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Wiliam Black Savages Treasury’s Conduct on AIG

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William Black, now a professor of economics and law at the University of Missouri (Kansas City) was a senior bank regulator during the savings loan crisis (his claim to fame was his pursuit of Charles Keating of Lincoln Savings, in which he was removed from the initiative and more management friendly investigators were assigned, and events later proved Black correct). Black has seen a lot of bad behavior at close range.

He is not at all impressed with how the Treasury has handled AIG. Via e-mail:

This is the consequence of six things on the Treasury end of things:
(1) the failure to use Chapter 11 bankruptcy/pass-through receivership to deal with deeply insolvent financial institutions

(2) the failure to expose, and to the extent possible, remedy through restatements the massive accounting fraud that AIG was/is engaged in that triggers the bonuses

(3) the failure to bring criminal charges against the control frauds

(4) the failure of Treasury as negotiators — they had all the leverage when they bailed out AIG and could have conditioned the aid on at least the VP tier and above giving up their bonuses

(5) the weakness of Treasury’s current lawyers who, if press reports are accurate, couldn’t think of any way for the U.S. government to take effective action against what it reportedly views as a scandal,

(6) (and I haven’t seen this discussed) why was Treasury blind-sided by this? It confirms that they did not conduct even the most obvious due diligence on AIG’s assets and contingent liabilities

Given what we know about the lack of due diligence by AIG on underlying assets, particularly nonprime paper, this confirms exactly how dangerous Treasury is to the the nation. It is also consistent with the concern that it faces such a critical staff shortage, particulary in the relevant skills (which the folks it hires from Wall Street lack). I doubt that they have five senior officials that have ever reviewed loan files for a living or conducted meaningful due diligence (which requires cracking the loan files).

On the AIG end we see the perverse incentives of keeping the senior level folks on that caused the crisis. They have every incentive not to be honest about the true extent of the losses. They know the place is dead (hopelessly insolvent) and have strong incentives to loot the corpse, e.g., through bonuses. They do not alert Treasury sufficiently in advance even to bonuses that they should know will be perceived as scandalous (though another problem with keeping these failed elites in power is that they are clueless about the reaction of normal people). They do not work to limit bonuses, e.g., by being honest about past accounting fraud. I believe when the facts come out that we will find that they did not make criminal referrals on the prior senior officials that led AIG’s accounting fraud (which would have given AIG and the Treasury a far stronger legal basis for refusing to pay bonuses that were “earned” via accounting control fraud.

I don’t oppose bonuses that are actually earned through long term performance. That is not the case with the AIG bonuses. We can offer well designed performance pay if we use bankruptcy or receiverships.

We see tonight another lame defense that the Treasury is trying really hard to claw back the bonuses. Please. Even if Treasury consulted outside counsel, I would strongly suspect it would be a large firm with a big corporate clientele.

Guess what? At those firms, HR is a backwater. The best HR lawyers are typically at boutiques or solo operators because they sue large corporations (that would represent a rather insurmountable conflict of interest for any firm seeking to represent those nice big meal ticket clients). I’m not current, but a decade ago, there was a woman lawyer (I cannot recall her name to save my life) who was an absolute killer, When a wronged executive or employee walked in with her at their side, BIg Co. knew they had a very serious problem on their hands. I am told by people who used her she was also a phenomenal negotiator on deals. It’s certain that Treasury did not attempt to secure advice from that sort of attorney.

And to Black’s point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5×7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity.

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45 comments

  1. Don

    “And to Black’s point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5×7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity. “

    I agree. A terrific post. People should read Pizzo’s “Inside Job” about the S and L Crisis. It will at least teach them what to look for.

    Don the libertarian Democrat

  2. Moopheus

    5×7′s? Are things so bad now that blackmailers won’t spring for 8×10′s? I’ve still got a wet darkroom–I’ll make some prints for them, very low rates.

    But really, fraud does seem to be the elephant in the room that no one seems to want to talk about, whether it’s in mortgages or management. In fact, it has always seemed like whitewashing the fraud has been an implicit goal of many of the programs put forth by this administration and the last. Really, one has to ask, who are they really protecting? It has to be more specific than just the appearance of the “integrity of the system.”

  3. Anonymous

    Tyler Durden carried a good discussion about the black hole that CDS are and the lack of foreseeable solutions, on the previous AIG disclosures post… something worth fleshing out and tying into your suspicions.

