[hrothgar]

DrTodd13, on Mar 20 2009, 02:02 AM, said:

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.

You seem to be assuming that the skill set necessary to bail out this business bears some semblance to the skills necessary to sell credit default swaps...

I doubt that they are remotely related to one another

[jdonn]

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 think my bash is that you feel the need to mention this in every thread about every topic. You didn't even make any segue onto the topic at all there...

"This is what I know about financial products, and oh yeah Obama is like Bush."

[Winstonm]

jdonn, on Mar 19 2009, 06:30 PM, said:

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 think my bash is that you feel the need to mention this in every thread about every topic. You didn't even make any segue onto the topic at all there...

"This is what I know about financial products, and oh yeah Obama is like Bush."

I was only further commenting on what Mike777 had said:

Quote

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

[y66]

I don't agree with the point made in an earlier post that equates taking responsibility for developing orderly procedures and clear rules for protecting the financial system with a political power grab.

I think Jerry Seib gets the right point across in his piece in today's WSJ.

Quote

At last there is bipartisan consensus on something in Washington. Everybody agrees they are furious at American International Group.

Beyond that, though, the outrage over AIG's payment of $165 million in bonuses to employees within the unit that almost melted down the economy has descended into typical political finger-pointing about who should have done what to prevent the embarrassment. And while that makes for good indoor sport, it is obscuring the two big lessons this mess is teaching the nation:

First, the government by and large has no business owning and running businesses -- and it is the majority owner of AIG. The cultures of the public and private sectors are simply too different.

And second, there needs to be a system established for times such as these, when the government does have to step in and perform triage in the financial sector, so it's clear who is in charge and what the procedures are. As it is now, all sides are making up the rules as they go along. When the House passes, as it did Thursday, a tax bill designed specifically to extract money from 73 individuals who took large bonuses from AIG's financial-services unit, it's pretty clear that things have gotten out of hand.

Translation: We need an agency and some clear rules to handle winding down big financial companies.

The ideal solution, of course, would be to avoid this kind of situation entirely. Governments aren't equipped to operate businesses, and businesses aren't prepared to operate amid the complicated sensitivities of the political sector. Governments run best by consensus, companies best by crisp decision-making at the top. Incentives are different in the two worlds; penalties and rewards are viewed differently, as the AIG flap illustrates.

In fact, some of the wisest words President Barack Obama has spoken since being elected came during the transition period, when the question of whether the government should simply take over General Motors and Chrysler was in the air. "We don't want government to run companies," Mr. Obama said on NBC-TV's "Meet the Press" in December. "Generally, government historically hasn't done that very well."

That sentiment explains why, despite rampant speculation to the contrary, the administration has been straining to avoid nationalizing any banks or directly taking over auto makers. Nationalization would distort markets, create unfair advantages and introduce either political considerations or suspicions of political considerations into business decisions.

There is, in fact, a huge difference between the government injecting capital or taking a minority position in a business -- with a prospect of getting taxpayer money back but no confusion about who continues to run the company -- and nationalizing a firm or becoming a majority owner.

This is the line the administration has tried not to cross. AIG is the exception to the rule. Because of AIG's dire straits, the government has invested so much bailout money that it now holds a stake of almost 80% of the company. Taxpayers are the majority owners...

[hrothgar]

This morning I was listening to an hour long interview with the author of "House of Cards" who noted that there was a significant change in the ownership model of Wall Street firms 25 odd years ago.

Twenty five years back, most Wall Street firms were privately held. Now-a-days, most of them are publically traded. This has introduced some significant changes in the risk profile and the trading strategies adopted by these firms.

Back in the day, most Wall Street firms were gambling with their own money.

Today, they are investing money's belonging to third parties and skimming off performance based fees.

The author seemed to be hinting that if we returned to the days where trading firms were privately held (rading their own assets) we might have avoided the recent unpleasantness.

Not sure whether or not I buy into this, but it is an interesting idea.

As I noted earlier, I try not to get too bent out of shape regarding the bonuses structures. I'd much rather have the Treasury Department focusing on solving the real problem and have congress focus on structural reforms.

In my mind, some of the key issues that need to get sorted out are:

Should we allow pension fund managers to invest in any type of assets?Alternatively, should there be some kind of limitation? Maybe the Fed should create a dozen or so Exchange Traded Funds and require that pension funds stick their money into one of these...

Should we learn something from "too big to fail"? Should we cap the maximim size of firms that firms can get? Historically, these types of arguments have been based on anti trust considerations. However, there might also be arguments based on building a fault tolerant system.

BTW, when was the last time you saw anyone pushing the idea that we need to privatize Social Security?

[Lobowolf]

hrothgar, on Mar 20 2009, 03:24 PM, said:

BTW, when was the last time you saw anyone pushing the idea that we need to privatize Social Security?

You're right; it's been far too long.

There should be a provision for voluntary partial privatiziation of Social Security.

[y66]

Quote

Twenty five years back, most Wall Street firms were privately held. Now-a-days, most of them are publically traded. This has introduced some significant changes in the risk profile and the trading strategies adopted by these firms.

I totally buy this.

