No doubt much ink and many pixels will be spilled venting outrage at these antics. For myself, I can only add, somewhat dejected, I am not entirely surprised that this type of thing is going on since the government has made it clear that AIG is not going away.
Bill Kristol on Fox News Sunday summed it up nicely:
AIG sold these credit default swaps to very sophisticated investors, mostly to other banks and other major financial institutions, many of them in Europe, they bought these thinking hey easy profit, no risk....[these were] insurance policies against stocks that they didn't own. They thought they were just making money. AIG thought they were making money and the counterparty thought they were making money. And the way the bailout has worked, as I understand it, is that the counterparties have been relieved of any risk, not only any risk, any loss...If you're a sophisticated bank who bought a credit default swap from AIG you've been made whole. No haircut even, not even 80 percent or 90 percent, 90 cents on the dollar.I was just going to leave it at that, but reading that news story linked above I can't resist these.
"But where there are contracts, binding contracts that were entered into long before the government put any money into AIG -- we're not a country where contracts just get abrogated willy-nilly," he [White House National Economic Council director Larry Summers] added.Well, when you run your company in to the ground and you know, bankrupt it, then it cannot pay its contracts. My question is why should taxpayers have to do so?
Then, there was this item (emphasis added):
In a letter to Geithner Saturday, Liddy [the government-appointed AIG boss] said the bonuses could not be cancelled due to the threat of lawsuits for breach of employment contracts, and that AIG risked an exodus of senior employees if it does not pay them out.Finally some good news! The "senior employees" of AIG are threatening to leave. Why are these people even still on the premises? Is there any reason we would want to keep senior leadership that runs a company the way that AIG has been run?
AIG has got to be the best argument of an "exodus of senior employees" at least since Enron. Here's hoping that exodus or not, we don't end up wandering in an economic desert for forty years.
5 comments:
Jeremy,
I have a B.A. in Econ as well. I know we are on a sort of Ferris Wheel here, but I would ask you to look at (yep, we're supposed to be transparent and we're not) a huge but untold concept (ok, screw the concept) called "credit default swap".
It's the bug in the rug. It's the real reason because the web holding International banking institutions seems to live in this network. If I'm wrong kick me off your scene, but at least give it a look.
Jeremy,
I have a B.A. in Econ as well. I know we are on a sort of Ferris Wheel here, but I would ask you to look at (yep, we're supposed to be transparent and we're not) a huge but untold concept (ok, screw the concept) called "credit default swap".
It's the bug in the rug. It's the real reason because the web holding International banking institutions seems to live in this network. If I'm wrong kick me off your scene, but at least give it a look.
Del,
If you are saying that CDS's are a major part of what is crippling the financial industry right now, I would say you are right.
Many people seem to have forgotten that risk still existed, home prices wouldn't go up forever, and sometimes debtors default. AIG (and others) proved incapable of recognizing these basic facts and accounting for them in the management of their business.
I seem to recall a Will Rogers quote where he described a commodities future contract as being between someone who sold something he didn't have and someone else that bought something they didn't want (I'm paraphrasing here, but you get the idea.)
I would say these CDS have a similar quality to them.
Good for AIG and their big-wigs. The leaders of AIG deserve the bonuses. They were able to pull off quite the con job by getting the taxpayers to keep them afloat. Had there been no bailout of AIG, I don’t think they’d be getting their bonus. Serves us right!
Not having a degree in economics but being a student of of time, I truly have to ask the question would credit default swaps have been possible before the age of computer trading, or for that matter, would any of this mess we are in have been possible before computers? I reiterate my point that things cannot operate on the models of old archetypes of barter. Barter (here I'm sounding like Ezra Pound again) must be grounded in something time-oriented, like the time it takes to cut a tree or pick an apple; otherwise it is simply instantaneous nothingness, black holes "created" by brokers bending over computers trying to find any way to cheat the public. The money-lenders must be driven from the temple again and regulations (pre-Ronald Reagan)be put in place or the "system" won't work.
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