    It sounds like AIG is a real lemon, but a good front for funneling out taxpayer cash to banks (sans the stigma of govt assistance), and maybe a necessary front for keeping up appearances that the US’s behemoths aren’t paint-on-rust.

    Well, anyway.. back to trying to make that imaginary wealth real

  4. Anonymous

    Where is the Attorney General in all of this?

    Without forceful leadership at the top, there will be no recovery.

  5. Riggsveda

    Why is it that AIG’s argument against clawing back those bonuses (contracts must be honored) has the weight of a force field, when no one thought twice about breaking contracts when it was UAW workers who would take the hit? State workers across the country have or will be facing the breaking of their contracts by governors asserting emergency situations, but no one is howling about that. Or is it that the only legally-binding contracts left are those between members of the overpaid and overprivileged patrician class?

  6. dearieme

    “AIG must have the 5×7 glossies on some pretty influential people”: or a single photocopy of one man’s Long Form Birth Certificate?

  7. fresno dan

    I am shocked that anyone is shocked. The Fed is a bank…whose mission…is to SAVE BANKS (OK, OK, it is to ensure financial stability – which they believe means SAVING BANKS). That is what they really believe. They don’t have to be corrupt, or stupid, or evil. This is what they believe – they simply can’t see that the banks exist because of the country, not the other way around.
    O, and again, wonderful reporting by NC

  8. Mannwich

    This has been my assertion since Sept of last year. The fraud and criminality is so pervasive, the feds fear that if they go down that road, they’ll find that much of our system itself is completely fraudulent. Now what would that revelation do to the markets and our economy? It’s also likely why we won’t get the real truth behind the likes of Madoff and Stanford.

  9. Anonymous

    AIG is not the issue, and nothing more than a Red herring. Since the August 2007 credit blow up, the Treasury and the Fed initiated a policy to allow the principal financial actors to attempt to trade their way out of the mess. The policy is not working, but they are too invested to back out now. Keeping AIG alive allows another conduit to the investment banks. AIG seems to be acting as if they feel they have some power now – maybe they do. Given the recently released info on AIG counterparties receiving massive sums from the government – maybe they do.

    The “Fraud” is at the very highest levels of the Treasury. If the AIG conduit goes away, can the Treasury and the Fed rely solely on TARP II and TARP III? The derivative overhang will continue to unwind. Massive amounts of corporate term debt need to be rolled over in the next 48 months. Debt destruction will occur, and the White House / Treasuy will work to decide which firms live and which firms “restructure.” The market forces are in motion and the trends continue to point to debt destruction.

    Yet, Goldman Sachs will survive – maybe even prosper.

  10. Jesse

    Why is there such a reluctance to use the “F” word (fraud)?

    Who was the greatest beneficiary from the AIG bailout?

    Oh yes. Goldman Sachs. Cui bono.

    http://tinyurl.com/d83hje

    Why do you think Geithner was selected as the Treasury Secretary? Certainly not based on any merit.

  11. Anonymous

    Couldn't the names and photos of the larger AIG bonus recipients be posted, and those individuals given them a 48 hour window to submit a written account of their AIG-saving actions, along with management's justification for each individual bonus? Anyone can research the accounts to see how correct they are.

    The notice would be issued by a collection of the most prominent economics/finance/business bloggers & experts. The "data" would be posted on a unique webpage, and mirrored by the group members if they like. Coordinated and introduced skillfully, it could snowball in the media and have support verging on a mandate.

    With the lack of political will (and govt fear of appearing to be "anti-business"), I don't know how else the process can be dragged into the light of day, truth fleshed out, shame dispensed, and non-monetary incentive be generated to motivate these guys into breaking their own necks to salvage things.

    Bonuses are more insult on injury than anything else (seeing as we're bleeding out), but might it be a game changer that would make them reconsider their notion that they've got the govt between a rock and hard place?

    I don't mean to rant, its a real question/idea. Any thoughts?

  12. MyLessThanPrimeBeef

    It’s still not too late for change.

    BTW, I wasn’t last November, but I am ready for leadership change now. I think we need replace everyone in Washington DC, from the janitors all the way to the very tops.

  13. Anonymous

    p.s. – As much as I like Seeing Obama & Co talking about exercising all legal options to nip the bonus… at this point, and with AIG having so much egg on its face, so little to loose, and such minimal faces-in-the-media presence… is tough talk at this hour going to force AIG mgmt to get entreched in this legal battle to save face and shield populous wrath?

    Thhese guys can play legal games… dragging them into the light is where they;re out of their element — remember what a reptile Paulson looked like?

