The system isn’t working.
I know I hardly qualify for a Nobel prize because of this statement but plainly the problem is not just AIG. It’s bigger, much bigger.
Giving management stock or a bonus is a way to align the interest of management with those of the shareholders. If management only got a salary then they would use the shareholders money for banalities like private jets insted of maximizing the shareholders revenue. Or so the theory goes.
What we have learned from this debacle is that if the prize is too big then management has incentives for short prize earnings: they make a “killer” deal that delivers huge profits and also endangers the company.
That kind of money also destroys the democratic process. Why AIG received so much money and the “little” people nothing? Simply put, the “little” people forgot to buy a senator or two. And people claim that argentinian’s politicians are crooks… compared with many of the people involved in this scandal they are saints.
Because of this more regulation is not enough. Major changes are needed in the political arena.
The problem is that people are stupid. In 2001 Argentina´s economy colapsed. We colectively decided we have had enough with our political class. Everyone hoped for a change and then… everything is just the same.
I am pacifist, I don´t advocate violence but in the middle of that crisis someone interviewed and uncle of mine who was something of a local personality. He was 80 years old at the time and beyond good and evil, (he passed away recently), the journalist asked him how to end the crisis, he answered: the only way to do that and doing things rigth is to hang all politicians and bankers from the nearest tree.
Well said Estilicon,
I’ve said to friends and family for many years that the corporate elite are in bed with our “elected leaders” and basically give us from thier picks whom to choose from. Campaign Finance Reform is a joke.
In my eyes, those in wall street and the finanical sector are no better than crooks, and I did read your post Scylla and understand what your saying. But what you have only done in a convoluted way is explain the legalities of how the financial sector is able to bank rob the entire nation. I guess if It was legal to keep money that you obtained from busting into a bank at night and bypassing all the security systems successfully, then its all ok. (no lives harmed, at least physically anyhow)
You couch your explanations in legalities as if that makes it all alright! It’s not alright, and I would actually like to seem some people go to prison for this!
Also, we the people in the real world do not depend on the financial sector, but rather you there depend on us. The world has succeeded far longer without the likes of these effiicieny experts that skim the top off the real working humans in this world. The quality of life has gone down not up for the average american.
I can remember a time before all these crooks back in the 50’s when the head of the household could work and support the family and still have money for vacations, now its a given both have to work to make it. You could even get a job straight out of high school into a factory and work there for 30 years and support your family and spouse. But they outsourced all those jobs to get cheaper labor and say noone wanted those jobs. Bullshit, I know a lot of people that would like to have factory jobs that would enable them to support thier family and spouse. Just like you saying that we need Wall Street to start business via loans and other claptrap. Business and the other entities have existed just fine in the 50’s and 60’s and many years past without the crooks on Wall Street.
They have sold themselves down the line and the chickens have slowly come home to roost. The good thing in all this is that there is not much of a change for the working class to adjust to, or for friends of mine etc that live on family farms, but the elitist class that feels that they deserve everything have some lessons to learn and its coming.
Also, in regards to your meeting that was cancelled, boo fucking hoo! Get a cheap hotel or better yet, have the meeting in a conference room at your company, I’m sure its no problem getting a hundred fold up chairs laid out for the meeting.
You could not possibly be more wrong. And, this is an extremely common and dangerous misconception. From 1927 through 2007 the market earned an average of 10.87%, IIRC. People take comfort in that number, and they believe in that number and they plan Deterministically based on that number. And, they fail horribly more often than not.
If you look at the distribution of returns over that same time period, you will see that there only 4 FOUR years in which the S&P earned anywhere close to the average. There were only 4 years where it earned between 8 and 12%. Most of the time the market earns far more, or far less than that average return. Examining that distribution of returns you will find that there are a lot more up years than down years, and this will give you comfort. False comfort. Down years hurt you more than up years help you. For example, if you lose 50% one year, you need to make 100% to break even.
