep. Frank said, if everyone hid from these cowardly (and largely inconsequential) threats, no one would ever accomplish anything or reveal any information of significance.
ReplyDeleteHaving said that, I'm not exactly clear on why the names of bonus-earners need to be revealed. If the loan to AIG was made without any conditions regarding bonuses, then the money is AIG's to distribute as they deem appropriate.
The best comment I heard at the hearing, though, was from the member of congress who suggested that reserving a guarantee for bonuses in the case of company failure is akin to a ship captain reserving the lifeboats for themselves in the case of sinking. Does anyone know who that was?
Professor Klar,
ReplyDeleteExcellent piece overall sir!
One question:
Where did you hear that "the Obama Administration itself, through Geithner, that actually made the bonus payouts part of the bailout. They specifically put it in."
This piece in today's NYT would suggest otherwise: http://www.nytimes.com/2009/03/20/business/20bonus.html
Regards,
Peter Morningwood
Dear "Peter Morningwood",
ReplyDeleteHere is my source:
http://politicalticker.blogs.cnn.com/2009/03/19/geithner-treasury-pushed-for-bonus-loophole/