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Scapegoating Dodd, take 2

Sunday, March 22, 2009

Factcheck.org has weighed in on Dodd’s responsibility, or lack thereof, for the legislative language that allowed those bonuses (or, more accurately, did not stop them).

Some Republicans are blaming Democratic Sen. Chris Dodd of Connecticut for millions in bonus payments paid by taxpayer-owned American International Group.

…

As it was passed in the Senate, the stimulus bill contained a strict prohibition on recipients of TARP funds paying “any bonus” to at least the 25 highest-paid employees – or more, at the discretion of the Secretary of the Treasury. The language is contained on page 736, and it said the Treasury Department’s regulations governing recipients of funds under the Troubled Assets Relief Program (TARP) “shall” contain:

H.R. 1, Senate version: … a prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period that the obligation is outstanding to at least the 25 most highly compensated employees, or such higher number as the Secretary may determine is in the public interest …

This language was authored by Dodd, who offered it as an amendment to the Senate bill on Feb. 4. He said it was aimed at quelling public anger over lavish pay for executives of bailed-out financial firms. “Many of our constituents are so angry with what they see in executive compensation, it is difficult to have a conversation about the larger questions,” he said. The amendment passed quickly on a voice vote.

As was widely reported at the time, Dodd’s language was much tougher than the White House wanted. No such language appeared in the version passed by the House. When the two versions went to a Senate-House conference to work out a final compromise, Dodd’s strict ban was rewritten. Most important, the final bill said the prohibition on bonus payments (page 404) …

H.R. 1, Final version: … shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

In simple language, Dodd’s ban would have applied to AIG and any institution that had yet to repay TARP funds, regardless of whether existing employment contracts called for the bonuses. The bill that emerged from the House-Senate conference committee, and was signed into law by President Obama, only applies to bonus agreements made after Feb. 11.

This is yet one more demonstration that Dodd has been unfairly maligned. It does no more than repeat what was, at the time, a much publicized situation.

One interesting thing: the final language allows for valid contractually required bonuses “as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” That means Geithner could still have held them up, by making a preliminary determination that they were not valid, or by, as majority shareholder, instructing his minion, Liddy, to hold off until he or his designee could investigate their validity. There seems to more than a scintilla of evidence that they were not arms length transactions.


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Half Measures

Sunday, March 22, 2009

The headlines this morning were all about Obama’s intention to rein in executive pay as part of his overall plan to impose some order on the outlaw financial markets. There isn’t much detail because at the moment there isn’t much plan, but it seems pretty clear that they’re not thinking of doing much on the compensation side besides coming up with regulations that will make some lawyers rich, who will be tasked with coming up with ways of getting around them. And get around them they will.

So long as we consider the executive pay issue a problem of matching compensation with performance, we are bound to fail to address the issue. First, because that perspective demands that the problem be addressed as the Obama folks appear to want to address it: through more or less easily circumvented regulations. Second, because that perspective ignores the fundamental issue that really needs to be addressed: the rapidly rising and illogical income inequality that is threatening to destroy the middle class, and, sooner or later, our political system. It is widely recognized that raising revenue is only a secondary purpose of the estate tax. The primary purpose is to prevent the creation of an aristocracy of unearned wealth in this country. That’s why the Republican insistence on ending the estate tax is so insidious. We need to use the income tax for the same purpose. High marginal tax rates on outsize incomes are the way to go. They have the virtue of simplicity, making them all the harder to evade.

Since the plan is still in it’s formative stage, there’s also not much detail on what they intend to do about the financial instruments that got us into this mess:

An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis.

We can only hope that they will take a look at first principles here. Do we, as a society, gain anything by the very existence of some of these instruments? Credit Default Swaps have only been with us since 1997, meaning we managed to get along swimmingly without them for most of our history. Do we really need mortgage backed securities? Do they do anything other than make money for those who package them? They certainly appear to encourage risk on a mega-scale and were a prime factor in creating the housing bubble in the first place. We should consider treating these folks like polluters. Some types of pollution just shouldn’t be allowed into the marketplace, no matter how much it might harm the polluter’s businesses.

On another front, Geithner’s plan to clean up the toxic asset mess has come in for a lot of criticism. Brad Delong, a guy who deserves a hearing, says that it’s a good plan, and explains it here. I’m a bit dubious about any plan that creates more billionaires, but he appears to make some solid points.


