What bothers me is the assumption that these people taking these bonuses have done something wrong, or are doing something wrong.
Do you believe that it was these people who screwed up your 401k? The financial system? They’re not.
This whole thing is a smokescreen. These contracts have been out in the open for over a year.
This is what I see:
Some guy at AIG who has been doing his job for years, and doing it honorably and well suddenly encounters a new environment that completely renders moot his area of expertise. Call him Fred. Fred trades asset-backed securities. These are senior floating rate loans issued by corporations that put up collateral to back these loans. Typically they are 150% collateralized with real property, so they are pretty safe. The have nothing to do with CDOS, mortgages, leverage, or any of these other toxic instruments. There was a huge market for these securities, a market which has completely dried up and crashed and fallen apart not because the securities were bad, but because of the liquidity crunch. This market is simply collateral damage.
Fred has expertise, but he needs to find a new job. AIG is shutting this down. They’re not staying in this market. 95% of the desk leaves or is fired. Fred is looking for work, but he also feels a loyalty to his firm and the people he has been trading with at other firms. He’s torn. Somebody at AIG comes to Fred and makes an offer. Since Fred is one of their best, they want him to stay and oversee a graceful shutdown of this sector. AIG will be able to meet its trading commitments and this will protect the markets in general and slow down this disaster where liquidity is drying up (remember last November when all the firms were afraid to trade with each other for fear of who would go under and not be able to complete their commitments?) Fred will stay, and complete the commitments. He will keep liquidity in the markets, and help others at other firms remain solvent. He is protecting AIG’s interests and the public’s interests.
They will pay him a dollar salary, but when the job is done, if he does a good job, if he maintains liquidity, if he meets all the commitments, then he is promised a 250k bonus. Fred would normally make 2 or 3 times this, and he still might if he takes another job, but he stays because he thinks it’s the right thing to do. For the next nine months Fred works with a skeleton crew, engineering the graceful shutdown. Because there are so few people left, and so many terrified and anxious customers Fred’s job is a nightmare of stress. Because he works at AIG, he is treated like a villain.
During the 8 months that Fred is doing this he is praised by his higher ups for his commitment. The government which has given AIG money for the express purpose of maintaining the crucial liquidity that Fred is providing is totally aware of the arrangement under which Fred is laboring. Nobody attempts to renegotiate, and nothing is said.
Finally, Fred completes his job. AIG conducts an audit of all he’s done to make sure that is neat and satisfactory. They find that it is. They thank him, and congratulate him, tell him “good job,” and that the bonus he contracted for will be paid.
Fred now has to find a new job. Most of his compatriots have already found one. They’ve had an 8 month head start. Most of the good openings have been taken. His bonus will only be a fraction of what he might have earned. But, he did the right thing. He’s satisfied.
Now, a week before the bonus is to be paid, suddenly a bunch of politicians start pointing fingers and paint Fred out to be some kind of immoral mercenary cretin, a villain. He gets death threats as he walks into his building.
Two weeks ago, he was a loyal crewmember on a sinking ship, staying behind to protect the safety of others, now he’s considered a thief, the guy who screwed up the financial system. Now, because of the way he’s being portrayed in the press, his chances of getting a job with “AIG” on his resume have dropped to zero.
If we are to put a face to an incompetant villain who is as responsible for this mess as anybody, if we are to cast blame, than it is a pure certainty that one of the biggest villains has to be Barney Frank. Barney Frank who was assuring everybody that this 40 to 1 leverage was just fine and Fannie and Freddie were perfectly solvent.
Now this fat incompetant sack of shit who knew all about how AIG was being shutdown and gave it his tacit agreement is suddenly pointing the finger at innocents like Fred and calling him “villain.”
It’s called reneging. It’s despicable what the government is doing, painting these guys as villains. Trying to take back their fair and due compensation.
They are absolutely aware of what they are doing. This is deliberate. Barney Frank has been very good at getting up on a high horse and excorciating others for their sins.
I know a “Fred” I know another guy in municipal money markets and auction rate preferreds. None of these guys did anything wrong or had anything to do with this disaster. They’re victims as much as anybody else, and they’ve stayed behind at personal sacrifice to do the right thing.
