[onoway]

On the radio this afternoon it was reported that the person who is running AIG now ( I don't remember the name) has asked the people who got the bonuses to return at least part of the money. He was quoted as saying some had offered to return 100% of theirs. Can it be true? If so, how refreshing!

[Winstonm]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

[luke warm]

Winstonm, on Mar 19 2009, 08:53 AM, said:

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

i think you're being way too picky and pessimistic... once the green jobs get up and running and the tax rates are tweaked, we'll be ok... we won't even miss this bail out money

[kenberg]

onoway, on Mar 18 2009, 11:34 PM, said:

On the radio this afternoon it was reported that the person who is running AIG now ( I don't remember the name) has asked the people who got the bonuses to return at least part of the money. He was quoted as saying some had offered to return 100% of theirs. Can it be true? If so, how refreshing!

Edward Liddy, no relation I hope to G Gordon, gives every appearance of being a very good guy to have around. He reports his salary as $1 per year. In testimony to Congress, he said that the main screw-ups are no longer employed by AIG and the folks getting the bonuses are those who are actually doing the hard work of straightening it all out. Perhaps so.

I would be delighted to find that my disgust with the whole operation is out of date and that Liddy has brought the operation back into the light of day. I am by nature an optimistic sort and perhaps this will all work out. Optimism is compatible with a certain amount of skepticism so we will wait and see. We may all end up owing Liddy a huge vote of thanks. This would be very nice.

[mike777]

Winstonm, on Mar 19 2009, 08:53 AM, said:

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole thing can get pretty confusing. As I understand the problem was:

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.
That means the governent cannot make a profit on this stuff, it just breaks even at best.

8) Note all or almost of these bets are still not in default in March of 2009.

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .


10) This is a pretty confusing story, hopefully more facts will come out.

http://www.charliero...interview/10153

[Winstonm]

mike777, on Mar 19 2009, 10:02 AM, said:

Winstonm, on Mar 19 2009, 08:53 AM, said:

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole think can get pretty confusing. As I understand the problem was:

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.
That means the governent cannot make a profit on this stuff, it just breaks even at best.

8) Note all or almost of these bets are still not in default in March of 2009.

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .


10) These is a pretty confusing story, hopefully more facts will come out.

That actually makes some sense to me, now. So it seems GS, CS, and others were using AIG to insure against capital loss on the MBS and such that they held, and AIG - most likely using a faulty mathematical model - assumed the risk, believing in a flawed model that said that what did happen could not happen.

[mike777]

Winstonm, on Mar 19 2009, 10:17 AM, said:

mike777, on Mar 19 2009, 10:02 AM, said:

Winstonm, on Mar 19 2009, 08:53 AM, said:

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole thing can get pretty confusing. As I understand the problem was:

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.
That means the government cannot make a profit on this stuff, it just breaks even at best.

8) Note all or almost of these bets are still not in default in March of 2009.

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .


10) This is a pretty confusing story, hopefully more facts will come out.

That actually makes some sense to me, now. So it seems GS, CS, and others were using AIG to insure against capital loss on the MBS and such that they held, and AIG - most likely using a faulty mathematical model - assumed the risk, believing in a flawed model that said that what did happen could not happen.

Winston I actually read a very long piece about the model used. It is pretty famous in the finance world. The model seems to work very very well. Note the model is all about default risk. These bets did not default.



"Gary Gorton, a 57-year-old finance professor and jazz buff, is emerging as an unlikely central figure in the near-collapse of American International Group Inc.


Gary Gorton
Mr. Gorton, who teaches at Yale School of Management, is best known for his influential academic papers, which have been cited in speeches by Federal Reserve Chairman Ben Bernanke. But he also has a lucrative part-time gig: devising computer models used by the giant insurer to gauge risk in more than $400 billion of devilishly complicated deals called credit-default swaps."
http://online.wsj.co...9722784635.html





However there was collateral risk and liquidity risk and other risks that the model, and this was known, did not model.

Think of it as if we own a house, we have default risk, fire risk etc. However what most of us do not insure against are Floods, running water risk. If our house is in a 100 year flood plain most of us do not insure against that risk.

In this analogy AIG bought hundreds of billions of houses and no flood insurance.

[hrothgar]

mike777, on Mar 19 2009, 06:29 PM, said:

However there was collateral risk and liquidity risk and other risks that the model, and this was known, did not model.

Think of it as if we own a house, we have default risk, fire risk etc. However what most of us do not insure against are Floods, running water risk.  If our house is in a 100 year flood plain most of us do not insure against that risk.

In this analogy AIG bought hundreds of billions of houses and no flood insurance.

Your formulation makes it sound as if AIG got unlucky.
This is wrong. VERY VERY wrong.

AIG went down because the basic risk models used by their Financial Products group were fundamentally flawed.

At the most basic level, the risk models that they used when issuing Credit Default Swaps assumed that that foreclosure risk is Indendent and Identically Distributed (IID). Foreclosure risk was typically modelled as a normal distribution.

As we have now discovered, there is a great deal of correlation across foreclosures and the tails are a lot fatter than they thought.

The following piece is very "fluffy", but it provides a decent layman's discussion about what took place:

http://www.wired.com/techbiz/it/magazine/1...currentPage=all

[mike777]

AIG did not get unlucky, they were incompetent risk managers. I made that very clear. I said they knew there were other risks and did nothing about them. At at the very least not limiting collateral and liquidity risk was poor. My guess is they mispriced these risks. Keep in mind these contracts did not default.