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The Sanctity of Contracts

Sunday, March 22, 2009

Promises made are apparently sacred only up to a point:

Elizabeth and James Pham put all their savings into the deposit they made on a $956,990 two-bedroom apartment at Maxwell Place, a new development in Hoboken, N.J.

They signed an agreement for the apartment in 2005, put down $93,199 and were preapproved for a mortgage for the rest of the purchase price.

But when their closing date arrived last September, several banks told them that to get a mortgage, they would have to increase their 10 percent down payment by another 15 to 25 percentage points. With no way to come up with that much money, the Phams notified the developer, Toll Brothers, that they could not get financing for the apartment. Toll Brothers declared them in default and kept their deposit.

“It would take us another 15 years to save that money again,” Ms. Pham said.

I’m aware, by the way, that banks always put escape clauses in these commitments; escape clauses that buyers can’t put in their contracts with sellers. I’m also somewhat surprised that the seller is holding the deposit; here in Connecticut they are held by the agents, and can’t be released until both sides authorize it or a court orders the release. Perhaps that’s just not clear in the story. That gives even the most blatant defaulter some leverage to get some of the escrowed money. Perhaps the money is escrowed, and that’s just not clear in the story.

Still, the sacredness of these contractual arrangements seems stacked against the little guy doesn’t it. Someone made a representation to these people that wasn’t kept, and that someone will apparently suffer no consequences.


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Friday Night Music-The Eagles

Friday, March 20, 2009

Double feature. Take it Easy, with Linda Ronstadt and Jackson Browne playing along.

And Silver Threads and Golden Needles, with just Linda.


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AIG: The gift (to bloggers, anyway) that keeps on giving

Friday, March 20, 2009

Every time you think you’ve reached level red on the outrage meter, AIG manages to come up with a way to out-do itself. And I’m not even talking about the fact that it recently sued the government for a tax refund it feels its owed for laundering money through a series of offshore corporations:

The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan, details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall. Other deals involved A.I.G. offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg, A.I.G.’s former chairman, and the Starr International Company, a privately held enterprise incorporated in Panama, and commonly known as SICO.

The lawsuit contends in part that the federal government owes A.I.G. nearly $62 million in foreign tax credits related to eight foreign entities, with names like Lumagrove, Laperouse and Foppingadreef, that were set up or controlled by financial products, often through a unit known as Pinestead Holdings.

No, this Enron type activity is only to be expected. But there’s more. We have been assured in the past that although AIG’s financial products division (the one getting those bonuses and suing for the tax refund) has helped drive the world and AIG into bankruptcy, its core insurance business is quite profitable. No hanky panky there.

Well, that was then. Turns out that they came up with a nifty little way to disguise risk in their insurance business as well. Most insurance companies get reinsurance to protect themselves against outsize losses. As with all insurance, it’s a way of minimizing risk. AIG apparently came up with a way not only to minimize risk (on its books, at least), but to book revenues.

How? Simple, set up a bunch of subsidiaries, and have then reinsure each other. Of course, functionally, it’s as if AIG was selling insurance to itself, so they have not, in fact, reduced any risk. But of course you know there’s more. The company AIG is using to write the reinsurance is set up as a Bermuda corporation, so that it can take advantage of loose accounting rules that allow it to keep very low reserves for that reinsurance:

…AIG admits that its got a company, AIRCO, that is reinsuring its own insurance, and AIRCO is using a Bermuda accounting trick to limit the reserves it holds for this reinsurance.

You can read the whole story at the link above. You may be surprised (if you have been living under a rock) to find out that the potential losses from this clever little stunt could be in the hundreds of billions.


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3 more days

Wednesday, March 18, 2009

I took this picture on Sunday. These are Snowdrops, which I believe usually come out earlier than this time of year, though I’d defer to my wife on that if she were around to ask. I’m posting this just because, with all the bad news on the political front, we can still take solace from the fact that this very unpleasant winter is coming to an end, and that sooner or later, Spring will surely come.


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Tax the Bastards (all the Bastards)

Wednesday, March 18, 2009

Looks like there’s a bit of a disagreement among the financial writers at the Times. Yesterday Andrew Sorkin told us that we desperately need the folks who created this mess to get us out of it, so we should swallow hard and let them have their bonuses.

But David Leonhardt is having none of it. He puts Sorkin’s arguments in the mouths of others, and shoots them down tidily.

