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Guest Post: What Do Pensions Have in Common with AIG?

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Submitted by Leo Kolivakis, publisher of Pension Pulse.


After rallying for four days, stocks gave up early gains and the rally fizzled this afternoon:

Analysts said Monday’s pullback after a four-session surge didn’t necessarily signal that traders were reconsidering their newfound optimism about financial stocks, a main driver behind last week’s advance.

In fact some viewed the measured easing in stocks as reassuring following a surge of more than 9 percent in major indicators last week, more than the market has moved in some years.

“This is healthy,” said Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York. “The best thing for this market is that we don’t go up aggressively. A steady rise of a few up days then a down day would be a lot better than 1,000 points up.”

Stocks rose for much of the session as investors snapped up hard-hit financial shares. Comments from Federal Reserve Chairman Ben Bernanke and reassuring news from a British bank eased some worries about the overall economy and prospects for financial companies struggling with bad debt.

Bernanke said Sunday the recession would probably end this year if the government’s efforts to revive the banking industry succeed. In an interview with CBS’ “60 Minutes,” Bernanke said fixing the economy will require getting banks to lend more freely and financial markets to work more normally again.

Financials rallied strongly with AIG (AIG) and Citigroup (C) leading the pack, up 66% and 30% respectively today. And this constitutes a “healthy” market?!?

Hedge funds have been playing the financials using the Direxion Financial Bull 3X shares (FAS), an ETF that seeks to replicate, net of expenses, 300% of the daily performance of the Russell 1000 Financial Services Index. Who said the addiction to leverage is dead?

The big scandal today revolved around the AIG bonuses. By now, everyone knows that Goldman Sachs won big on the AIG bailout. And Goldman was not alone. AIG also paid hedge funds and other banks with taxpayer money:

While the biggest global banks and municipalities topped the list of entities that AIG owed money under counterparty agreements, two hedge fund firms, Citadel Investment Group and Paloma Securities, were also on the list for $200 million apiece. The two firms were owed the money under securities lending agreements with AIG.

A spokeswoman for Citadel said the firm had no comment. A spokesman for Paloma said the payment was part of a securities loan transaction for corporate bonds that was done in the usual course of business.

Indeed, the $200 million to the hedge fund firms was small feed compared to the money that the world’s biggest banks got for different kinds of counterparty agreements.

Goldman Sachs was listed as receiving $12.9 billion, Merrill Lynch got $6.8 billion, Bank of America received $5.2 billion, Citigroup received $2.3 billion and Wachovia $1.5 billion.

Foreign banks who received AIG money included Societe Generale ($11.9 billion), Deutsche Bank ($11.8 billion), Barclays ($8.5 billion) and UBS ($5 billion).

AIG came out with the list in an effort to head off the protest over the news that the company was paying bonuses of up to $165 million for executives in their structured finance group. That was the business that went heavily into collateralized debt obligations and got AIG into its financial mess to begin with.

AIG protested that it had to pay the bonuses because it was under contract to do so. The company also claimed that it had to pay the bonuses to retain those traders in order to unwind the business.

On Monday, President Barack Obama said he was asking U.S. Treasury Secretary Timothy Geithner to find every legal way to block the payments. “Under these circumstances it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

The U.S. Treasury has loaned AIG almost $170 billion in financial bailout money and now owns about 80% of the company.

The pressure mounted on AIG on Monday when New York State Attorney General Andrew Cuomo sent a letter to AIG Chief Executive Officer Edward Liddy about the traders’ bonuses, demanding details about their names, job description and job performance and whether the payments had already been made.

Cuomo said in his letter that if the company did not comply with his request by 4 p.m. (EDT) Monday, his office would issue subpoenas and go to court.

AIG did not immediately return a phone call from HedgeFund.net seeking comment.

Talk about the glue that binds a nation. I agree with Miles Mogulescu of the Huffington Post who writes that the Obama administration must stop bonuses to AIG Ponzi schemers:

It’s time for some righteous populist anger from the Obama administration–not just in words, but in deeds–to stop the looting of the Federal Treasury by Wall Street executives using taxpayer money to pay bonuses to the very people who manipulated markets and were instrumental in bringing the international financial system crashing down on the heads of hundreds of millions of people in America and around the world.

If the Obama administration doesn’t stop AIG from paying hundreds of millions of dollars in bonuses, it will enable a popular uprising (led, unfortunately, by hypocritical Republicans posing as populist leaders) which will block the Obama administration from taking the actions necessary to save the financial system. It could destroy Obama’s presidency and lead to a decade-long depression.

