The AIG Bonus Issue

As the AIG Bonus issue gains more attention, there seems to be a bigger back story than most would have expected and it seems that no one is immune to the fallout.

First, Timothy Geithner expresses outrage over the bonus payout:

I know there is considerable outrage in the House of Representatives, as there is throughout the country, about the bonuses awarded to the employees of AIG Financial Products division at a time when the company is reliant on significant taxpayer dollars.  The President shares that outrage, and so do I.

Then we hear that President Obama said he was stunned to hear about the AIG bonuses:

President Barack Obama has told Jay Leno he was stunned when he learned of the bonuses that bailed-out insurance giant AIG was paying its employees.

Obama told “The Tonight Show” host the payments raise moral end ethical problems — and the administration’s going to do everything it can to get them back.

But Obama added the bigger problem is the culture that allowed traders to claim them. He says that’s got to change if the economy is to recover.

But then we find out Geithner was the person who PUSHED for the AIG employees to keep their bonuses:

Treasury Secretary Timothy Geithner told CNN Thursday his department asked Sen. Chris Dodd to include a loophole in the stimulus bill that allowed bailed-out insurance giant American International Group to keep its bonuses. 

In an interview with CNN’s Ali Velshi, Geithner said the Treasury Department was particularly concerned the government would face lawsuits if bonus contracts were breached. 

Either Geithner is not telling his boss, the President, what is really going in the Treasury or he is lying about his outrage over the bonus payment (or both).

Folks, Geithner needs to go.  

He “forgot” to pay his taxes even after his employers told him of his liabilities.  He designed, with ex-Treasury Secretary Paulson, the original $700B bailout that was wasted, and now he is playing two face with the AIG bonuses. It is becoming more and more apparent that this man does not have the interest of the United States at heart.

Cooking this weekend

I am in a very… not creative… um… experimental food mood.  I think this weekend I will attempt to cook up some Vegetable Pakora and some Chicken Curry.

The recipes above are a few that I found while searching around, but I am open to suggestions.  If there is an Indian dish you love, and think I should give a try, please do leave me a comment and point me in the right direction.

How time has flown

Before I walking into a meeting room today, I was looking at a giant wipe board calendar that was broken out by the 12 months of the year.  This calendar highlighted all the events – major events – that my team was working on during the year.  

As I was reviewing the calendar I realized, wow… a quarter of the year has already passed by and it seems as if I am standing still.  What have I accomplished thus far?  Have I moved forward, or am I just running in place?  Am I making the most of my life or am I simply moving from day to day?

I have no real answers.  Yes, ideas, but no real answers.  

When I was a child, it seems as if the summers wold last forever.  I had no care in the world and always wished that I could fast forward the future, but now the feeling of carelessness was replaced by reality.  The looking toward the future has become just making it through the day, and it seems the gift of youth I once had was wasted as I rushed (pushed) myself toward adulthood.

I’m just amazed at how quickly time moves and how views change.

Is a bailout the right thing, yes.  Is the current proposed solution – all three pages of a solution, that is – the right one, no.  But, as Jim Cramer points out it’s the best thing we have thus far.

The current plan…

1. Will stop the foreclosures
2. Will not cost a lot of money and could even make money
3. Can prevent “golden parachutes” by requiring executives to waive their salaries in order to take advantage of the plan
4. Banks will not need to take large write-downs as responsible banks have already written down the value of their loans
5. “Rome is burning” and a solution is needed quickly to avoid another Great Depression

Let assume Congress wants a different plan, why not look how Sweden solved its banking Crisis back in 1992… that strategy held banks responsible and turned the government into an owners of banking assets via warrants and, when assets were sold,  the money was then passed on to the taxpayers.  Oh, wait that is exactly what the U.S. Government was going to do with AIG.

While Cramer has been off on stock picks, and really one only needs to be right more than 51% of the time to be good in the market, he called the mortgage collapse over a year ago.  He layed out exactly what was going to happen but no one was listening…  Will they listen this time?

There are a number of things that are being said in the news / press / world of blogs that I need to be addressed.

The Stock Market is not the economy

Without a doubt, the stock market is wild right now.  The press gets excited when the wild swing and destruction of capital takes place, but it has happened a number of times in the past – it’s all part of capitalism.  It happened in 2001, in 1990, 1987, early 80s… and on and on and on.

Corporate scandals, poor business practices, and just plain dumb luck will lead to situations like this all the time.  Currently, the financial industry is in disarray but this does not equate to an overall bad economy.  While economic growth is not historic highs it is also not contracting.  As of now, the United States is not, officially, in a recession.