  14. Anonymous

    “”AIG must have the 5×7 glossies on some pretty influential people”: or a single photocopy of one man’s Long Form Birth Certificate?”

    Offensive rightwing claptrap.

  15. Eric L. Prentis

    LARRY SUMMERS BULLSH*T! “The government cannot just abrogate [AIG bonus] contracts.” Ha! When AIG first came begging for a government bailout the Feds needed only to insert a clause that all bonus contacts were abrogated or taxpayer funds wouldn’t be forthcoming. Now that AIG has come begging three times, AIG can either stop the bonuses or return the $170 billion taxpayer dollars, or better yet, let the bonus babies sue, no US jury would award these bogus bonuses. Larry Summers acts like a big pig protecting all his little piglets. President Obama, where are you.

  16. Anonymous

    Our dear savior, Abraham Delano Obama, is out this morning assuring everyone that has the stomach to listen to his phoney posturing anymore that he will do everything in his power to pursue AIG legally on these bonuses. If BS were green this guy would be an 18 hole golf course. Why now is it “everything in his power”? He hadn’t exerted his full powers earlier? Precisely why? This commitment has all the force of his support for Charles Freeman.

  17. shoeless

    Yves,

    Could it have been Judith Vladeck you are thinking about? She was responsible for loads of NY law on wrongful termination during her career. Sadly, she passed away a couple of years ago.

  18. Anonymous

    I no longer think there is are ever will be any justice upon all these banksters are political crooks! The US citizenery simply don’t care enough about their freedoms to give a effort. We’re doomed it is that simple. I for example have over and over and over again told my fellow peers at work that stocks and banks are a bad bet but the only response is a deer in the headlights look. I’m forcing myself to just stop reading due to the level of frustration and anger. I’m moved totally into metals and no not ETF metals. My taxes are through the roof this year just for taking my own hard earned money and investing in something other that the IRA/401(k) scam. “Let them all eat cake”……….Amused

  19. Jason

    I’m sick of being outraged. It doesn’t work. Obama is a weasel that will slink out of this. He will clawback a very little bit to make it seem like he cares about the little guy when the opposite is true.

    I voted for Obama but I am ready for a revolution. Throw these bums in jail or hang them by their necks until dead!

    They are robbing the treasury of trillions to give to their fat-faced fuckhead friends on Wall St. and we’re sitting around getting mad and not doing anything about it. Most of my foolish friends on the left will give Obama a pass. And our media has been broken for probably decades. The people I hang around with, and my colleagues (almost all with advanced degrees) are onto the swindle on it is only the dumbest of the dumb (see e.g., Lary Kudlow, Obama, Summers, et. al) that still deny the obvious.

    The Democrats and Republicans are bought and paid shills of corporate America. Burn this shit down! The people need to seize the assets and hang these mofos! Literally.

  20. Michael

    The bonuses are quite simply hush money. Pay oversized bonuses and give the recipients time to spend them and let everyone fear clawbacks if anyone talks.

  21. Anonymous

    The Tresury the IBs the banks = criminal enterprise. The only honest AG on all this seems to be from NY and not from the Federal government. In my opinion the way Obama has handled the law side of the mess puts into question his integrity. Makes me wonder why I voted for the guy in the first place

  22. Anonymous

    Anyway to know what percentage of Congress is invested in these “toxic assets” that banks are holding?

    The fact that they are playing along with the fraudsters is telling.

    Why is Washington so hell-bent on restarting the real estate market, even if it ruins more Americans?
    Isn’t this the only way for those assets to regain their value?
    Isn’t this

  23. Peripheral Visionary

    “I doubt that they have five senior officials that have ever reviewed loan files for a living or conducted meaningful due diligence (which requires cracking the loan files).”

    This is an astute point–Treasury lacks the ability to administer its own programs. My own government agency gives financial advice to Treasury because they lack the ability to understand the very programs they are overseeing.

    This goes back to the excellent post from W Buiter on the spoils system. The Federal system, particularly at the higher levels, has become encumbered with politically connected lawyers whose primary skill is climbing the political career ladder. Look at the resume of virtually any appointee in virtually any department of government and you will see the same formula: law school degree, Congressional staff experience, and a string of political appointments, with a little time in the private law sector mixed in. Government needs a few lawyers, but right now it is absolutely saddled with an endless array of laywers who “contemplate nothing but the law”, and Treasury is no exception.