Instead, while AIG prepares to use hundreds of millions of dollars in taxpayer money to pay bonuses to the very executives at AIG’s Financial Products Unit who designed, managed and marketed the credit default swaps which were little more than a Ponzi scheme, the Obama administration sends out Tim Geithner, Austan Goolsbee, and Larry Summers to lamely express fake anger to the media while defending the payments on the grounds of the “sanctity of contracts”.

As Larry Summers timidly told George Stephanopoulos, “The easy thing would be to just say…off with their heads, violate the contracts. But you have to think about the consequences of breaking contracts for the overall system of law, for the overall financial system.”

Even first year law students in Contracts 101 learn that there are numerous exceptions to the “sanctity of contracts”. As any working lawyer will tell you, contracts are legally abrogated every day–a big part of our court system is given over to litigating disputes over the enforceability of various commercial contract provisions. If Treasury Secretary Geithner is rolling over and passively taking the advice of lawyers hired by AIG’s Chairman that there are no legal defenses and counterclaims to paying the executive bonuses, then he’s talking to the wrong lawyers. He and President Obama need to bring in the best litigators in the country and give them the mandate to find every available legal argument for not paying the bonuses, and then force every employee of AIG’s Financial Products Unit who is unwilling to give up their bonus to hire expensive lawyers to sue for it, and vigorously defend these lawsuits through trial and up the appeals ladder, if necessary, for years, before even considering paying any such claims.

Let’s clearly understand what the executives of AIG’s Financial Products Unit did: As several commentators have noted, AIG’s Financial Products Unit is a hedge fund grafted onto an insurance company. I would go even further–It’s all-but a Ponzi Scheme grafted onto an insurance company.

AIG’s principal business is selling insurance including casualty, auto and life insurance. In fact it’s the largest insurance company in the world. Insurance is a highly regulated business. When a company sells insurance, government regulators require it to set aside financial reserves to pay claims. For example, if an insurance company sells fire insurance, it uses actuaries to calculate the amount of fires which are likely to occur and the likely costs of paying claims on these fires, and is required to set aside enough money to pay these potential claims. It also invests these reserves and profits from these investments. AIG’s regulated insurance business was profitable and would not require AIG to take $170 billion and counting in Federal bailouts.

AIG’s Financial Products Unit was instrumental in creating and marketing a new type of insurance product which purported to insure investors in mortgage-backed bonds and derivatives against losses to their investments if the homeowners who took out these mortgages defaulted on their payments. Only AIG didn’t call these products “insurance policies”. They called them “credit default swaps,” instead.

Because AIG and other big financial institutions claimed that credit default swaps were not insurance but a form of financial security like a stock or a bond, they were not required by regulators to put aside reserves against losses.

This worked out pretty well for AIG and its high-paid executives during most of the past decade while the real estate bubble kept home prices rising, allowing homeowners to continually refinance their mortgages and make their payments–AIG profitably collected billions of dollars of premiums on the credit default swaps it sold, hardly ever had to pay any claims, and gave executives hundreds of millions of dollars in bonuses for keeping the circus operating.

(It worked out pretty well for Bernie Madoff, too, who could continue to pay earlier investors from the proceeds paid in by new investors, until the financial markets crashed and investors started asking for their principal back.)

In fact, credit default swaps were little more than an (arguably) legal Ponzi Scheme which, because reserves against losses were not set aside, relied on a constant flow of new premiums to pay-off any potential losses, as well as to pay the oversized bonuses to the executives who created and sold them. In selling credit default swaps, many of which insured sub-prime mortgages, AIG executives did not perform due diligence on the viability of the underlying mortgages to determine the actual risk that mortgagees would default if the housing market stopped rising.

As a result, last September, when the housing bubble burst, and increasing numbers of homeowners stopped making their mortgage payments, the counterparties to AIG’s credit default swaps demanded that AIG post hundreds of billions of collateral to secure the counterparties against the potential losses to their insured bond and derivative portfolios. AIG didn’t have the money, because it had failed to put aside adequate reserves and because it had already paid out the premiums it had received in the form of bonuses to its executives and as dividends to its shareholders.

