YET ANOTHER VOICE JOINS THE CHORUS
Yes, that's right. Gregg Easterbrook takes a short detour in one of his typically long (and somewhat tedious) Tuedsay Morning Quarterback columns to explain, clearly and comprehensively, how the AIG "deal" was a disgrace from start to finish. I advise you to skip the column in full, and I'm going to re-print the entire "essay" within the column here:
[I]n February, after Barack Obama said he would act decisively to stop executives of bailed-out firms from receiving bonuses, TMQ cautioned, "If the new president stakes some of his prestige on what seems like a dramatic decision and it turns out a year later that CEOs easily evaded the seeming 'limits' and stuffed their pockets with tax money anyway, Obama will seem an ineffectual leader." It didn't take a year -- only a month! In mid-March, the No. 1 news item was tax-subsidized bonuses to the very executives who screwed up AIG. Obama said from the White House he was "deeply outraged." Speaker of the House Nancy Pelosi said she was taken by surprise and called for an investigation. Treasury Secretary Tim Geithner declared he had just absolutely no way on Earth of knowing the bonuses were coming. Wait -- they could all have read about the planned AIG bonuses in November in a football column. Anyone paying attention to the business pages knew in November 2008 that tax-subsidized bonuses for AIG were coming. Yet no national leader paused from the Washington ritual of round-the-clock self-promotion to do anything. When in March the AIG payouts were announced, Federal Reserve chair Ben Bernanke told "60 Minutes" he was "full of anger" about the bonuses. Bernanke was the one who, in the fall of 2008, decided to hand AIG up to $172 billion in taxpayers' money without imposing any accountability or conditions. This was a much worse business decision than anything any AIG executive did.Easterbrook's a smart guy. He's well-educated and well-read. But nonetheless, as he points out, he wrote this in a football column. He points out that he knows these seemingly fascinating facts because they're public, and have been since last fall. It's the same reason a know-nothing like me has been aware of this stuff since last fall. Because it was never hidden, and anyone who wants to know about it can, and will.
Beyond the irresponsibility with which Washington's Democrats and Republicans alike are mishandling taxpayers' money, my worry about Obama continues -- if he keeps theatrically denouncing tax-subsidized bonuses, yet does not actually do anything, he's going to make himself into an ineffectual leader.
What's the next AIG bonus scandal coming? The company's CEO, Edward Liddy, told Congress he is pure because he is "not getting a bonus and is only drawing $1 a year in salary." This is the classic statement that is literally true but intended to deceive. Liddy is likely to receive a "special bonus" from AIG in 2010. How do I know this insider fact? Because months ago, AIG announced it! Liddy claimed he found paying bonuses to AIG managers "distasteful" but had to honor bonus clauses in their contracts because "honoring contracts is at the heart of what we do in the insurance business." Liddy may be saying that because his contract calls for a "special bonus," and he wants to make sure he gets the money! If, after the AIG bonus hullabaloo goes right up to the White House level, the CEO of AIG stuffs his pockets with a taxpayer-subsidized bonus in 2010, Obama will look like a phony.
About the sanctity of contracts: For years, AIG raked in rich profits by signing contracts promising, in return for a fee, to make good any losses on securities defaults. Last fall many mortgage-backed securities defaulted -- and AIG refused to make good. The company would not honor its contracts, instead insisting taxpayers cover the losses. "Honoring contracts is at the heart of what we do" -- this AIG fib would be amusing if it weren't being used to expropriate money from average Americans. When AIG owed money to others, the company ignored the contracts it signed. When contracts could be used to justify taxpayer money to AIG executives, well then, we must honor the sanctity of the contract!
Now about AIG's small outrage ($165 million in bonuses) and its large outrage ($172 billion in taxpayer subsidies). White House economic adviser Lawrence Summers called the bonuses "outrageous" but then said they must be paid because AIG "has entered into a binding contract requiring the payments, and we are not a country where binding contracts get abrogated willy-nilly." Not only had AIG already shown itself eager to abrogate contracts willy-nilly, think of the situation in the fall of 2008, when AIG was days away from insolvency. Liddy could have put his senior staff on a conference call and said, "I know you have contracts promising bonuses. But if we go out of business you not only will never see those bonuses, you will lose your jobs, salary and benefits. I offer a compromise in which you keep your jobs and salary but forgo the bonuses. Do you want that, or nothing? Choose now." This is how smart business people run organizations -- it's called negotiating. Instead AIG's CEO took no action on the bonuses, then turned to taxpayers to cover his ineptitude.