    The solution is more experienced staff who actually have real-world, live-action, private-sector non-legal experience. More former Wall Street people (distasteful, but they understand the markets), more private sector executives (ditto), and a lot more ordinary people who have worked for ordinary businesses, and a lot fewer political-career-ladder-climbing-lawyers.

    Unfortunately, given the resume of the Commander in Chief, the prospects for that change in attitude happening over the next four years are not good.

  24. Waldo

    Written in the Financial Times today – “Obama vows to fight AIG bonuses”.

    The President is thinking apart from Treasury (I think). This may be or may seem to be window dressing but none the less it is an opportunity for Obama to start applying his character. I never expected him to do it on the onset. He needs to work into the seat of power. He has my confidence.

    “Rule of law” must be brought back to the highest level of government (absent for 8 years).

    Natur und Kunst

    Nature and Art, they go their separate ways,
    It seems; yet all at once they find each other.
    Even I no longer am a foe to either;
    Both equally attract me nowadays.

    Some honest toil’s required; then, phase by phase,
    When diligence and wit have worked together
    To tie us fast to Art with their good tether,
    Nature again may set our hearts ablaze.

    All culture is like this: the unfettered mind,
    The boundless spirit’s mere imagination,
    Fore pure perfection’s heights will strive in vain.

    To achieve great things, we must be self-confined:
    Mastery is revealed in limitation
    And law alone can set us free again.

    Johann Wolfgang von Goethe

    [This is a derivative of Goethe's original thought - converted from the German language to English]

  25. MyLessThanPrimeBeef

    Chuantzu and Goethe must be the same person because for Chuantzu knowledge is infinite while human life is finite, so how can one use something finite to comprehend something that is infinite?

  26. Waldo

    “Chuantzu and Goethe must be the same person because for Chuantzu knowledge is infinite while human life is finite, so how can one use something finite to comprehend something that is infinite?”

    A philosophical discussion about infinity is not prudent to this blog.

    So, in a limited (applicable to this blog) manner what we have on the legal books is all we need to understand and apply today.

    It would be unwise to under-estimate Goethe. [It would be unwise to not apply lessons from our past].

  27. BondsOfSteel

    Hey, I got a way of avoiding paying the bonus without violating the contacts. FIRE THEN WITH CAUSE… THEY LOST BILLIONS!!!

    It’s not like out of work financial people in NYC are hard to find these days.

    Only when we (the taxpayer) have new people in the firm will the fraud cases come to light.

  28. Yves Smith

    shoeless,

    It was Judith Vladeck, thanks. I never met her, but heard stories about her from several people, which says she must have been quite a force. Thanks.

  29. Anonymous

    re: Peripheral Visionary,

    My buddy is a new employee at the Treasury. He has a History BA graduating cum laude, a Johns Hopkins School of Foreign Affiars masters, with interning experience at Fannie Mae. He ended up interning at the Treasury and works in the “fozen assets” dept (where they lock down assets for Burmese Generals and sketchy Saudi terrorist funders)

    His story is like every other friend who finds themselves working in govt now. that law school/politics/govt think is a tired stereotype. You’ll find a lot of young and especially 2nd career people in govt. A lot of the folks there today, aren’t the middle agers of the 70s/80s recession looking for a secure job, they’re people from a younger generation on their second or third career, who just enjoy the public service.

  30. Anonymous

    This is a link to the document submitted by AIG describing the AIGFP employee retention plan and the reasons given for not being able to reduce the payments further. http://www.scribd.com/doc/13291401/AIGFP-Employee-Retention-Plan

    Interesting tidbits include the fact that the $165 million for 2008 bonuses is 43% lower than 2007 pay levels (upon which the retention arrangements were calculated), but that the required payments are due to be higher next year! References to complicated bespoke transactions and difficulties in hedgeing complicated positions can also be seen as consistent with the fraud accusations.

  31. Anonymous

    Why does not the Treasury take some of this money it is giving away and hire the best derivative people out there on short term contracts to go in and wind AIG FP down. It would seem to be more efficient than giving the same people who created the mess more money in the form of retention bonuses.

    Chief

  32. Love Box 9

    DOJ should have been on this years ago, but the blackmail runs very deep and wide in all this mess, so who is covering for who? We know SEC is corrupt and useless, as is Treasury, as is FBI, as is DOL and then all the AG’s are out of the way and the only people left in control are the guys at places like AIG that are getting bonuses … hmmmm?