As a side note I think the whole discussion of whether this was a Nassim Taleb Black Swan event(fat tail) or a Benoit Mandelbrot's Gray Swan of a flawed model that does not forsee disaster or whether this was a Black Bart(risk was fully knowable, fully discoverable in the course of competent work) per Janet Tavakoli is an interesting issue. Black Bart is said to have robbed California stagecoaches without ever firing a shot and the mortgage meltdown involved some bloodless robbery.

edit.

[y66]

That Charlie Rose segment that mike777 posted was good stuff.

[DrTodd13]

It seems to me that if you care about the survival of this company (too big to fail or so they say) that the last thing you would want to do is try to undo bonuses, especially contractually obligated ones. You can't (and definitely shouldn't try to) force people to work for a certain company and if these people don't get bonuses at this company then a great many of them are likely to leave for greener pastures. How will a company in such a predicament survive when its best and brightest and those who understand the most about the business leave?

[Phil]

DrTodd13, on Mar 19 2009, 12:56 PM, said:

It seems to me that if you care about the survival of this company (too big to fail or so they say) that the last thing you would want to do is try to undo bonuses, especially contractually obligated ones. You can't (and definitely shouldn't try to) force people to work for a certain company and if these people don't get bonuses at this company then a great many of them are likely to leave for greener pastures. How will a company in such a predicament survive when its best and brightest and those who understand the most about the business leave?

Todd, I would think you'd be the last person around here to defend a bailout.

[jdonn]

Who says the people in charge at the company were its best and brightest anyway?

[Lobowolf]

They're not going to be replaced by the best and the brightest, either. If the idea of the bailout was to make it a continuing, viable, competitive company, this isn't the way to do it. Whoever the best and the brightest are, they're not going to work for TARP recipients if their compensation is up for grabs retroactively. 90% retroactive tax is a poor call based on political posturing and grandstanding.

[jdonn]

Lobowolf, on Mar 19 2009, 03:16 PM, said:

They're not going to be replaced by the best and the brightest, either. If the idea of the bailout was to make it a continuing, viable, competitive company, this isn't the way to do it. Whoever the best and the brightest are, they're not going to work for TARP recipients if their compensation is up for grabs retroactively. 90% retroactive tax is a poor call based on political posturing and grandstanding.

I couldn't agree more. That's the true argument against what the government is doing, not a worry that the best and brightest at the company will leave.

[Echognome]

I agree that a 90 percent tax enacted retroactively is wrong. It is clearly a punitive levy. It is not, however, unprecedented to have such high rates.

From wiki on U.S. Income Taxes:

"During World War I, the top rate rose to 77%; after the war, the top rate was scaled down to a low of 25%.

During the Great Depression and World War II, the top income tax rate rose again. In the Internal Revenue Code of 1939, the top rate was 75%. The top rate reached 94% during the war and remained at 91% until 1964."

My understanding is that these top rates were enacted to counter war profiteers from making money from the blood of fellow citizens, although my understanding is, admittedly, simplistic.

[mike777]

As I mentioned before I think to use the taxing power to punish a few selected people, retroactively, sets a dangerous precedent. The House clearly said this tax is to punish people.

I do a agree with many other posters that this is a bit too much ado about nothing but as for the CEO, he should have just bit the bullet and not paid the bonuses to this division. If that means people suing the company and being fired, so be it.

In any event we all know for the next two years there are going to be scandals and outrage coming out of all stuff.


BTW I read where the President wants new expanded powers. He wants to set up a "resolution trust division" that will have powers similiar to the FDIC. FDIC applies to commercial banks, this new regulatory power will have the power to takeover/sell at auction insurance companies/investment banks/finance companies without a court order or shareholder vote. The FDIC already has this power for banks.

[Winstonm]

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

[mike777]

Winstonm, on Mar 19 2009, 04:48 PM, said:

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

I am not sure what you mean by trigger. But per Hank Greenberg these things did not default and they are called credit default swaps. He made clear that AIG only paid out collateral.

To put this another way, people can default on a mortgage in this package but it does not put the contract into default.

See Charlie Rose show.
See WSJ article.



"From comments made by AIG executives it appears that the company fundamentally misunderstood the nature of risks that it was underwriting. Those risks were

a) much more highly correlated than they assumed (due to the nature of bonds in CDO structures as well as the likely performance of super-senior tranches in event of impairment)

actually mark-to-market risk, not default risk which actually made AIG’s business much riskier than it thought. This is because long before super-senior tranches became impaired (the only risk AIG was worried about), AIG will have had to post more collateral than the cash it had on hand effectively guaranteeing its bankruptcy long before it had to “make the policy holders whole”"


http://creditriskchronicles.blogspot.com/2...anage-your.html

[DrTodd13]

I'm not defending a bailout. The bailouts are immoral. Notice that I said "if" you want to keep the company from dying then you need to keep or recruit top people. These people no doubt put blinders on and got hyper-greedy but they aren't stupid. If anybody can salvage the company in its current form it is going to be smart people who understand the business. You can believe that merit was disregarded in favor of some other factor and therefore the best and the brightest somehow didn't rise within the ranks of AIG but in general, from my experience, that isn't how business works. The competent rise to the top and the incompetent don't. Lobo is just making my point. If you want AIG to fail then this is how you do it...you say we'll just confiscate your contractual income whenever we desire and no one good enough to actually save the company will choose to work there.