Now these lying fat fucks in Congress who helped engineer this mess are turning on the guys they counted on to help fix it and cover their asses, and calling them villains, all to better hide their culpability and cloak themselves in righteousness in the hopes that the sucker public will buy it. Not only are they denying these people their due compensation, they’re dragging their names through the mud to protect themselves.
But couldn’t it also be considered a condition: We’ll give you $X, but if you take it you can’t do Y with it? And if that is in fact a possibility, is it absolutely too late to do that now?
Well, I’ll give him something other than derision.
Barney Frank may indeed (prolly does) have some culpability in this. I’m sure there are others in Congress who helped pass the legislation necessary to make things legal.
But they didn’t act alone, and I doubt they came up with all the ideas themselves. What lobbying groups, paid for by whom, sought the laws that made this mess “legal”? It wasn’t me, it wasn’t my mom, it wasn’t the guy who manages the Taco Bell down the road.
Who developed all these crazy debt/money/asset/leverage swap/trades/purchases? Did Barney Frank do that? Or did some genius in the financial industry come up with it, and then pay a lobbyist to pay congresscritters to put it into law as an ok thing to do?
I don’t absolve Barney Frank from any guilt that is his, but unless you can provide evidence, I have a hard time believing that he or any combination of elected officials came up with all this on their own.
ETA: then we should rightly chastise and harangue Sen. Dodd for being a tool, now that I see xtisme’s link. I never said the blame was solely on the greedy financial people… I’m sure there’s a whole lot of people involved in developing a system that is so flawed and corrupt.
You’re right. This is not the work of one person. The short version:
Jimmy Carter did a smart and good thing. He helped to Government institutions guaranty mortgages for people that might not otherwise get them at reasonable rates. This put affordable housing within reach of many. It led to the creation of a lot of jobs, and a lot wealth. Houses were in demand. Homebuilders did well, banks did well. People could buy houses. Good for people, and good for the economy.
Reagan expanded it to bipartisan support. I can’t stress enough how good a thing this was for so many, for the economy in general. It was a beneficial chain that kept growing and doing good things and helped fuel our wealth and growth.
Because these mortgages were secured by the government they were very safe, suitable for investment. People sought them out. This created a demand for mortgage backed securities, which kept mortgage prices down which created demand for housing and all related industries.
The problem with these securities was that you never knew when a mortgage was gonna pay off, so you never knew when you’d get your money back. Lou Rannieri at Lehman addressed the problem which led to the creation of CMOs. What these did was turn mortgages into things very much like regular bonds. It took real genius to do this. It worked and it worked well. As it kept working the statistical analysis that made them possible got more and more refined and the securities got better and better.
The basic gist of how they worked is like this: While you can’t predict the actions of any one mortgage, you can predict a pool of a billion dollars worth with pretty good accuracy. Think of that pool as like a lake. You create a series of bonds that are like rivers coming out of the lake. Those rivers all are set up with locks to maintain a steady flow rate regardless of how much or how little rain falls into the lake. To balance this out you create another river which is basically your overflow/underflow river. The purpose of this river is to stabilize the others. If there’s a lot of rain that river flows heavily. If there’s a little it flows little. This river is called a z tranche, and since you couldn’t tell what the weather was like it was unpredictable.
All the rest were pretty predictable thanks to the z tranche which caught the unpredicatbility.
This statistical analysis became so useful and these things worked so well that the concept started to be applied to mortgages that were not guarranteed by the government.
This z tranche was guarranteed but because it was so unpredictable as to when it would pay the rate you got from it was very very high.
You could take a bunch of unguarranteed mortgages that were predictable and pair them with a z tranche which was guarranteed but unpredictable and create a new security that was both guarranteed and predictable.
Of course, then you had a new z tranche from this security (a CDO) which was even more unpredictable.
A whole bunch of these hybrid securities were created and it was very good. Clinton was nervous that the whole thing could get to crazy and he warned about it, and insisted that their be some controls. This did not go over well. Because everybody was making so much money the Republicans thought he was being an asshole and trying to shut down big business. Democrats thought he was being an asshole and trying to shut down low cost mortgages to poor people.