Because these counterparties were some of the largest banks, investment houses and hedge funds in the world, the Federal Reserve under Ben Bernanke and (then) Tim Geithner, and the Treasury Department under Hank Paulson and (now) Tim Geithner, decided that AIG was “too big to fail” since AIG’s failure to pay-off the losses on its credit default swaps to these other “too big to fail” financial institutions would lead to a cascade of huge bankruptcies which would bring down the international financial system.

So far the Federal government has given AIG $180 billion to back up its credit default swaps to these counterparties, with no end in sight, and we, the taxpayers, now own 80% of AIG. Meanwhile, the AIG executives who created this disaster demand hundred of millions of dollars in bonuses and the Obama administration throws up its hands and says there’s nothing it can do, as though it is powerless but to listen to AIG’s Chairman and his lawyers that the bonuses must be paid.

Under these circumstances, I have no doubt that smart lawyers, hired by the Obama administration, can find numerous legal arguments for refusing to pay the contractual bonuses to AIG executives.

Without having seen these contracts, here are a few legal arguments off the top of my head: Most executive contracts provide that the executive is in breach if s/he engages in gross negligence or willful misconduct. According to the New York Times, most of the AIG executive contracts under which the bonuses are to be paid were entered into in early 2008, after the real estate bubble had started to burst and subprime mortgages started to default in large numbers.

There is a strong argument the AIG executives responsible for designing and selling credit default swaps were grossly negligent (if not willful) in failing to perform due diligence on the risk of loss that the underlying bonds would default and setting aside sufficient resources for paying claims if defaults happened. Instead, they pocketed hundreds of millions of dollars in bonuses off of the premiums from prior-year’s credit default swaps and made no provisions for setting aside funds for paying potential claims. This may not only have constituted gross negligence or willful misconduct–It may even have constituted criminal negligence or fraud.

If President Obama wants to avoid a populist uprising that could sink his administration, he needs to tell Geithner and Summers to stop defending the legality of the AIG bonuses and bring the full force of the federal government down on the heads of any executives of AIG’s Financial Products Unit who have the nerve to claim a bonus. (As Robert Kuttner has pointed out, “the outrage over the the AIG bonuses is a sideshow. The larger problem, both financially and politically, is the entire strategy for rescuing the banks.” But if Obama doesn’t act forcefully to stem popular outrage by halting the AIG bonuses, he may never have a chance to get the policy right on the financial rescue.)

Obama should go on national television, explain to the American public how AIG executives used the phony insurance policies of “credit default swaps” to game the financial system, and announce that any executive of AIG’s Financial Products Unit who claims s/he’s entitled to a bonus will have to hire a lawyer and sue for it–and that the government will insist that every such suit go to trial and if the government loses at trial, be appealed for years before any claims are paid.

Moreover, the government will require AIG to countersue every executive that claims a bonus for gross negligence and/or fraud and will seek damages and a refund of prior year bonuses. In addition, Obama will instruct the FBI to investigate the AIG executives for criminal fraud. And he will instruct the IRS to conduct full-scale audits on the last 7 years of their tax returns to insure that they properly paid the government everything it was due on their huge incomes. He will use every legal resource at the disposal of the Federal government to make their life a living hell if they continue to claim bonuses on their ill-gotten gains.

Rhetoric denouncing the bonuses is not enough. Decisive action by the Obama administration to stop payment of the bonuses is required. Anything less threatens to destroy the credibility of the Obama administration with the American people and derail Obama’s efforts to prevent a depression.

UPDATE: President Obama has just released a new statement on the AIG bonuses and unfortunately, he’s blowing it by failing to express a sufficient level of populist anger which reflects the anger of the American people, or definitively state that the bonuses will not be paid, period. He follows Larry Summers and Tim Geithner by expressing faux outrage: “How to they [AIG] justify this outrage [of the bonuses] to the taxpayers who are keeping the company afloat?” Then Obama says the Geithner is “working to resolve this matter with the new CEO, Edward Liddy, who came on board after the contracts that let to these bonuses were agreed to”. (Liddy is the CEO who already told Geithner than he’s legally obligated to pay the bonuses.) Obama says that he’s asked Geithner “to pursue every legal avenue to block these bonuses”.

Not good enough. Obama has to stop being polite. He needs to proclaim that the full force of the Federal government will be brought down on the heads of any AIG executive who tries to claim a bonus.

I would throw all the crooks who ran AIG’s Financial Products Unit in jail and prosecute them under the full extent of the law for criminal negligence that has caused irreparable damage to the U.S. and global economy. That’s why AIG’s dismal results back in August spelled trouble for pension funds.