But I come not to dump on Sorkin (again). I come to praise Leonhardt, primarily because he agrees with me on the surefire way to stop executive compensation abuse:

It’s entirely understandable, then, that the Obama administration, the Federal Reserve and Congress are looking for creative, legal ways to claw back some of the bonuses. That bonus money is really taxpayer money: absent a bailout, no A.I.G. would exist to pay bonuses.

The larger question is how to change the rules on corporate pay to reduce the odds of future crises. Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street. That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets.

The bonus scandal offers Mr. Obama and Mr. Bernanke a chance to get ahead of the curve — so long as they come up with changes that extend well beyond A.I.G.

…

Today’s tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent.

That is a legacy of the tax changes of the early 1990s, when far less of the nation’s income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes.

In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay.

Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation?

In fact, that’s sort of the point. Given the damage that’s been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo.

Nothing that these people do is worth the money they are stealing being paid. In fact, most of what they do is totally unproductive, as Obama said today, they produce paper wealth for themselves, but no real wealth for anyone. They can cause a lot of harm to the average person, but don’t ever seem capable of producing much that’s useful for anyone but themselves.

Let’s go back to the 50s. A 90% marginal rate on these guys makes sense to me. If we do it to all of them there will be no constitutional problem, so long as Justice Roberts keeps his lawless hands off of the legislation. Sure we take some worthy rich folks down, but this is a question of the greatest good for the greatest number.


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Scapegoating Dodd

Tuesday, March 17, 2009

I just got finished watching Olbermann’s show, in which law professor Jonathan Turley casually endorsed the canard that Chris Dodd is responsible for preserving AIG’s ability to pay the much and rightly maligned bonuses. We can expect Simmons to jump on this bandwagon. It’s a line also being pushed by the Treasury Department, which is trying desperately to deflect responsibility. It’s also completely untrue, as is well documented here at Firedoglake (this seems to be my day for linking to that estimable site. I encourage you to read the whole post, but if you’re too lazy, here’s the essence:

It’s impossible to know how many of those bonuses would have been covered by Dodd’s original language without examining the individual contracts. What is certain, however, is that the loophole regarding “retroactivity” which facilitated the payout of the bonuses that AIG cited in their white paper, was something that Treasury specifically lobbied for. For the “administration official” to blame Dodd in the pages of the New York Times for the payout of these bonuses, after the White House publicly fought him tooth and nail to weaken compensation limits, is completely disingenuous.

One point should be remembered if, as I suspect, this meme continues to spread. This was not inside baseball. At the time, Dodd’s amendment was in fact publicly deplored by the Obama administration. What he proposed is not what we got. It’s shameful that they’re trying to throw him under the bus to protect their own skin. It will be equally shameful if the media goes along with this line, without even bothering (as Turley apparently did not) to check the facts that should be easily obtainable in their own archives.

UPDATE: From the Huffington Post:

In an interview with CNN’s Ali Velshi Thursday, Treasury Secretary Timothy Geithner confirmed that his department had pushed Sen. Chris Dodd to add a loophole in the federal stimulus bill allowing bailout recipients to receive bonuses. Dodd had told the network Wednesday that he had been the one to insert the loophole, but at the request of the Treasury.

According to a commenter, my original post has been proven wrong. I did not, so far as I can see, say that Dodd never agreed to the final bill. I said, as did the folks at Firedoglake, that it was pressure from the Treasury (or White House if you prefer) that led to the adoption of the final language. You can criticize Dodd for caving to Treasury, but you can’t accuse him of slipping the provision into the bill of his own accord, particularly if you are speaking on behalf of Treasury.


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The sanctity of contracts and bonuses by other names

Tuesday, March 17, 2009

One of the drawbacks of being an evening blogger is that by the time you get a chance to put in your two cents on the morning news, most of what can be said has already been said.

Nonetheless, let me add my mite to the chorus of outrage directed at Andrew Ross Sorkin of the New York Times, who tells us all to chill out and let those AIGers get their bonuses.

Why? Two very good reasons, according to Sorkin.

First there’s the “sanctity of contracts”. Since Sorkin has presumably, like the rest of us mere mortals, not read the contracts, this is an odd argument. But it’s particularly ironic since contracts are de-sanctified amazingly fast if one of the parties happens to be a union. Just ask the workers at GM, who are not at all to blame for the bad decisions that got their companies into their current predicament.

