Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Congressman worries that taxpayers are chumpsGreat video of Rep Elija Cummings (D-MD) grilling Neil Kashkari (the guy Paulson has put in charge of handing out the $700 billion bailout). He asks why taxpayers shouldn't feel like "chumps" for handing over endless billions to AIG. HT to Michelle Singletary.Kucinich has a nice line at 8:04 -- "I don't think anyone questions, Mr. Kashkari, that you're working hard. Our question is who you're working for." Labels: AIG, Dennis Kucinich, Elija Cummings, Henry Paulson, Neil Kashkari, Washington Post AIG Reputation Destruction VideoOur recent post More AIG Fun With Bailout $$ was featured in a terrific Flash animation titled Social Media Guns on AIG, produced by VizEdu, which looks like a great company (and we like their politics).The final bit of the animation is especially good: "Your Brand Is Now Owned By The People." Labels: AIG, bailout, financial crisis, VizEdu AIG to pay $503 million to top execsMore good times at AIG, the failed insurance company that has (so far) received $152 billion in Federal bailout money.After receiving endless grief about spending millions on lavish corporate retreats, executives have decided to take the more direct route and pay out an extra $503 million in corporate compensation to top executives. According to the Washington Post AIG's plans to crack open its deferred compensation bank for payments early next year is conveyed in a two-sentence paragraph buried inside a quarterly financial report filed with the Securities and Exchange Commission on Monday. But some compensation experts and AIG stakeholders yesterday said they considered the exodus of $503 million in AIG money dubious at a time when the company is drenched in red ink. The company reported losses this week that brought total losses to $37.63 billion for the first nine months of the year. In their defense, AIG officials said that the half-billion dollar payout was necessary to keep its top talent (you know, the people who've been doing such a great job with the company) from leaving. They also stress that the payouts won't come from the taxpayer-funded bailout money. It will come from their secret stash of money hidden deep in a fortified bunker. Labels: AIG, financial crisis bailout, Golden Parachutes More AIG Fun With Bailout $$AIG execs just want to have fun, even if it means they have to sneak around mean old Uncle Sam to do it.Local news crews got wind of another AIG retreat, this time at a posh resort in Phoenix. The cost for rooms alone was a reported $300,000. Now, it's not like the company has no shame. After being lambasted for a $440,000 retreat at a California spa, followed up by an $86,000 corporate hunting trip to England, the Phoenix event organizers had the good sense to issue a memorandum urging hotel workers to keep a low profile:
Perhaps the company felt that it was time to loosen the purse strings, as the news of the latest corporate shindig broke on the same day the government announced a restructuring of the bailout package that increased the total taxpayer financing available to AIG by $50 billion. Company officials claim that they have canceled all unnecessary retreats, although this didn't stop them from
Meanwhile, back in the world of financial meltdown, a Canadian law firm has filed a class-action lawsuit against AIG for $550 million in damages on behalf of Canadian investors. Labels: AIG, bailout, financial crisis bailout $600 Billion Plan: Not Enough to Sustain RallyDespite a stimulus plan of historic scale, the announcement of China's $600 billion program, though sufficient to fuel major rallies on equity markets in Asia and, to a lesser degree, Europe early, has been eclipsed by a continuing stream of bad bad news from the US. And the article doesn't even mention Circuit City's filing for bankruptcy. From Reuters:Oil falls, recession concerns outweigh China plan Mon Nov 10, 2008 1:46pm EST By Edward McAllister NEW YORK (Reuters) - Oil prices fell on Monday as concerns about the mounting global financial crisis offset Saudi Arabia's move to cut supplies and China's launch of a $600 billion economic stimulus plan. U.S. stocks cut gains as General Motors shares slumped, Fannie Mae recorded a record $29 billion loss and the United States pledged further support for struggling insurer AIG. U.S. crude fell 91 cents to $60.13 a barrel by 12:41 p.m. EST, after rising as high as $65.56 on news of China's stimulus plan. London Brent crude was down 63 cents at $56.72. "The crude futures rally didn't last even half a day today because the oil markets are vulnerable to the steady drumbeat of bad economic data," said Gene Mcgillian, an analyst at Tradition Energy in Stamford, Connecticut. "Bad news from Fannie Mae, AIG and earlier GM all point to demand destruction," he added. The U.S. government restructured its bailout of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant. China's spending package aims to boost domestic demand and help the world's forth largest economy ride out the credit crisis, but analysts said it would take time to filter through to the energy markets. "If you step back, you realize China's stimulus could take months, or even years, to affect energy markets," said Phil Flynn, an analyst at Alaron Trading. "After the initial boost to the market, the excitement is wearing off. It's an admission that China's economy is slowing." Saudi Arabia told refiners in Asia it would cut December supplies by 5 percent, signaling its adherence to an OPEC plan to cut output. Oil prices fell nearly 10 percent last week and dipped below $60 the previous week to their lowest level since March 2007, after a string of dismal economic reports from the United States sharpened fears of a protracted recession. (Additional reporting by Gene Ramos and Robert Gibbons in New York, Fayen Wong in Perth and Barbara Lewis and Alex Lawler in London; Editing by Walter Bagley) Labels: AIG, China, Circuit City, Fannie Mae, financial crisis, financial crisis bailout, General Motors This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street AIG Keeps SinkingAIG executives, back from