  33. DanyBoy

    I have heard whispers to this effect:

    Let the children play!
    They still have God to settle up with.
    We still need our gurus to steer us through the uncertain future.
    Masters will be masters!
    The best and brightest make up for the “up-front investment” later on

  34. run75441

    Yves:

    Amazing stuff and I posted using your comments elsewhere. It is amazing we can fire air controllers under contract. We can negate healthcare coverage under contract in federal court in bankruptcy. We can kill union contracts. God forbid we take away bonuses for W$ and AIG because it is under contract. If there was ever a reason to place AIG into conservorship, you have expressed it. AIG needs to be dismantled and management fired.

    Do you have speaking engagments in Chicago? I would love to attend one and hear you talk. I would drag some of my big and awesome litigaton friends with me. They don’t quite know what to make of this hack economist.

  35. Anonymous

    Maybe more “F” is what the financial systems needs. With creative accounting, they can make it look like there is no “R” or “D”. which would fool a lot of people into parting with their money for “S” and “B”. No one would know they were in trouble for years…i.e. long enough to take the money and run….wait that already happened. Sorry scratch that.

  36. Anonymous

    So far when you divide the bailout money by the number of families in the U.S., it’s only about $8000 per family.

    Americans spend this much on entertainment every year, and it’s this such great entertainment? I say you’re getting your money’s worth.

  37. Anonymous

    This is all about one-upmanship.

    AIG and their Wall Street cohorts told the American public, “Just to prove we are smart and you are stupid, we are going to enrich ourselves, live like gods, rip you off and there is nothing you little people can do about it”.

    Our elected dear leaders said, “Oh yeah! Well, we will show you! We will just pay for all of your losses with the little people’s money, so put that in your pipe and smoke it AIG.”

    I’ll let you decide who won this little contest.
    – Avg John

  38. Peripheral Visionary

    Anon 9:26: “His story is like every other friend who finds themselves working in govt now. that law school/politics/govt think is a tired stereotype.”

    Oddly enough, my observation is that second-careers are more likely among younger members of gov’t than older ones; and much more likely than those in positions of influence. In my own agency, it is people my age (30′s) who are most likely to have worked in another field; go up the ladder to higher positions and go up to older employees, and a majority have never been outside of government or government-related positions.

    The law school/politics/gov’t thing may be a tired stereotype, but I see plenty of it in my own agency, and I see plenty of it in the Obama appointees (and in Obama himself.) There seems to be a growing sympathy for a European-style technocracy; an elite class of government servants unencumbered with connections to the private sector. I think that’s a serious mistake, and Europe does not seem to be faring any better in this crisis even with its supposedly superior public servants. Government needs more people with private-sector hands-on experience; and while I see some of that coming in at the lower levels, there is still precious little at the higher levels.

  39. Anonymous

    As a derivatives trader and one who knows some of the AIG-FP traders in question, I can confidently state that the argument over the efficacy of the latest bonuses is misguided. The wheels are already in motion…

    Whether or not they get these bonuses, the top talent at AIG-FP will leave. There will be no more big pay days — that is the bottom line. More importantly, who would work at such a reviled company unless they really had to? Saying you’re now a trader at AIG-FP is similar to saying you work at Madoff Securities of Enron. Many already have left and others are just waiting for this last bit of renumeration. Most don’t need another job or can afford to wait until the market picks up. The others, who are not so wealthy or in demand, will stay regardless of what happens and take any salary given, bonus or no bonus.

    So, whether they get this bonus or not, the result will be the same: the so called “stars” will leave and AIG will be left with those who have to stay to take care of cleaning up their portfolios.

    So, there is no strategic reason to pay these latest bonuses . It is just more money down the drain.

  40. Anonymous

    William Black – Deceptive

    http://tinyurl.com/d6d3cq

    William Black admits at the above that the Prompt Corrective Action (PCA) does not apply to holding companies, but on Bill Moyer he indicates it does.

    The major bailouts are going to holding companies, Citigroup, Bank of America, etc that have both commercial banks (FDIC) and investment banks (SEC & CFTC – voluntary)

    GAO reports that there was no authority to take over the investment banks, but the Federal Reserve can provide money if the bank is a threat to the economy.

    FINANCIAL REGULATION: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216,
    January 2009

    On March 26, 2008, Geithner proposed regulations to increase authority

    “Under current law, no regulator has the authority to essentially take over a troubled bank holding company—conglomerates with a wide range of financial operations—the way the government routinely does with smaller, commercial banks.”

    Some Republicans voiced opposition.

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