A whole bunch of bank people kept complaining about outdated rules pertaining to leverage. If you lowered those rules than the banks would be able to loan more money, people could own more houses, and industry and the economy could continue to climb. A good and a bad thing happened here. In order for the banks to be able to write the kind of mortgages they wanted they also had to perform a community service and give loans at reasonable rates to poorer folks since writing mortgages was a public trust. You had to serve the whole public. This was a good thing. To make up for this Paulson lowered the requirements for leverage and it was now possible to leverage 30-40 times your assets in these securities in order to facilitate more mortgage writing and keep up with demand. This was not such a good thing.
Let’s say you could borrow money short term at 3% and invest it long term at 6% in very very safe instruments. At 40 to one this means $10,000 could be leveraged up to $400,000. At 6% that’s $24,000 a year. You have to pay back 3% or $12,000, but you can effectively make $12,000 a year in very safe instruments with $10,000. What a deal.
With this leverage comes margin. As long as the investments are stable your money is safe. However, if it fluctuates you lose your money first. So, it was very important that these investments be very stable.
Remember that z tranche? it absorbs volatility! Exactly what the doctor ordered! Suddenly these z tranches became very valuable because could be used to absorb or offset volatility. They could be hybridized or paired to do all sorts of useful things in stabilizing a portfolio.
It all worked, and it all worked very well, and the whole country prospered. Than, in 2000 the stock market crashed.
These securities and the housing markets were the one thing keeping us going. Clinton didn’t try to stop it, he was a lame duck. Bush didn’t try to stop it. We needed it. We counted on it, and we stretched it, and we made it work. In 2002 Bush, several Republicans and several democrats started to realize this thing was getting overstretched.
The demand for Z tranches and the hybridized derivatives thereof used in the creation of these leveraged CDO portfolios was actually creating a huge positive demand for very risky mortgages. We were entering a bubble. Fannie Mae and Freddie Mac were doing a poor job in keeping things responsible and they were setting the market in these securities much the way the Fed sets short term interest rates. The other banks had to follow through or be wiped out of the mortgage market.
When hearings were held on this the loudest and most vocal supporter of these practices was Barney Frank who shouted down any idea that Fannie or Freddie were anything but perfectly sound. There was a huge backlash from Democrats and Republicans who both had very strong incentives a spade a spade and realize there was a problem. Who wants to put the brakes to the one industry propping up the economy? Who wants to be the one denying housing to the poor.
The practices continued in spite of more warnings, and they continued even when the economy got better and they weren’t needed. The whole thing grew exponentially and very few, Bush, Clinton, a few senators, a few congressman piped up. Again, they were shouted down, largely by Barney Frank.
If you were one of the reasonable people making those warnings, you were wrong for a very very long time. It’s hard to stick to your guns when you are wrong for a decade. So, they got quiet. The very fact that nothing had gone wrong was shown as evidence that nothing would go wrong. It was all terribly complex. These instruments and their relationships became so complex that it was literally impossible to completely understand any of them. You’d have to read hundreds of thousands of pages to do so, and by the time you were done you’d have to start all over again, because what you read would have been obsolete. It was a very fast fluid market.
Now, no matter how you think about a security, the primary value of a security at any given point in time is nothing more than the confidence people have in it. It’s as simple as that. If everybody thinks X is worth $10, than that’s what it’s worth. People were very confident in these securities.
Than, the appetite for housing started to drop just a little bit and suddenly that confidence was shaken. People began to sell and that selling became an avalanche. The leverage magnified that selling and forced more and the whole thing collapsed, like a kid who had piled blocks to high.
Some traders did unethical things. Some didn’t. Some mortgage companies did unethical things. Some didn’t. Most companies did nothing more stupid than getting caught up in the enthusiasm. Barney Frank knew better. Paulson is just an idiot.
Now of course, the scapegoat here is all of Wall St. The real villains were in the walls of Freddie mac, and Fannie Mae, and the biggest villain IMO is Barney Frank, followed by Stan O’neill (at merrill,) followed by a bunch of guys in the CDS markets. Even there though the villains are few. Most CDS are fine. The fact that most work just fine enabled some unethical traders to hide quite a few wolves in sheeps clothing in amongs the herd. A bunch of those guys were at AIG. A relative few, but everybody suffers because of them.
Think of all the poor schmucks who are stockbrokers with Smith Barney, or Merrill, or who sell AIG life insurance or annuitties. These are very hardworking people. The vast majority of them have worked for decades to build up a clientele in a very competitive environment, and they build that clientele up based on a record or service and trustworthiness. They know their clients. They are friends. Their kids go to the same schools as their clients.