The collapse of AIG, et al., is not a giant conspiracy

I want to know if people are still taking their medication.  More and more there are stories / commentaries that the bailout of AIG is due to the company being a front for the government or that we are heading into a financial dictatorship.

The reason AIG was given what amounts to a structured bankruptcy is quite simply. Their debt, the bonds they offered, was considered to be some of the highest-grade investment vehicles on the market.  Just about every major company in the WORLD owns said bonds and if the assets suddenly became worthless, the potential for failures of companies worldwide was very real.

The $700 Billion dollar rescue is the right thing

The creation of a Resolution Trust is the right thing to do and creates a bottom for the mortgage industry – the mortgages are now set with a value established by asset managers, backed by the government, and create a tradable security for the investment market.    Furthermore, as the real estate market improves the government will be sitting on A HUGE asset bank that goes right back into the treasury.

This is all caused by poor regulation, greed and policy

Yes, policy created this current situation, but it wasn’t Bush policy – it was Clinton policy.  President Clinton pushed extensive changes allowing lenders to distribute and fill “questionable” loans, his legislation – essentially – allowed the sub-prime mortgage industry to start.

In 2002, Ron Paul called for change due to the financial risk, in 2003 President Bush recommended a regulatory overall to prevent a collapse and in 2005 John McCain warned of a financial collapse but NO one acted.

Who failed to act?  Congress.

Bankers utilized the “loose” regulation and got greedy.  They started to issue loans to individuals who could not afford their loans and, next thing you know, boom there is a crash.

This is life…

The stock market, the economy and life are full of ups and downs.  What the government is doing right now is attempting to provide stability to the financial and credit markets, and as the economy as a whole.  Is it what I want to see in a free market society, no?  Is it the right thing to do, yes.

From very early on I have held the belief that we are not in the middle of a banking collapse, rather we are in the middle of a market correction. It is also important to separate banks that are going under from the likes of Freddie Mac, Fannie Mae, Lehman and AIG. While all can be tied to the same cause, they fall into three separate categories.

Category 1

The retail banking industry, where you and I have our money, has seen 11 organizations close to date. Closures were directly connected to bad debt and an inability to provide liquidity for all deposits within the bank. It important to note, deposits in such banks are federally insured up to $100,000 per account.

Category 2

The recent bankruptcy of Lehman Brothers, a money center bank, falls into the commercial category. They are not a retail bank, nor did they do retail business, which means the government did not need to utilize the Federal bank insurance fund to cover monies. Again, the failure was tied to illiquidity due to bad debt.

Category 3

AIG is neither a retail bank nor a money center bank (brokerage) but an insurance provider to a number of industries, including banking. The liquidity crunch currently facing this organization is due to the insurance underwritten to cover banks debt (both retail and brokerages). No FDIC coverage, no “man on the street” unable to obtain his or her money because of the situation.

Retails banks will continue to fail due to bad debt, and would even fail in good markets due to mismanagement, I think it would be hard to say we have a banking collapse unless people were having difficulty obtaining their money. At that point we would truly be facing a banking collapse, which is why I am concerned to see that the Federal bank insurance fund dwindling and regulators consider options for replenishing it.

From the article:

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Basically, if a large retail bank goes under the FDIC is out of money and needs to find additional funds, most likely in the form of a loan from the treasury. What happens, though, if several large retail banks collapse at the same time?

The FDIC predicts difficulty with one large retail institution; several closings could cause a shortage of funds available to the public. Take it on step further – what if the FDIC cannot obtain the money from the government in order to cover the deposits?

This is what a true banking collapse would be.

In an effort to prevent the proverbial house of cards from falling in the financial industry, the Federal Reserve is providing an 85 Billion dollar loan to AIG in exchange for an 80% stake in the company.

Here is what will now take place:

1. AIG obtains a 2 year, 85 Billion dollar loan
2. Certain lines of business will be sold in order to repay the loan
3. The company’s management will be replaced, former Allstate Corp. CEO Edward Liddy will take the top spot within AIG

Most likely the entire company will be sold, in the long run, to repay the debts owed to the Federal Reserve; however, the two years allows the new management to orderly sell of the company, repay debts, and not cause panic in the financial markets. The major reason the Fed stepped in with AIG, and not in the case of Lehman, was due to the chance AIG would bring down financial institutions in the U.S., as well as overseas financial institutions.

What is unknown at this point is what happens to the company, and any equity holders. Does a much leaner AIG come out to the market place, or does this entire process simply mean here is 85 billion dollars to orderly disband the company leaving employees, equity and bond holders with nothing.