But if you think AIG took enormous risks allowing their executives to reap huge bonuses, then what do you think about a public pension fund using the government’s balance sheet to sell CDS? I would say that borders on criminal negligence too and it all goes unnoticed because nobody has a clue as to what these mega funds are doing behind closed doors.

Worse still, the global Ponzi scheme unraveled fast since last August, closing the curtains on private markets, exposing the bogus benchmarks that were governing them and ending the great pension con job.

What do pensions have in common with AIG? It turns out a lot. Both were claiming to run a core business when in reality they were fueling a Ponzi scheme using “sophisticated instruments” or “alternative investments” that threaten the security of the global financial system.

Just like AIG, most pension funds lack transparency, allowing them to operate beyond the reach of regulators. Moreover, there is no accountability or serious risk management taking place at any of these large pension funds, allowing senior managers to reap huge bonuses for taking excessive risks (typically by beating bogus benchmarks in private markets).

And just like AIG, when their financial solvency eventually reaches a breaking point, these pension funds are going to require billions, if not trillions, in bailout funds to allow them to meet their pension obligations.

You’d better get ready because Uncle Scam wants your money and there is nothing you can do to stop him.

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26 comments

  1. Independent Accountant

    YS:
    Break contracts? That’s easy. File bankruptcy. Have Obama tell AIG’s “contract holders” on television as follows, naming them, “I expect you to walk into the human resources department of AIG no later than one week from today, contract in hand. Then tear it up. Absent your doing that, we will withdraw our support for AIG and let it file bankruptcy”. That’s it. Let the AIG monster finally go bankrupt. To show the Feds “mean it”, let the indictments roll. If the SDNY US attorneys office is too incomptent to write them, I will, for a fee. Imagine how quickly the “contract holders” will capitulate when they see senior members of AIG led away in handcuffs. Or turned over the angry mob of peasants with pitchforks outside AIG’s offices. If say our “friends” at Goldman conclude we’re serious, Goldman will hire all the AIG “talent” just to shut it up. Having gotten $13 billion (admitted) from the AIG bailout, why shouldn’t Goldman ante up a few hundred million to quiet the “contract holders”?

  2. MyLessThanPrimeBeef

    It’s simple. Just declare the financial industry a federal disaster area, impose martial law and terminate all existing contracts. Shoot any looters on sight. They have been warned.

  3. MyLessThanPrimeBeef

    Decimate, as in executing every tenth person/corporation? But then you said ‘the whole’ financial group. I could be wrong but I think to decimate the whole financial group would leave it @ 90% of what it was before it was decimated.

  4. A Lawyer Mom's Musings

    Show me a contract that doesn’t contain a fact issue and I’ll show you the Martian that occupies my kid’s high chair. And even if there were none, we all understand and appreciate the concept of efficient breach.

    But Lawrence Summers opining on the sanctity of contracts when Obama wants mortgage cramdowns? That’s just too rich. That sort of duplicitous double-talk gags me.

    Re AIG: instead of throwing the contract holders under the bus, how about throwing Geithner and/or Congress under a fleet instead? They are the very folks who could have negotiated away these bogus, sorry, I mean bonus, agreements in the original bailout terms.

  5. A Lawyer Mom's Musings

    Show me a contract that doesn’t contain a fact issue and I’ll show you the Martian that occupies my kid’s high chair. And even if there were none, we all understand and appreciate the concept of efficient breach.

    But Lawrence Summers opining on the sanctity of contracts when Obama wants mortgage cramdowns? That’s just too rich. That sort of duplicitous double-talk gags me.

    Re AIG: instead of throwing the contract holders under the bus, how about throwing Geithner and/or Congress under a fleet instead? They are the very folks who could have negotiated away these bogus, sorry, I mean bonus, agreements in the original bailout terms.

  6. Swedish Lex

    So, instead of saving the financial system from collapse and avoiding world wide depression, Geithner is talking/defending/explaining/commenting bonuses for a single company.

    Seems that someone in the Administration does not have his priorities in the right order.

    Could it not be this simple: Ignore those contracts, name all the recipients publicly, invite them to come out of the closet and to dis-shame themselves by unilaterally renouncing their bonuses. Those AIG people who have no sense of shame, and I suspect there are quite a few, would have to sue AIG/Uncle Sam and would have to spend the next 10 years litigating with public opinion against them. No one other employer would like to hire such pariah.