What this means is that an investor, beleiving a “stable and modest” return is the norm, who invests deterministically will fail at the first downturn. For example, let’s say you have 100k. You plan on taking out 6k a year but averaging 10% to stay ahead of inflation and allow for minor deviances from standard returns. If the market drops 30% in year one, at the end of the year you will have 64k left. If the next year you make 25%, you will then have 74K. If the market than goes down 20% you will then have 48k. Such deterministic planning cannot survive two bad years in a row, or even one really bad year.
There is no such thing as “stable and modest” returns.
No, it never used to be that way. Total bullshit. It wasn’t that way in '87. It wasn’t that way in 1929 or 1909. It wasn’t that way during the Great Epizootic of 1873, or the Year the Cows Didn’t Come Home, or during the first oil crisis (whale oil.) It wasn’t that way during the Dutch Tulip Craze, or the Great Amber Bubble in ancient Rome. They had speculative bubbles and crashes in the 1600s. The very first that we know about was described by Pliny the Elder, and occured when a group of wealthy families cornered the market on Geese feeding, and started selling interests in the enterpise. That crashed, too.
It’s truly a pleasure.
That’s an accurate understanding.
Ok. The scenario is that you are buying a CDS, but you don’t want the underlying bond to default. Why are you doing it? Is that it?
There might be several reasons:
Let’s say you own a whole bunch of bonds in XYZ corp. XYZ is in major trouble, and lots of people think they might default. Unfortunately, you thought they were going to be ok, and you bought no protection. Now you’re really worried. The price for a CDS on XYZ from a reliable issuer has gone through the roof. Thinking quickly you realize there is a company JKL, a very run, stable and respectable company… but XYZ owes JKL a vast sum of money, or, they are XYZs major supplier, or they are otherwise tied together in such a way that XYZs failure would be very detrimental to them. The CDSs on JKL are cheap. You think that if XYZ fails, it will be very bad news for JKL and the CDSs on JKL will increase in value. So, you buy as many of them as you feel you need to hedge your portfolio against XYZs failure. In short, JKL is a proxy for your XYZ risk.
That’s one scenario. The most common one. A complex proxy play is the most common reason for the behavior that your describing.
I have no problem with that viewpoint. What I have a problem with is the ex post facto reconsidering of the compensation contracted for.
Consider: If you and I enter into a contract to fix your sink for $1,000. I fix your sink. You owe me a $1,000.
You do not ethically or legally or morally have the right to renegotiate the contract after I have performed the work in good faith.
If you had an objection to the price you were obligated to bring it up before you agreed to it. Your failure to do so beforehand invalidates any objection you might have as being in bad faith.
This is **exactly[b/] what is happening at AIG. These people entered into contracts that. Before these contracts were made the government dictated the terms of who could be eligible for bonus compensation, and placing limits and guidelines on what that bonus compensation could be. AIG then structured the bonus compensation in compliance with these guidelines and entered into the contracts with their employees.
The employees fulfilled the terms of their contracts, and only now, eight months later is the government seeking to renege on this deal.
The top leadership of Freddie Mac, Fannie Mae, quasi-governmental organizations operating under the direct supervision and mandate of Barney Frank walked away after the failure of these institutions (in large part due to poor governance and fraudulent accounting practices) with bonuses in the tens of millions of dollars per person.
At AIG, the top brass, the top 45 executives were excluded from receiving any bonus compensation by the government.
While the names of these people have not been published, they are not the governing force of AIG that implemented bad risk management practices that led to the companies downfall. These are not the people who were in a position to see the whole big picture of what was going at AIG. These are people who were simply doing their jobs and implementing the stategies that management decided to pursue. Largely they are experienced, talented, and hard-working individuals.
AIGs trading commitments and interests had to be wound down gracefully. There are only so many people who have the experience, expertise, and knowledge to do so. For most of them, it was against their best interests to stay and do it. Staying at AIG would not help their resume. Staying at AIG while the majority found other employment would mean that after the work was done it would be much harder to find a new job in a much smaller and more competitive environment. They would be the last to the table. Staying at AIG meant you were going to have an extremely difficult and stressful time trying to unwind the commitments of a dying organization.
