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  • martinchuzzelwit martinchuzzelwit Mar 18, 2009 12:25 PM Flag

    WSJ Op-Ed on AIG - regulators say they were "on the job"

    The Real AIG Outrage

    President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

    Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

    Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.
    * * *

    Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.

    The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.

    Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.

    But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it "a false statement" to say that his agency couldn't regulate the London office.

    And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit.


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    • That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.

      Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.

      Current AIG CEO Ed Liddy was picked by the government in 2008 and didn't create the mess, and he shouldn't be blamed for honoring the firm's lawful bonus contracts. However, it is on Mr. Liddy's watch that AIG has lately been conducting a campaign to stoke fears of "systemic risk." To mute Congressional objections to taxpayer cash infusions, AIG's lobbying materials suggest that taxpayers need to continue subsidizing the insurance giant to avoid economic ruin.

      Among the more dubious claims is that AIG policyholders won't be able to purchase the coverage they need. The sweeteners AIG has been offering to retain customers tell a different story. Moreover, getting back to those infamous bonuses, AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both.
      * * *

      The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

      Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.

      Please add your comments to the Opinion Journal forum

      • 3 Replies to martinchuzzelwit
      • > Whether or not these funds ever come back to
        > the Treasury, regulators should now focus on
        > getting AIG back into private hands as soon
        > as possible.

        This is exactly what the RTC (Resolution Trust Corp.) did after the S&L crisis 20 years ago. It was wrong then, and it would be wrong again.

        20 years, the RTC sold bank stock that they had acquired almost immediately. They did not wait to give the banks a chance to get on their feet and for the stock to recover. So, we the citizen, and the government lost most of the money they had spent to save the banks.

        If we get stock in AIG and failing banks now, companies that we intend to make whole again, then we should wait until those companies are restored to good health and until the stock is worth something. Don't sell the stock back cheaply to the bank CEO and management, and other investors so they can make millions as the bank stock recovers. We need to get something back for our national investments, certainly. Don't make the same mistake twice!

      • Was just listening to the McCarthy hearings in Congress going on right now against the head of AIG, a private citizen, and I had to choke at these blowhard representatives and their sad, sad, stuttering outrage. They're gonna take back those bonuses, don't ya know? They're gonna tax them 100%. They want to know the names of the recipients, private citizens, and if he won't give them the list, they'll show THEY are in charge and THEY will issue subpoenaes against private citizens (Barney Frank). They are gonna get that taxpayers' money back for the taxpayers - money that equals less than one tenth of one percent of the whole AIG bailout. Heh, Barney, how about just getting back all of the bailout? How about just getting the government out of a private business and let it sink or swim on its own? How about GIVING back those hundreds of thousands of dollars donated to your campaign and Dudd's, and Obummer's and Clinton's and a myriad of other liberal democrats? Was that taxpayer's money as well??

        But the funniest one was the representative who said that AIG was the name of a company that stands for Arrogance, Incompetence and Greed. Well guess what, you stupid legislator, that company is owned by the government to the tune of 80% and I can't think of anything more Arrogant, Incompetent and Greedy than the leaders of our government right now.

      • Martin,

        In one of the ironies of this situation, Senator Dodd is now being fingered by the Obama administration as the author of a TARP loophole that permitted payment of the bonuses.

        Exactly the opposite is true, as Jane Hamsher explains:

        Language from the Senate bill, written by Dodd:

        (4) 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 with respect to any TARP recipient;


        (a) In General- Notwithstanding any other provision of law or agreement to the contrary, no person who is an officer, director, executive, or other employee of a financial institution or other entity that receives or has received funds under the Troubled Asset Relief Program (or ‘TARP’), established under section 101 of the Emergency Economic Stabilization Act of 2008, may receive annual compensation in excess of the amount of compensation paid to the President of the United States.

        (b) Duration- The limitation in subsection (a) shall be a condition of the receipt of assistance under the TARP, and of any modification to such assistance that was received on or before the date of enactment of this Act, and shall remain in effect with respect to each financial institution or other entity that receives such assistance or modification for the duration of the assistance or obligation provided under the TARP.

        Dodd's version prohibited TARP recipients from paying out bonuses, retention awards or incentive compensation to the 25 most highly compensated employees. It also prohibited any employee of a company receiving TARP funds from making more than the President. Both provisions would have been in effect so long as a company was receiving TARP funds. Since AIG just paid out $1 million in bonuses to 73 employees, Dodd's version limiting all employees to what the President made (roughly $500,000) would have substantially nipped that in the bud.

        Dodd's provision was weakened when the bill got to conference. According to those knowledgeable about what happened, it was due to pressure brought to bear by the Treasury out of concern that those with contracts that guaranteed them bonuses would litigate.

        From the final conference version of the bill:

        (iii) The prohibition required under clause (i) 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.

        So -- in the end, all compensation limits only applied to contracts written after February 11, at the specific request of Timothy Geithner, and AIG was able to pay out $286 million in bonuses on Sunday.

        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.

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