their spa retreat and British hunting trips, are busily back at work throwing tax dollars into the furnace.In little over a month, the company has accessed $90.3 billion (nearly three-quarters) of the $122.8 billion in credit lines extended by the Fed in exchange for an 80% stake in the company. AIG chief Edward Liddy said that the company may soon have to ask for more money if the company is forced to post more collateral for bond holdings that it guaranteed but that are now being downgraded. Under extreme pressure from NY Attorney General Andrew Cuomo, AIG has agreed to put a hold on paying out performance bonuses to former and current executives. The impact of the AIG collapse is being felt far and wide. Thirty municipal transit agencies, including those in Atlanta, Chicago, DC, San Francisco, and Los Angeles, are facing the prospect of being forced to come up with hundreds of millions of dollars. The crisis is a result of complicated (but legal) tax dodges between the transit agencies and private banks (explained here in the Washington Post). Basically, the banks paid the agencies large sums upfront that would be repaid in installments over time. Exploiting a loophole in the tax code, the banks saved hundreds of millions in taxes, but split the profit with the transit agencies. The deals were guaranteed by AIG, but now that the insurer is on the skids and the federal government has declared an end to the tax dodge, the banks are demanding that cash-strapped transit agencies hand over hundreds of millions in cash in the next few weeks. The demands may actually be a bargaining tactic to force Congress to extend the tax breaks. Labels: AIG, corporate taxes, economic meltdown, public transit, tax dodges AIG Execs Still Living the High LifeIn case you were concerned that company execs at AIG (the failed insurance company that was bailed out by the Fed because it was "too big to fail") would have to tone down their high-flying ways, fear not.Last week we reported how, after begging taxpayers for $85 billion to save their hides, they treated themselves and their top insurance salespeople to a week-long luxury spa retreat to the tune of $440,000. This week, corporate honchos found themselves back in the spotlight after reports surfaced that the company spent $86,000 on a corporate hunting trip in England the same time they got an additional $37.8 billion from taxpayers. While the company is now claiming that it will pare back such extravagances to only those that "maximize revenue," they are still mum on whether any top executives are considering giving back any of the hundreds of millions they received in compensation. NY Attorney General Andrew Cuomo, however, is not amused. Labels: AIG, economic meltdown, financial crisis bailout, Golden Parachutes It feels good to be an insurance exec too!Executives at insurance behemoth AIG must have been really stressed after getting an $85 billion bailout from the government. That seems to be the logical explanation for why executives at the failed company held a week-long retreat at the luxury St. Regis Resort in Monarch Beach, CA right after the Treasury agreed to stop the company from imploding.Congress's chief curmudgeon, Henry Waxman (D-CA), chided the executives for running up a tab including $200,000 for rooms, $150,000 for meals, and $23,000 for the spa. News reports did not indicate whether anyone took advantage of the resort's "Pamper Your Pooch" package. The package consists of an overnight stay in a Resort view guestroom, a personalized welcome letter to the pet, the exclusive St. Regis doggy bed, pet amenities including “Sniffany & Co.”, “Bark Jacobs”, “Dog Perignon”, or “Jimmy Chew” toys, personalized silver food and water bowls, an array of treats, biscuits, and bones, along with an issue of Hollywood Dog! Pricing for this package begins at $545 per night. (two-night minimum required) As they did yesterday with ex-Lehman Brothers CEO Richard S. Fuld Jr., Waxman and others (seemingly in need of some R&R themselves) taking a careful look at thousands of documents from the failed insurer and raising concerns about what appear to be hastily-crafted golden parachutes for top company executives while the company was in freefall: According to the Washington Post:
But the board agreed to ignore the losses from the financial products division and gave Sullivan a cash bonus of over $5 million. The board also approved a new compensation contract for Sullivan that gave him a golden parachute of $15 million, Waxman said. Joseph Cassano, the executive in charge of the company's troubled financial products division, received more than $280 million over the last eight years, Waxman said. Even after he was terminated in February as his investments turned sour, the company allowed him to keep up to $34 million in unvested bonuses and put him on a $1 million-a-month retainer. He continues to receive $1 million a month, Waxman said. Labels: AIG, bailout, financial crisis bailout, Golden Parachutes, Henry Waxman, Lehman Brothers, Richard Fuld Jr, St. Regis Resort, Washington Post The Greed FallacyYou can't explain a change with a constant.This posting is by D&S Associate Arthur MacEwan. Various people explain the current financial crisis as a result of "greed." There is, however, no indication of a change in the degree or extent of greed on Wall Street (or anywhere else) in the last several years. Greed is a constant. If greed were the cause of the financial crisis, we would be in financial crisis pretty much all the time. But the financial markets have not been in perpetual crisis. Nothing close to the current crisis has taken place since 1929. Yes, there was 1987 and the savings-and-loan debacle of that era. The current crisis is already more dramatic—and threatens to get a good deal worse. This crisis emerged over the last decade and appeared full-blown only at the beginning of 2008 (though, if you were looking, it was moving up on the horizon a year or two earlier). The current mess, therefore, is a change, a departure from the normal course of financial markets. So something has to have changed to have brought it about. The constant of greed cannot