Now, though they’ve done nothing wrong, they are the bad guys in most people’s eyes. They’re working harder than ever talking to nervous clients, the markets are down business is way off, they are making a fraction of what they made two years ago while working five times as hard and everybody hates them for it.
It’s like that for everybody on Wall St.
Ignorant people, seeking somebody to blame generically paint with a broad brush and say “greedy Wall St. did this.”
They didn’t. Stupid people did this. Greedy people did this. Some of them are on Wall St. Some are in Government, some were in predatory lending companies, and some were just idiots who should have known better than to be a two year interest only adjustable rate mortgage that they couldn’t possible afford.
I’ll tell you that the traders and such who are still at AIG aren’t the bad guys. These are the guys that stayed behind to try to fix the mess largely against their own best interests. They’re not the fast buck people. Those are long gone. These are the stickers.
Fucking these people over is a bad idea.
I simply can’t beleive how stupid the american people are to buy this whole transparent song and dance. Barney Frank and congress are suddenly all upset about these payments now? To me it’s a case of the murderer handing the axe to somebody else and then pointing their finger at them.
Ahhh, fuck it. I’m going to bed. beleive what you will.
I really used to like Barney Frank; I disagreed with him, but I thought he was honest and a straight shooter. If I saw him right now, I’d spit in his face. And that’s not figurative.
That is the best summary I’ve yet seen about what is/has happened. Thank you, Scylla.
I’m still not thrilled about the bonuses, or the excesses of many of the people & companies & lobbyists involved, but I admit to a better understanding of the situation after having read your post.
I seem to have missed a crucial link here. Because Congress made stupidity and greed legal, did that make it compulsory? Was there some legal mechanism in place which compelled people to behave badly? If Congress should legalize roasting puppies on a spit tomorrow, I very much doubt it will affect my puppy-roasting behavior, which is to say, none.
So what are we to believe? Shit Happens, then? Adopt the passive voice of a child who offers the information that the window “broke”, that his mother’s prize vase “fell off the table”. These men, so highly prized, so highly paid for their expertise and experience, none of them could see this coming? None of them read any of the articles I read? A radical hippy lefty type knows more about this shit than they did? Really?
Perhaps we cannot assign guilt with specificity, perhaps we cannot charge exact crimes. But I ask: which of the prevailing political philosophies is most receptive, most sympathetic to the views of business and wealth? Which is most amenable to the laughable notion of a Free Market, correcting itself by some means magical? Who pressed to have the financial industry freed from the onerous constraints of sensible regulation?
Was it the autoworkers? The cigar chomping labor bosses? Bo’s mom, the guy down at Taco Bell? The dirty fucking hippies?
So Fred makes 500,000 - 750,000 a year in what (I condiser) is a business that doesn’t contribute much to society. When people complain about his bonuses and his bosses’ million dollar bonuses they’re told that “hey he gets the money because he was smart enough to chose a job that paid so well”.
But when he doesn’t get the money because he wasn’t smart enough to recognise the house of cards his industry was building, he should get the money anyway, paid for by everyone else.
You’re right and you’re wrong. Nobody forced traders to create CDS that couldn’t possibly work. Nobody asked them to. Some just did on their own out of greed, and their is nobody else to blame.
I could give you quite a lot of examples like that. Pure greed of individuals effectively stealing.
That though, is not what caused this. We’re talking about the failure of a trillion dollars or more of debt instruments. Very few were done in bad faith.
Now, about making the greed compulsory; yeah there is an argument that that happened. The government forced banks to make bad loans as a condition of being able to make good loans. Oddly enough those loans didn’t fail right away, and after a short period of time the banks were happy to make the loans on their own without any coercion.
Also, Freddie and Fannie frequently set the market for these loans. If you wanted to be in the mortgage business you had to fall in line. Why on earth would somebody buy a $150,000 mortgage from me at a 9% rate and 20% down when they can get one for $450,000 with with interest only, a 3% rate, and nothing down?
Fannie and Freddie set the market pretty low, which effectively forced everybody else to come in low. The guarrantees on these loans made possible by Freddie and Fannie set them in high demand for securitization which made them profitable. After a while the banks needed no compulsion to go lower.