If somebody didn’t do it, and didn’t do it right, it would be a catastrophe. Bear Stearns, Lehman, Iceland, AIG, are dominos. AIG is the biggest one so far. If it completely fails it will knock down ten others. AIG is a huge insurance company. Their products pay off life insurance, their annuities pay retirement benefits. Almost every single pension plan, charitable foundation and insurance company in the world has their products in their portfolio, and are depending on them. If they fail catastrophically, they are all in jeopardy.
People who were supposed to know better were overwhelmed with horror and surprise at the consequences of Lehman’s failure. That failure almost took down the whole system. If the Lehman scenario occured at AIG it looked like a virtual certainty that the whole global financial system would collapse in days, if not in hours.
That’s why the government stepped in. I exaggerate not at all.
So, they go to these guys, and they explain to them that they have to stay, and you know… save the world from destruction. They are being viewed as villains, but most of them had very little or anything to do with AIGs disaster. Mostly, the ones that did were the first to jump ship or be shown the door. What you have left are your stalwarts. They are told that they will receive a $1 salary, but they are presented with contracts. If they stay, if they make it work, if they fix it, and if they can create a graceful extrication and shutdown of AIGs activities than they will get paid. They are presented with the contracts. Some of them sign, some of them leave.
The ones that stay work their asses off. EVERYBODY hates them. Nobody understands what they do or are doing, but everybody watches the news and the news says that the people at AIG are a bunch of crooks and scumbags who destroyed the world. They stay, and they unwind trillions of dollars in product, they assure payments, they restore liquidity to their markets.
Other firms which behaved every bit as stupidly as AIG did manage to hold on and survive because of their efforts.
Now, when the job is done, these people that stayed behind are being attacked as immoral profiteering crooks. Who’s attacking them? The very politicians and regulators who were as complicit in this disaster as the CEOs and boards that let this happen. The people whose job it was to regulate this market so that it didn’t happen, who instead used their positions of influence to fatten themselves and their cronies at the trough. These politicians and regulators point their finger and use them as a target of convenience so that can pretend that they had nothing to do with it and are outraged by it. So they can cloak themselves in virture and deflect the blame that should be theirs onto others.
Why not go after the heads of Fannie and Freddie for their bonuses in the 10s of millions of dollars each that they received after the institutions they were shepherding collapsed?
Why not go after Robert Rubin who walked away from Citigroup with 50 million dollars?
Why not go after all the CEOs, top executives and board members who walked with multimillion dollar bonuses? It was those people whose job it was to keep their companies level and solvent and govern them with prudent risk practices, not the guys who stayed behind at AIG to fix things after the fact.
Why not go after Stan O’neill who left Merrill with 100s of millions?
I will tell you. Rubin was a part of the Clinton administration. Most of the board of directors of most of these companies served under various administrations ranging from Reagan, Clinton, Bush I and Bush II. Many of the people right now on the economic side of the Obama administration are associtated with Rubin.
It wasn’t any different under Bush, I’m not being partisan, but these guys all know each other and work with each other.
You work for a financial firm on Wall Street for a while, and become an upper level executive. One of the top executives gets tapped by an incoming administration and he takes some guys with him. They serve in government for a while . They leave government and then they take one of the top spots at a Wall St. Firm, or they serve on four or five different boards of directors (often simultaneously.) While they are there they peddle influence to other companies of use their government ties to get favorable legislation passed. These incestuous fucks are the real villains.
The truly ironic thing is that these government officials and regulators or going to absolutely get away with it. The people that we are trusting to protect us from the villains are the villains themselves. The cops are the crooks. They’re not going to catch themselves. All they need to do is trot up some people and say “here’s the bad guy.” Since they’re supposed to be the cops everybody beleives them.
Barney Frank just offends the shit out of me, because he’s the most blatant and obvious about it.