be the explanation. So what changed? The answer is relatively simple: the extent of regulation changed. As a formal matter, the change in regulation is most clearly marked by the Gramm-Leach-Bliley Act of 1999, passed by the Republican-dominated Congress and signed into law by Bill Clinton. This 1999 act in large part repealed the Glass-Steagall Act of 1933, which had imposed various regulations on the financial industry after the debacle of 1929. Among other things, Glass-Steagall prohibited a firm from being engaged in different sorts of financial services. One firm could not be both an investment bank (organizing the funding of firms' investment activities) and a commercial bank (handling the checking and savings accounts of individuals and firms and making loans); nor could it be one of these types of banks and an insurance firm. However, the replacement of Glass-Steagall by Gramm-Leach-Bliley was only the formal part of the change that took place in recent decades. Informally, the relation between the government and the financial sector has increasingly become one of reduced regulation. In particular, as the financial sector evolved new forms of operation—hedge funds and private equity funds, for example—there was no attempt on the part of Washington to develop regulations for these activities. Also, even where regulations existed, the regulators became increasing lax in enforcement. The movement away from regulation might be seen as a consequence of "free market" ideology, the belief as propounded by its advocates that government should leave the private sector alone. But to see the problem simply as ideology run amok is to ignore the question of where the ideology comes from. Put simply, the ideology is generated by firms themselves because they want to be as free as possible to pursue profit-making activity. So they push the idea of the "free market" and deregulation any way they can. But let me leave aside for now the ways in which ideas come to dominate Washington and the society in general; enough to recognize that deregulation became increasingly the dominant idea from the early 1980s onward. (But, given the current presidential campaign, one cannot refrain from noting that one way the firms get their ideas to dominate is through the money they lavish on candidates.) When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn't take a particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations. The danger of risk is not simply that one investment—one loan, for example—made by a financial firm will turn out badly, or even that a group of loans will turn out badly. The danger arises in the relation between its loans (obligations to the firm), the money it borrows form others (the firm's obligations to its creditors) and its capital (the funds put in by investors, the stockholders). If some of the loans it has made go bad (i.e., if the debtors default), it can still meet its obligations to its creditors with its capital. But if the firm is unregulated, it will tend to make more and more loans and take on more and more debt. The ratio of debt to capital can become very high, and, then, if trouble with the loans develops, the bank cannot meet its obligations with its capital. In the current crisis, the deflation of the housing bubble was the catalyst to the generally crumbling of financial structures. The housing bubble was in large part a product of the Federal Reserve Bank's policies under the guidance of the much-heralded Alan Greenspan, but let's leave that issue aside for now. When the housing bubble burst, many financial institutions found themselves in trouble. They had taken on too much risk in relation to their capital. The lack of regulation had allowed them to get in this trouble. But the trouble is much worse than it might have been because of the repeal of the provisions of Glass-Steagall that prevented the merging of investment banks, commercial banks, and insurance companies. Under the current circumstances, when trouble develops in one part of a firm's operations, it is immediately transmitted throughout the other segments of that firm. And from there, the trouble spreads to all the other entities to which it is connected—through credits, insurance deals, deposits, and a myriad set of complicated (unregulated) financial arrangements. AIG is the example par excellence. Ostensibly an insurance company, AIG has morphed into a multi-faceted financial institution, doing everything from selling life insurance in rural India to speculating in various esoteric types of investments on Wall Street. Its huge size, combined with the extent of its intertwining with other financial firms, meant that its failure would have had very large impacts around the world. The efforts of the U.S. government may or may not be able to contain the current financial crisis. Success would not breathe life back into the Lehman Brothers, Bear Stearns, and who knows how many other major operators are on their deathbeds. But it would prevent the financial crisis from precipitating a severe general depression; it would prevent a movement from 1929 to 1932. The real issue, however, is what is learned from the current financial mess. One thing should be evident, namely that greed did not cause the crisis. The cause was a change in the way markets have been allowed to operate, a change brought on by the rise of deregulation. Markets, especially financial markets, are never very stable when left to themselves. It turns out that the "invisible hand" does some very nasty, messy things when there is no visible hand of regulation affecting the process. The problem is that maintaining some form of regulation is a very difficult business. As I have said, the firms themselves do not want to be regulated. The current moment may allow some re-imposition of financial regulation. But as soon as we turn our backs, the pressure will be on again to let the firms operate according to the "free market." Let's not forget where that leads. Arthur MacEwan is professor emeritus of economics at UMass-Boston and is a Dollars & Sense Associate. Labels: AIG, bailout, Bear Stearns, credit crisis, Glass-Steagall |