So, there was some of both. The failure of goverment was this: The original programs did good things, great things really. Setting the bar low in the 70s 80s and 90s and making securitization possible was a good thing.
But, if you are going to set the bar you need to lower it when it needs lowering and raise it when it needs raising. That is the regulatory role of government. It failed to fulfill that role and apply the dampers when necessary. It threw fuel on the fire.
I’ll do my level best to answer any questions you have to the best of my abilities. However, the truth, or lack of it in what I say is not changed by whether or not you believe it.
Not believing it isn’t really an argument, just a statement.
You’ve given a good objection, and it would be wrong to lay the whole think at the government’s feet. But there was a huge failure in regulation. The government incented these practices, encourage them, and now those same people want to point fingers at others.
They’re selling you a bill of goods. You don’t trust the fatcats? They’re quite a few of them in government, and their hands are very dirty in this.
Frank should hang for Freddie and Fannie alone. Those were government or quasi-government enterprises set up for the public trust. A lot of bonuses there, you know.
That may be because you’re ignorant of it. The asset-backed or Senior floating rate loan market is a very important one for a lot of reasons, as was the auction preferred market.
If you think it doesn’t contribute anything to society, you are being very foolish indeed. Look what happens when it becomes impaired. Unemployment goes up, credit cards get called in, inventories shrink, business grinds to a halt, and we drop into a recession. Or, haven’t you noticed?
It is complex, and esoteric, and difficult to understand. Most people never deal with it or think about it. But these things are in the background of everything that we do economically. Without them, we don’t do it.
The other side of them provides people with retirement income, allows insurance companies to pay claims, funds scholarships and puts kids in college.
It’s complex and esoteric and difficult to understand. But, because you don’t don’t assume that it isn’t important.
Except that it is not what is happening at AIG. These people were asked to stay and to help clean up a mess that few if any of them helped make. They were told that if they did, they would get paid. They were offered contracts, which they accepted with full knowledge and disclosure to the government of what was going on.
They did there job.
Now that it is time to get paid the government is trying to renege.
Let me put it this way:
I work for a construction company that is building a deck on your house. Halfway through construction the company folds. You’ve paid the company half the money and you have half a deck.
So, you talk to me and two other guys at the company and you agree to pay us the other half if we finish your deck, which we do.
After we do, you say that the company I worked for was a bunch of scumbags and therefore you’re not going to pay me.
I see. So it was Barney Frank who carried the banner of de-regulation? Not Phil Gramm, who’s name has yet to pass your lips. Not the Republicans championing the Free Market? Not Bush crowing about how the “ownership society” made conducting a ruinously expensive war on the credit card hunky-dory? Barney Frank who wanted the sharks with the frickin’ laser beams…no, wait, that was Dr. Evil. Barney Frank is the lone Congressman who brought our economy to its knees in the long, long, endless years of Democratic dominance. What was that, two? Boy, gotta hand it to him, he worked fast!
He must have planned for years, he must have maneuvered with exquisite care, so that as soon as the Dems took over the House—wham! Suddenly he was in a position to ruin the careful and prudent financial acumen of the Pubbies, and he struck!
Does he sacrifice virgins to his Dark Lord? Is that the source of his sinister power? Could it be…SATAN?
I guess I shouldn’t be surprised by the lack of understanding of this…after all, at my last count Liddy has explained this to the creatures who control Congress at least 10 times (I’m being literal here…and I’m probably understating the actual amount of times he’s been asked the same thing as I finally got frustrated with the stupidity levels) and they still don’t seem to get it. I say seem because they just keep asking him the same questions over and over again.
He did have an interesting thing to say about future regulation and the failures of past regulation (he only answered this 3 times by my count) that has to do with how very complex this is/was, and about possible ways to look at systemic risk through multiple business units. I forget who it was, but one of our lovely female representatives stated that she didn’t understand why the current regulation didn’t work (she was hinting that Bush et al simply didn’t enforce it…there is probably as much political sniping by both sides as there is grandstanding and general stupidity). Liddy basically told her that the situation and the risk was simply too complex for the government (or anyone else) to really grasp, and that it was a tangled house of cards. This representative interrupted him and said something like ‘well, the government can surely understand the complexities’ to which Liddy basically snorted and then explained exactly why that was untrue. He went on for about 5 minutes and I could tell by the glazed, deer in a head lights look on the Congresscritters face that she didn’t have a clue what he was talking about…he had gone past the edge of her carefully crafted notes probably by some staffer.