On the big outrage, of the $172 billion taxpayer-funded giveaway, we now know much of it used to cover credit-default swap debts AIG refused to honor. Large amounts went to foreign banks, such as Deutsche Bank and Societe Generale of France. AIG simply handed over payment in full, without negotiating. When AIG was days from insolvency, it should have said to Deutsche Bank and others, "If we go bankrupt, you will stand in line with all the other creditors at the bankruptcy court and be lucky to get 10 cents on the dollar. Would you accept 50 cents on the dollar to settle instead?" Negotiating with creditors to avert bankruptcy is a standard business tactic; General Motors and Chrysler have been doing this for the past few months. As the Wall Street Journal recently reported, a year ago Merrill Lynch was owed credit-default swap payments by an insurer called XL Capital, and after negotiations, Merrill accepted 13 cents on the dollar.
But instead of negotiating a reduction of debt, AIG simply immediately handed over full value. After all, the money was coming from taxpayers' pockets, and when has anyone cared how much taxpayer money is wasted? Goldman Sachs was the largest single recipient of AIG's paid-in-full taxpayer-funded gift, receiving $13 billion. Merry Christmas! And now we learn that Liddy owns at least $3 million worth of Goldman Sachs stock -- whose price was shored up by the paid-in-full taxpayer gift. AIG's tax-funded gift to Goldman Sachs couldn't possibly have had anything to do with Liddy's stock, could it? The worst sin is that the Washington muckety-mucks running the tax-money giveaway team did not require AIG to negotiate down its counter-party obligations. Bernanke and Henry Paulson, who approved AIG's actions last fall, deserve to be run out of town on a rail for their irresponsibility in management of public funds. Meanwhile, can anyone imagine that if a French or Germany insurer owed money to an American bank, that the French or German governments would ever pay one single centime or pfennig, let alone cover the entire debt immediately?
AIG fiasco note No. 1: Treasury Secretary Geithner, who has taken Paulson's place on the giveaway team, said the AIG bonuses were justified because AIG "cannot retain the best and the brightest" without paying bonuses. Geithner and everyone at the Treasury Department have a personal self-interest in the notion that money managers should be paid huge bonuses even for screwing up. Treasury officials (and Summers) come from jobs in which they were paid millions of dollars a year for giving financial advice, and want to return to such jobs; it is critical to their own pocketbooks to maintain the illusion that executives on Wall Street and in banking are super-brilliant geniuses who deserve millions under all circumstances. Anyway, the phrase "the best and the brightest," the title of David Halberstam's great 1972 book, is derisive. The treasury secretary should know enough about the recent history of the United States to know what "the best and the brightest" means.
AIG fiasco note No. 2: Here is AIG's 2007 annual report, in which the company declares of its financial products division, "AIG believes any losses that are realized over time on the super senior credit default swap portfolio … will not be material to AIG's overall financial condition." Important false financial statements in annual reports often are viewed as securities fraud. Yet while former Enron executives are in jail, AIG executives keep rolling like pigs in taxpayers' money.
AIG fiasco note No. 3: How does the $58 billion in AIG funds given as a gift from American taxpayers to foreign banks compare with stimulus spending that will benefit American taxpayers? There is $28 billion in the stimulus bill for road and bridge construction and repair.
Add Easterbrook's piece to all the respected economists and on-line commentators that have weighed in (negatively) about Obama's economic plan, and it really makes me wonder: what will it take for a savvy politician like Obama to hear the grumblings and pitch his insider interests aside in favor of political expediency. I suspect it will come when one of two "types" join the fray: a "left" voice, like Olbermann or Stewart; or a truly "mainstream" voice like Letterman or Brian Williams or Anderson Cooper.
I wonder if that time is coming. Because if it's not coming soon, I don't think it ever will. And short of that, Obama may not wish to annoy his Wall Street Masters by firing their chosen Insiders. I think if at least one (if not two) of the Geithner/Summers/Bernanke triumverite survives the next three months we've crossed the Rubicon for good. One of them must go by July 4th.