  7. killben

    “As Larry Summers timidly told George Stephanopoulos, “The easy thing would be to just say…off with their heads, violate the contracts. But you have to think about the consequences of breaking contracts for the overall system of law, for the overall financial system.”

    Has Larry Summers heard of something called Bankruptcy … if AIG can hold a gun and say “bailout me out or I will wreck the economy” then tax-payers “rescind or file for bankruptcy” ..

    As long the dumb suckers (tax-payers) stay quiet, authorities like Larry Summers will make only timid statements..

    “Rhetoric denouncing the bonuses is not enough. Decisive action by the Obama administration to stop payment of the bonuses is required”

    I second that!! We don’t want just measly talk … we want action … we want the money clawed back !!

  8. Anonymous

    Worrying about the bonuses is like
    worrying that you’ll lose the sweater you left in the back seat as thieves drive away in your car.

    It might be even worse! $165 million in bonuses is less than 1/1000th of taxpayer funds advanced to AIG. A decent sweater represents a greater proportion of the value of most cars!

    It’s ridiculous for Obama to decry
    the chump change being passed out the back door when he’s shoveling in mega bucks through the front.

  9. fresno dan

    One point that doesn’t get brought up is: what are the shareholders doing??? – prior to the government owning AIG. It seems to me that the whole concept that “shareholders” are owners is being exposed. I find it hard to believe that any AIG shareholder, would have agreed to bonuses to the people and institution that caused the bankruptcy of the firm they own.
    O, and I think the idea that bankruptcy was/is a better way to handle this crisis will gain ever greater currency.

  10. Anonymous

    This whole flap over the bonus payouts is a diversion to distract the US taxpayer from the real theft at hand: how tens of billions of dollars of US taxpayer money are being funneled into EU-zone banks. CDS and other contracts are being honored at 100 cents on the dollar, while the US taxpayer gets one massive loss after another.

    Geithner and Bernanke must be hoping that the populist noise over bonuses goes on forever. With such a smokescreen, they can empty the US Treasury of everything down to the penny.

  11. Anonymous

    The correct reference to focus popular outrage in this case is Merchant of Venice (minus the anti-semitic overtones).

    The “quality of mercy” need not be strained from derivative traders and others focused on their narrow self interests here.

    But I am more than concerned when previously responsible shills for the bond market forget that they and their clients are fundamentally dependent on the good graces of the state for their livelihood.

    It is in no one’s interest to pick this fight.

  12. ruetheday

    Apparently the sanctity of contracts only applies to the compensation given wealthy financiers. It doesn’t apply to UAW workers and the car companies, it doesn’t apply to all of the firemen/police/civil servants being forced to take furloughs (MULA) despite their employment contracts, it doesn’t apply to the terms of the bailouts which change by day (like when AIG calls up the Treasury as says they want a lower interest rate on their existing loan).

  13. David Galbraith

    “The Treasury will use a $30 billion infusion into AIG to force the company to repay all of the bonuses promised to employees of its Financial Products group, a White House official said.”

    Am I missing something or is this a political magic trick, the same one tried in the UK with RBS?

    i.e.

    AIG agree to repay bonuses to prevent the $30 billion being stalled. But the bonus payments already went out on Friday and can’t be recouped.

    The money to return to the government comes from AIG, not the bonus recipients, and therefore creates a cost which in turn comes from the government which potentially plugs the hole in the books by handing the money back.

    The sleight of hand is that everyone is so fixated on the name AIG as the villain, that they don’t see that AIG is largely nationalized and therefore is actually themselves, whereas ‘bonus recipient’ is the real target.

    Public anger is quelled as newspaper headlines read, ‘AIG repays bonuses’. The government looks like it has been firm and doesn’t get distracted dealing with a couple of hundred million in a trillion dollar problem. Financial Products guys keep a year of bonuses, but they took much more in previous years, anyhow, and won’t be in future, after CDS regulation.

    None of this is done conspiratorially, but out of self interest. The government have other things to worry about, as long as public outrage is contained.

    If the masses are kept happy, all that is at stake is one years bonuses in one division of one firm in a decades long industry-wide Ponzi scheme.

    Until there is a person to vilify, like Fred Goodwin at RBS, anger will be limited and the ‘AIG’ as bad guy, foot-shooting performance will continue.