Hell, I didn’t understand much of what he was saying for that matter. Of the folks in this thread I doubt many people besides perhaps Scylla even have an inkling just how complex this all was and is.
But if anyone wants an answer to the OP about what the bonuses are all about, why they were paid and why it’s probably a bad thing to try and stop them, I urge you to at least try and slog through some of the C-SPAN coverage and Liddy’s answers. All you have to do is watch about 30 minutes as he gets asked this over and over and over and over again…and he answers it in detail over and over and over again. I think it’s actually still going on…at least it was when I checked about half an hour ago…and, curiously, the next Congresscritter in the queue was asking him about the bonuses and how AIG could justify them in light of…
The other thing is retention bonus or I’ll go elsewhere my ass. I worked in the biz for 7 years and got out after the 1997 crash. In 1997, there was none of this rention bonus or paying feel good bonuses. Bonuses got slashed, massive layoffs and industry consolidation.
The investment banks have shed something like 200,000 jobs. A very significant number of “hedge” funds are out of business.
Just where are all these people going to go for more money? AIG FP guys are gettng paid a lot by ibank standards. There is a huge pool of talented people searching for a shrinking number of jobs. And if they don’t stay in the industry, then they have no option to make anywhere near their current total compensation - and they likely never will. It’s a buyers market for talent and ibankers need to quit talking their own book like it’s a sellers market.
My global fortune 50 company has reduced bonuses because the global economic downturn has slowed our profit. We still make over a billion dollars a month in net profit. We didn’t, for example, lose the equivalent of 18 years of profit in 2008 like Merrill Lynch did. God knows how much those 400 people at AIG FP will eventually lose.
Hank Paulsen bailed out his buddies. A much bigger question is why are we paying out 100 cents on the dollar to AIG FP? Talk about moral hazard.
Anyone that took TARP had to or face bankruptcy. As such, you don’t get to dictate the terms. AIG FP and the finance industry have alternately claimed need to retain these people, they can go elsewhere, only guys that know how to unwind the positions, it will trigger the redemption of all outstanding derivative contracts, etc.
I see. So it was Barney Frank who carried the banner of de-regulation? Not Phil Gramm, who’s name has yet to pass your lips. Not the Republicans championing the Free Market? Not Bush crowing about how the “ownership society” made conducting a ruinously expensive war on the credit card hunky-dory? Barney Frank who wanted the sharks with the frickin’ laser beams…no, wait, that was Dr. Evil. Barney Frank is the lone Congressman who brought our economy to its knees in the long, long, endless years of Democratic dominance. What was that, two? Boy, gotta hand it to him, he worked fast!
[quote]
No. Phil Gramm is a dick, and Bush should have pushed hard, instead of folding like a cheap suit. I don’t think there is anything wrong with free markets with good regulation, so I’ll pass on that one. But, Barney Frank is a big villain in this. He was in bed with the capitalists that you hate, while also claiming he was for the little guy.
And, he was in charge of the oversight committee over the whole time period that this thing happened, and, he defended all the practices and Fannie and Freddie until it became clear that was a non-starter. He was deeply involved and deeply culpable in the whole mess, and now he is the biggest hypocrite of them all, jumping over to the other side so that he can point his finger and say “look at what all these bad people did.”
At least Bush tried to slow it down, as did Clinton. Frank helped push the train over the cliff and wants to blame the conductor.
Shit luce. This is not a partisan issue. Both parties fucked up. Few people on either side of the aisle were acting responsibly here. Clinton did, so did Bush. Bush had some Democratic support when he went after Freddie and Fannie in '02, but not a lot. He didn’t have a lot of Republican support either.
The bottom line is that Barney Frank was the top government oversight guy in this fiasco. He was the guy telling everybody else that everything was fine while the house was burning down. He was either asleep at the switch or culpable. Probably both.
Now he’s pointing fingers at others.
This is not partisan. You don’t have to be a Democrat to think Nixon was a crook. You don’t have to be a Republican to think Blagojevich was a scumbag.
Barney Frank is not the only shitbag. He is one of the bigger ones. More importantly he has yet to pay the piper.