Look for example at the board of directors for Citigroup or Merrill or '07. It’s loaded with ex-regulators. Both companies, IIRC have this guy who is the former CEO of one of the bond rating companies that labelled all this toxic debt AAA. Hmmmmm, do you think something funny was going on there?
Even Rubin tried to strong arm the ratings companies into not downgrading Enron while Enron was going under.
These are you villains. That is the level that they exist. Corrupt incestuous and irresponsible regulators and corrupt incestuous irresponsible corporate govenors created this problem. That’s who’s responsible.
The wrongdoing of a handful of traders didn’t do this. They’re small potatos.
The people responsible are pointing fingers to deflect the blame from where it should be and these largely innocent people that had nothing to do with are suffering death threats, won’t be able to get jobs, and are being villified in the press.
The guys that stayed behind at AIG did a good thing. I can’t tell you what their part was in creating the problem, because I don’t know specifically who they all are. I do know that any part they had was small, because the problem was systemic.
I can tell you that they played a large part in holding the whole shebang together for the last six months.
Probably the first time anybody actually ever earned their bonus.
I’m going to have to try to get to some of the other questions and issues directed at me at a later. Sorry for the delay.
Hey, bullshit yourself! When are you gonna learn not to underestimate the intelligence of the people who disagree with you, how many times you gotta get burned before you learn?
Of course there are such investments, there are because people want them, and if they’ve got money and they want it, you’ll fucking well offer it. My grandparents were goofy for govt. savings bonds, wouldn’t have bought stock with twice the return if the stock was for GodAwmighty Inc.
T-bills are another. (Hope I didn’t mispell, Mr. Scylla, sir, I’m not real bright…) Mortgage investments used to be, until everybody went nuts. As I thought I made clear, I’m making a distinction between investment and speculation. Granted, they are much alike, but I’m pretty sure you’re sharp enough to catch my drift.
So do me a favor, sport, don’t pee on my shoes and tell me its raining. Above, you will find a scenario very different from the one you posit, got all the same big words you use and everything! You were invited to critique, if you can, but you seem to be too busy making sweeping authoritative statements.
Don’t worry, he can’t spell “guarantee” the same way twice. 
Scylla, one key point in a well thought out response is that in the real world, and for that matter Wall Street until this recent moral hzard was created, based bonuses on BOTH individual and corporate performance. And that is not being applied here.
I fullly agree the captains that allowed this to happend take it in the shorts. Dick Fuld at least got punished by the market for his sins.
the other absolute disgrace is paying out 100 cents on the dollar for the AIG exposure. there is plenty of precident on Wall Street and t e real world for haircutting these obligations. “I’ll let you out for half” is the traders code. paulson paid off goldies and the other survivors big time.
Scylla keeps making simple metaphors like, “consider I’m fixing your sink, you owe me for that work” as if we’re all stupid. We’re not all stupid, but that he thinks we are, is instructive only of his mindset.
The point is, someone who fixes your sink is doing work. Also, we can assume that they aren’t responsible for breaking the sink in the first place. Also, they don’t get millions of dollars a year for it. There are many differences, these are just some of them.
T bills and savings bonds are unprotected against currency and inflation risk. Both of which are discounted to an unreasonable degree since neither risk has exploded and killed anybody recently. The meager average returns from either investment gives you less of a hedge against these risks, which are every bit as significant and dangerous as the ones currently clobbering us in the head.
I just did. Right now a treasury or savings bond contains more absolute risk than a company like, say, Kimberly Clark which makes toilet paper.
The potential possible risks to an investment are specific risk, systemic risk, market risk. inflation risk, currency risk, regulatory risk, and fraud.
Your safe investments have been and are vulnerable to about half of those.
Well, to the simple-minded, like yourself, its “fixing the sink”. Actually, its adjusting the hyrdological configuration of the water circulation systems. You wouldn’t understand…
And yet, according to what I hear on the news, they’re selling pretty darn good. Buncha dummies? Not like the smart guys with the creative financial approaches? Hows that working out, by the way?
Talking about the article from TPM, above. Missed your notice, apparently.