    Lastly, in terms of the idea of threatening tax audits etc., surely this is also a side show? AIG is a multi-national with one of the two main Financial Products offices being outside of the US. Surely many of these bonus recipients are not answerable to the IRS, being foreign nationals working outside of the US?

  14. Anonymous

    All of this fire and brimstone about AIG financial products seems remarkably disingenuous and bordering on insanity. I agree that Obama, Summers and Geithner sound ridicously impotent about the issue of compensation, but that’s because they are (willfully?) missing the point which is that the government negotiated a very bad deal when it bailed out AIG. by keeping it afloat as a private company, they stopped short of nationalizing it – for a number of good reasons (for instance, they didn’t want to trigger an accelleration on the CDS). Now they have to deal with the consequences of it being a private company. One of those consequences is that the company entered into contracts which they are bound to uphold, including contracts for compensation.

    if obama and the government are so keen on having the government violate the terms of legal contracts without any sort of due process (sort of a BIG constitutional issue, i hear) then they should apply themselves to something a lot more porductive than these compensation issues. For instance – they should consider tearing up the CDS that AIG and many others entered into, perhaps on the theory that such contracts were not legally authorized. At least then they would have some legal basis, instead of just a populist surge of emotion. it would have the additional benefit of actually doing something to solve the financial crisis, unlike this nonsense over the compensation.

    on the point of the people at AIG financial products – it is popular all of a sudden to conclude that these people were willful law breakers (i believe this line of thought is used to justify the unconstitutional violation of legal contracts between private parties by a government agency) but that is also just a false, false, false line of thinking.

    what these people did was absolutely within the law – CDS was widely used and actively encouraged across industries and by the government – including the chairman of the Fed. They had the approval of their accountants, the rating agencies, their compnaies investors, their managment and many other constituents. in fact, people who argued against this type of business were actively derided. Not only that, most of the people in this business believed that they were in a legitmate business which was adequately adressing the various credit issues thanks to a wide variety of economists, rating agencies, research instituions and other scholarly types which concluded that the risk was appropriate.

    it is all well and good to re-write history to justify your current thinking – it happens all the time for economic gain – but it is not the making of a very sound legal argument. if the government wants to run AIG as their own company, all they have to do is take over the remaining 20%, and of course, deal with the consequences of such an action.

    if not, they, and all of you other clever commentators, should think very hard about advocating the violation of laws based on subjective, retoractive, reinterpretation of history for populist agendas. It is a pretty scary thing. once the government starts this sort of thing it is awfully hard for them to stop. and if this is what you really believe in, you should at least be consistent and sensible about it – apply it towards something that will do some good – like tearing up CDS.

  15. CTMM

    The guest posts are cool, but how about easing up on the use of bold text?

    Instead of a thoughtful essay it transforms a post into something that looks like FIVE INCREDIBLE PENNY STOCKS POISED TO ROCKET!!!!

    This blog is great in part because Yves and readers devote time to real writing, not just pull quotes for executive summary.

  16. Leo Kolivakis

    CTMM,

    I have my style of blogging and Yves has hers. I am not here to compete but to inform her readers of important trends that are happening in global pension funds.

    You will never be able to please everyone and I do not blog with that intention.

    If I bold something it is because I want to emphasize it.

    The most important thing is to have an ongoing dialogue on what is going on “behind the scenes”, always questioning what you are reading in the financial press.

    I thank all of you for your contributions. I enjoy reading the insightful feedback.

    Kind Regards,

    Leo Kolivakis
    Pension Pulse

  17. setitnforgetit7

    Anon’s at 6:49am and 7:44am are absoulutely right. The bonus outrage is much ado about nothing and diverting attention away from the broad daylight theft of the taxpayer by Goldman Sachs, Deutsche Bank, Societe Generale, BNP Paribas, etc., using AIG as a conduit. It is this simple; and the point needs to be reiterated.

    If you’re over the age of twelve and you still think that this was an accident that our legislators placed virtually no restrictions as to where the bailout money was funneled, you could not be more wrong… and I have a bridge I’d like you to check out. This was all prerehearsed with Hank ‘Fox Guarding the Henhouse’ Paulson stealthily bailing out his cronies at Goldman Sachs (insolvent) and elsewhere on Wall Street with taxpayer dollars that will never be repaid. You have to be blind, donning rose-colored glasses and in denial not to get this. Dissecting all of the diversionary tactics ad nauseum is a waste of time. Keep it simple, silly.