Second, we need the guys who got us into this mess to stick around and get us out:

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Even if you take that argument on its face, its absurd, as Barney Frank has pointed out. But the more telling argument against it was made over at firedoglake:

So what Sorkin is saying is that we should just admit, in a very public way, that we have no ability to regulate the system. That if someone commits fraud and theft on such a massive scale, there’s nothing we can do but pay everyone off or they will use their knowledge to steal even more money. He’s saying that there is no authority, no viable regulation, no legal structure that can right this mess. All we can do is keep writing checks, pay off the blackmailers and hope that if we let them continue to get rich they won’t make matters worse.

Meanwhile, the other thieves and crooks, acting while attention is focused elsewhere, are finding newer and creative ways to preserve their right to loot from the public fisc. Again from firedoglake:

Anticipating restrictions on bonuses, officials at Citigroup Inc and Morgan Stanley are exploring ways to sidestep tough new federal caps on compensation, the Wall Street Journal said.

Executives at these banks and other financial institutions that received government aid are discussing increasing base salaries for some executives and other top-producing employees, the paper said, citing people familiar with the situation

And then there’s this from this morning’s Times:

Goldman Sachs got its bailout. Now some of its bankers, those aristocrats of Wall Street, apparently need a bit of a bailout too.

Goldman, which accepted billions of taxpayer dollars last fall and, as learned Sunday, was also a big beneficiary of the rescue of the American International Group, is offering to lend money to more than 1,000 employees who have been squeezed by the financial crisis. The loans, offered via e-mail last week, could range from a few thousand dollars to hundreds of thousands.

…

Some Goldman employees got rich before the markets collapsed, allowing them to invest several million dollars in the funds, often on a leveraged basis. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history — nearly $70 million.

But one former Goldman partner estimated that a quarter of the bank’s roughly 100 partners are now worth $5 million or less because of losses on their company stock and other investments. Last year, the bank’s seven top executives received no bonuses. One of them, Jon A. Winkelried, resigned from his position as co-president a few weeks ago, saying he wanted to spend more time with his family. His estate on Nantucket is on the market.

These poor guys, some of them down to their last $5 million. My heart would be bleeding if it hadn’t practically stopped when I looked at my 401K statement. When they got their huge bonuses they couldn’t just buy stock at face value. They had to buy even more by leveraging their money, basically buying in to the scam they were perpetrating on everyone else. Now they are being bailed out with our money in the form of “loans”. I’m not buying that these are loans, or at least I’m not buying that they will stay loans. When the heat is off, when no one is looking, Goldman will forgive the debts, and presto-chango, you have a back door bonus.

Among other things, it is becoming clear that Obama made a huge mistake in picking Geithner (along with Larry Summers) for Treasury. He is entirely too comfortable with the mindset that got us into this mess and he is totally unaffected and non-infected by the righteous rage that is sweeping the country. Certainly, in retrospect, it would have been better if he had been the one torpedoed by tax problems, rather than Tom Daschle. I’m not one to excuse the leader by blaming the subordinates. That’s a Republican dodge. This is Obama’s mistake too, for shying away from exerting government control over these zombie institutions. We own 79% of this company and exert 0% effective control. That’s idiotic.


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Simmons makes it official

Monday, March 16, 2009

To the surprise of absolutely no one, Rob Simmons says his family was unanimous in support of the decision he made weeks ago: he will run against Dodd for the U.S. Senate.

Simmons will run as a populist. If elected, he will follow his pattern as a Congressman, and be a loyal foot soldier for his right wing masters.

This race gives me the heebie-jeebies. It is eerily reminscent of the 2000 Congressional campaign when Simmons ran against Gejdenson, the only name Democrat in the District that he had a chance to beat. Sam ran a lackluster campaign. After 20 years in Washington, and a lot of close elections, he just couldn’t summon up the energy to run a first rate campaign. That, added to his unfortunate housing situation, did him in.

Dodd hasn’t had a string of tough elections, but in all other respects, right down to the unfortunate housing situations, he’s in the same situation as Sam. He can beat Simmons if he starts running hard right now. If he doesn’t want to put in the time and effort, and if he doesn’t want to reconnect with those of us in the trenches, then he could do us all a favor by stepping aside and let Blumenthal wallop Simmons.

I really have a bad feeling about this race. Dodd is a good Senator, but he’s suffering from several self inflicted wounds. It’s more important that his seat be occupied by a Democrat that that it be occupied by a Dodd.


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