Michael Lewis also makes this point in Liar's Poker and again in his December 08 story "The End" which is one of the most amazing pieces of journalism I've seen in this saga.

[y66]

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

[bangs head on table]

[Lobowolf]

y66, on Mar 20 2009, 04:46 PM, said:

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

[bangs head on table]

Hey, whom you calling a gentleman?!

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

[luke warm]

Lobowolf, on Mar 20 2009, 04:52 PM, said:

y66, on Mar 20 2009, 04:46 PM, said:

What's up with lobowolf and mikeh lately?  It's a sign of something when gentlemen stoop to sarcasm.

[bangs head on table]

Hey, whom you calling a gentleman?!

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

what are you, some kind of subversive?

[jdonn]

y66, on Mar 20 2009, 04:46 PM, said:

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

[bangs head on table]

I hope I haven't caused too many concussions to the forums readership over the years. If so I apologize.

[Winstonm]

Here is a nov 2008 quote from Felix Solmon and it appears to substantiate what Mike777 wrote:

Quote

At heart, here, is an age-old debate over the value of any fixed-income instrument. Let's say you buy a bond at par which makes all its interest and principal payments in full and on time. Then you're happy, and making money. But let's say that a couple of years after issue, that bond is trading at just 10 cents on the dollar. Have you lost money?

As far as AIG was concerned, it was one of the biggest companies in the world, more than capable of weathering any mark-to-market storm -- and therefore all it cared about was default risk, not market risk. But as a result, it took on much more market risk than it was really aware of -- and that market risk ended up forcing the entire company into the arms of the US government.

The lesson, of course, is simple, but hard to learn: it's not the risks you measure which bring you down, it's the risks you don't measure. But protecting against those risks is very, very hard.

[y66]

No concussions here. Not even from han's posts. Head is made of oak.

[matmat]

y66, on Mar 20 2009, 09:44 PM, said:

No concussions here. Not even from han's posts. Head is made of oak.

it shows.

[y66]

Thank you. I guess oak is not sufficiently self-deprecating. Should have tried ironwood.

[kenberg]

Lobowolf, on Mar 20 2009, 04:52 PM, said:

y66, on Mar 20 2009, 04:46 PM, said:

What's up with lobowolf and mikeh lately?  It's a sign of something when gentlemen stoop to sarcasm.

[bangs head on table]

Hey, whom you calling a gentleman?!

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

You suggested a voluntary portion of Social Security. I don't think that I am just playing with words to ay that for most of us, that comes close to being what we actually have. It's not a portion of Social Security per se that is voluntary but a portion of the general preparation for retirement. I am 70 and I am retired although I still work some (few things are either/or). The Social Security paynebts that I made over tghe year were the involuntary part. i paid into a pension fund, not entirely voluntary but I could select from various plans and levels. I was at a university so i could divert some salary into TIAA-CREF which had choices, some more tied to market performance than others. There were additional plans. And of course i could just go buy some stocks. So if we take planning for retirement as a complete entity, there is a mixture of required and voluntary participation. Allowing a voluntary change in Social Security would change the proportions but would not change the fundamental concept of a mixture of required and voluntary plans.


I got my Social Security card when I was 14. I was setting pins in a bowling alley and contributions to Social security were required. So I had been paying in for 50+ years when I required. I get somewhat over 20K a year from them, minus charges for Medicare and taxes. One could say that this isn't much after fifty years of contributions but the flip side is that this is, or is advertised to be, the rock solid part of my retirement. The stock market can drop out of sight and prices can soar, the payment is indexed to inflation and guaranteed by the government.


Preparation for retirement should have a voluntary part and a non-voluntary part. Presumably the non-voluntary part should be roughly adequate so that if the person totally mismanages the voluntary part then, in retirement, he will still have enough to get by. The alternative woould be that we have old people that we either let starve or we support in some other way that just would not be called social security. I would not want to be living on 20K a year but people do. If Social Security can be properly funded to maintain its current role of providing for very modest support it seems like it is doing its job. It's in the nature of voluntary that no one is stopping people from preparing, or failing to prepare, for a better retirement.

[PassedOut]

Social security is not just a retirement plan. As part of the social safety net, it provides some insurance for disabled workers, for up to five spouses, and for children.

Most of us rely much more on voluntary pension plans, savings, and other assets we've built up over the years, and rightfully so. But the social safety net is also important to maintain. If the social security retirement plan were to become voluntary and/or privatized, we would still need taxes to provide for the disabled, spouses, and children.

And there would also be the problem of paying for the retirement of those who did not contribute voluntarily to the fund, and for those who lost all of their retirement money via unsuccessful investments.

Maybe some can say, "Let them starve," but we just won't let that happen on a large scale. So the taxpayers would wind up footing the bill for those people anyway, without having received the money they would have been paying through the years.

[Winstonm]

For a CDS to be triggered, a default is not always needed. Wikipedia explains:

Quote

Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument

The thing to notice about the CDS is that it is an unregulated product and thus two counterparties can structure the payoff in any manner upon which they agree.

[y66]

Excerpt from a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

Quote

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

rest of letter.

[kenberg]

An extraordinary letter and action. It should be given the most serious attention. I imagine I have to confess to being more than a bit simplistic in my thoughts.