But what does this mean to us, the bag holding public? Nothing. The assets of AIG will have to be sold off in order to pay a loans coming due and thereby protecting the taxpayer.

So, no, this is not like Fannie Mae and Freddie Mac… that is the deal that will hurt the tax paying public.

Others:

Ankle Biting Pundits – The Financial Meltdown
Let’s talk Money – Fed’s $85M loan to AIG; Time to fire Paulson
Lehman collapse – AIG on the way
A Time to choose – $85 Billion to AIG, oh my god
Jon Taplin’s Blog – The AIG Rescue

What the financial markets face today are two ugly monsters, walking hand and hand, causing devastation wherever they seem to go.

First off, the economy is stuck in the middle of a Sub-Prime mortgage crisis. Essentially, banks became greedy and started handing out mortgages and loans to just about anyone who had a pulse, couple this with falling real estates values and there is a disaster waiting to happen.

A large number of the recipients of said loans often had poor credit and little to no money down on the property they purchased. Suddenly, home owners can no longer pay on their mortgage (loss of a job, mortgage rates changed) and the bank is left with property deflated in value and no one to pay on the loan. This means financial institutions are now holding “bad debt” – receivables that can no longer be collected on – which needs to be covered on the company’s balance sheet. When the bank can no longer cover the debt situations like Countrywide, Lehman Brothers or Bear Stearns take place, they go out of business and the remaining assets, or anything of value, are purchased by competitors for pennies on the dollar.

The second crisis facing Wall Street – no, the economy in general – is now a credit crunch.

Due to the risk seen in the mortgage industry, and the bodies on Wall Street, banks and institutions are unwilling to provide, or make it incredible difficult to obtain credit for, individuals or companies.

You want a new car? Maybe you cannot get a loan because your credit is under 700. What about that oil producer? BigOil Co. wants to expand operations but cannot obtain a loan because the cost is too great, there by reducing a competitive advantage. Worse yet, companies that need bridge funding – funding for the short term to fund operations – may be unable to get the cash they need and as a result go out of business.

AIG, one of the largest bond insurers in the World, is being hit by both the sub-prime crisis and the credit crunch.

One of the many products AIG offered was insurance on financial products and what is hurting the company at this point is their insurance of mortgages. When a financial institution had a loan that is considered to be “bad” they file a claim (AIG) in order to recoup their money. While AIG could be able to insure the mortgage portfolio of one institution, say Country Wide for example, it did not have enough money to fund the portfolios of Country Wide, Lehman and Bear Sterns combined. So, what does the company do? Go to the credit market…but that well may be dry due to the credit crunch as described above, leaving the company trying to find a buyer for it’s assets, find funding at a steep price, or going bankrupt.

Note: Constellation Energy fell almost 40% as investors fear banks may pull lines of credit – this is how the credit crunch can impact ALL aspects of the world economy.

The sub-prime crisis triggered the credit crunch. As a result every individual, world wide, is at risk of being impacted in some way – be it large or small. The lack of credit or liquidity has the ability to send economies around the world into recession. If businesses are not spending money, people are not spending money, and economies shrink until the deflation has worked out of the system.

While I understand the government’s reason for stepping in to socialize Fannie Mae and Feddie Mac, I am sure I agree with the decision to do so. The only thing I can assume is the impact on the U.S., and potentially global, economy was so great no other option existed. So, in this political season the question that seems to be asked quite often is “What policy could be put in place to stop this?” Short answer: none.

As much as people do not want to hear it, this is what happens in a free market. Ups and downs occur. The government should not be rescuing companies because of their greed or poor judgment, nor should they be bailing out the “man on the street” that purchased too much home.

The one place government does need to look; however, is their enforcement of financially significant data. A number of the financial institutions with bad debt were unable to tell investors or regulators just how much risk was on their books (i.e. – we don’t know how many of our loans are bad). This lack of visibility in financial information led to the sudden collapse of firms like Bear Sterns and Lehman

Funny thing… I thought SOx was going to fix all of that.

Hang on, the ride is going to be bumpy for some time.

Others Covering:

The Anchoress: Wall Street Woes, Media Meltdown & More
Hot Air: Who’s policies led to the credit crisis
Right Voices: Dodd says he was on top of the financial crisis
Flopping Aces: Democrats rewriting history once more
The Dude’s Blog: Disingenuous Dems Lying About Credit Crisis

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points – Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) – 0.20 – down 94.4%
AIG (AIG) – down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) – 17.83 – down 13.44%
Morgan Stanley (MS) – 34.16 – down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…