“Safe” is, of course, a relative term, and was meant that way. Bet just about anything you knew that.
And right now, kinda seems like what people are most interested in is putting their money someplace where they can get it back. So, if there isn’t a “safe” investment today, bet yer ass there will be one tomorrow morning. Or, at least, there will be one being sold as if it were.
Scylla, safe is relative. That said, US treasuries are the benchmark for investments. We don’t know how much radioactive waste Kimberly Clark may be exposed to yet. We’re only learning about GE, the bluest blue chip benchmark corporate for the last 100+ years. That was a very safe investment right?
There are times when the safest investment is treasuries or frankly just putting your cash under the mattress. While you might not beat inflation, in times of stress you’ll beat most other forms of alterneate investments (corporate bonds, stocks, property, etc).
Practially any standard US based investment vehicle has FX risk. And while a hard asset *can *be a hedge against inflation, I’d say there’s an awful lot of property based assets in the US that are not going to beat inflation over the next 5 years.
Please share what great investments out there we should be considering that
a) don’t have FX risk
b) are a hedge against inflation and
c) are “safe”
He’s used a lot of metaphors - “Building a Deck”, “Fishing”, and “Sinks”. I don’t get much joy out of this thread, but that’s the funniest part as far as I’m concerned.
Scylla:
Noam Chomsky has been making this argument for years. And yet he’s dismissed as an anti-American, left-wing kook. Strange to see you agreeing with him.
I’m just sayin, is all.
Invest in a career in finance!
Does the fact that the AIG bonuses guaranteed 100 % of the previous years bonuses while they knew full well the company bottom line was going to suffer due to rash and crazy investments.bother anybody? They wrote that into the contract . But, they are writing their own contracts ,so what do you expect? Now the contracts should be legal and binding?
Obviously the financial stability of the bank or country did not factor at all. Stop the bonuses and make them go to court to prove they are legitimate.
You mentioned a few posts ago, that mortgages have been safe… until recently. One of the main reasons why the bubble in mortgage backed securities collapsed was because it had been very safe for a very long time. Because of this people put a lot of money into them, creating a bubble which burst.
People normally sell out of assets that have just crashed and buy assets that have been doing very well and been very safe for a long time. Out of the frying pan and into the fire.
The very fact that the asset class you describe has been selling very well, and that everybody thinks it’s good and safe is a very disquieting notion. These CDOs were triple a and insured for the most part.
I think the biggest risk out there is in treasuries and savings bonds. What do you think will be the effect of all these trillions of dollars the government is spending to fix this mess? Hmmm?
What say we have 20% inflation while our currency is being devalued by another 20%?
You’ve just lost 40% in your “Safe and stable” securities.
Now, of course, you may laugh at this risk, disbelieve it. It may or may not happen. The point is, the fact that people don’t beleive it can happen and are discounting the risk, actually increases the likelihood that it will.
Nassim Taleb, a former trader, financial genius, and multimillionaire from his own trading pretty much predicted the disaster that just occured. Right now, he is very concerned about the scenario I’ve outlined. He thinks there’s a good chance that it might be next. All the ingredients are there.
If by “relatively safe,” you mean could lose 40% or more in a single year with a historic real return rate approaching 0 then I guess those are “relatively safe” in the sense that there is absolutely no way that you can eeeek out a return on them.
You’re right about the second part there.
No. But I would guess that after it dropped from 40 to 5.75 there was probably a lot less risk in it. I put GE’s core business at 12. I was on the analyst call Thursday relating to GE capitol, and while I don’t trust Immelt at all, I think a strong case was made the GE Capitol is solvent.
KMB is down about a third. Those toilet paper companies don’t do a lot of dabbling in toxic debt. KMB doesn’t need quite the extensive capital arm since few people finance Huggies and tissue paper.
I strongly agree that there are such times. It is the cyclical nature of things that it is so. It is just not always so, and this is one of those times when I think they are downright risky as hell.
Well, if I did that, that would ruin my argument that there is no such thing as single “safe” investment. Wouldn’t it?