  18. Anonymous

    By Decimate ‘the whole’ financial group, yes, I was implying randomly firing 10%.

    Based on their results, the whole group should be wound down. We’re told that’s not possiable. A symbolic random 10% (including mgmt… everyone) would be possiable, send a message, and open enough headcount to bring in some new people.

    AIG needs to bring in new people if it’s going to avoid Lehman’s fate.

  19. Anonymous

    Anonymous @10:18 a.m.
    1) Contract law may be guided by the U.S. Constitution in some of its aspects, and I know it sounds VERY SERIOUS to speak of some legal action as unconstitutional, but just how is renegotiation of employment contracts unconstitutional? Are you referring to British law?
    2) You need to decide whether CDS contracts were potentially “not legally authorized” (paragraph 2) or whether “what these people did was absolutely within the law ” (paragraph 4). All vaporous declarations to the contrary, there are credible suggestions that “what these people did” may not have been entirely legal. Ponzi schemes qualify as fraud; fraud is commonly illegal; AIG’s CDS business has been likened to a Ponzi scheme.
    Perhaps British law is less clear on this matter, but I suspect one could see to it that the lads in AIGFP face some “discomfort” if they don’t cough up their retention bonuses. All hot air notwithstanding.

  20. Peter the Rock

    It’s easy to condemn the poor employee of AIG. I was once a salesman for Xerox in the 70s. Exactly the same senario…pump the pump, close the deal, grab the commission. We did not think about the grandee scale of things…we were targetted and choose to rise to the occasion.

    I do however agree with your proposition: disclaim the contract and have each exec institute a legal action. However, I do feel for them, as they were just the foot-soldiers, it’s the Mr Bigs you need to get..Paulson first and the other pratts later…!
    Hang the Bastards…..

  21. STS

    Anybody else here ready for a dose of an obscure concept called … ‘capitalism’? Treasury should force AIG to spin off AIG Financial Products and then put FP into Chapter 11.

    The ensuing legal Armaggedon over AIG Financial Products’ CDS would be highly instructive. For example all those counterparties now pretending to be solvent (and bragging about how they don’t need no stinkin’ bailout money) would suddenly become a tad more humble.

  22. Anonymous

    “The bonus outrage is much ado about nothing and diverting attention away from the broad daylight theft of the taxpayer by Goldman Sachs, Deutsche Bank, Societe Generale, BNP Paribas, etc., using AIG as a conduit.”
    And why do think that a American Bank pays foreign bank.
    I don’t think it’s a gift.
    I’m french and I know someone who is betting on stock, his bank, maybe Societe Generale, said to him that he could ensure is possible loss, and I think, that it’s AIG who is ensuring the possible loss in stock exchange.
    The problem with AIG is that they receive insurance premium but they never covered the risk.
    The american taxpayer is paying who Wall Street.

  23. Anonymous

    “The american taxpayer is paying who Wall Street.”
    Mistake
    The american taxpayer is paying for Wall Street.

  24. JC

    Just say no to paying these guys. Just saw a segment at TPM, where a guy there estimated that, to finally fully bail out the financial system, will require 1 trillion dollars.

    NO ONE will politically be able to do this, if these bankers/finance people involved with CDS stuff, gets away with stuff like this. Congress will vote further rescue down.

    Thus, dooming future recovery, to a long way off, thus dooming Obama’s first term.

    Someone needs to get word to Obama – his primary two guys, Summers and Geithner, appear to be taking him for a ride. Being accomodationist with the financial “centers of power”, for lack of a better word – the Goldman Sachs, AIG-heads, etc – simply means that he reduces his chance of a 2nd term win.

  25. Yves Smith

    Anon of 10:18 AM,

    I suggest you go read A Lawyer Mom’s Musings above. With all due respect, most people who go on about “the sanctity of contracts” have had very few real world dealings with them.

    Contracts are disputed and renegotiated, or terminated (with some kind of consideration paid) ALL THE TIME. And who prevails generally has VERY little to do with the merit of their position. It generally is a function of:

    !. Who will be damaged most by discovery (costs and what embarrassing other stuff will be found)

    2. Who has the deepest pockets

    3. Who is most tenacious

    The government CLEARLY has the deep pockets here, and also can embarrass AIG execs enormously. But it doesn’t want to, perhaps out of (misguided) fear about reducing confidence.

    And sadly, AIG can fake tenacity (they lack the staying power to be truly tenacious).

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