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Geithner and Bernanke Visit Financial Services Liveblog

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A few days ago, this hearing might have focused on why we need to bribe the banksters to clean up their mess. Now, it will undoubtedly focus on why we’re socializing risk some more. We’ll also have William Dudley, the new head of the NY Fed.

The hearing is on CSPAN1 and the committee stream. We’ll have a long series of member statements before we get to Tim and Ben. 

From Geithner’s statment, he’s still pushing regulation of "too big to fail" rather than avoiding "too big to fail."

We must ensure that our country never faces this situation again. To achieve this goal, the Administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision. All institutions and markets that could post systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking. Regulators must apply standards, not just to protect the soundness of indivdiual institutions, but to protect the stability of the system as a whole. 

And here’s Timmeh playing dumb on bonuses.

 In November, as part of the government’s infusion of capital, Treasury imposed the strictest level of executive compensation standards required under the Emergency Stabilization Act. When we were forced to take additional action in March, we required AIG to also apply the Treasury rules that will be promulgated based on the executive compensation provisions in the American Reinvestment and Recovery Act.

See, AIG has given out bonuses to 4,500 people since we bailed them out in September.  And Treasury knew about the AIGFP bonuses (to be paid in March) when they were negotiating the most recent $30 billion. But for some reason Timmeh doesn’t want you to know about it.

Barney Frank: [Reminding the context of AIG, the Lehman collapse and the no involvement of Congress] Two examples of how not to proceed. Lehman, not help for creditors. The other one, AIG, help for all of the creditors. Contrast with Wachovia, IndyMac, WaMu. Those of us who will mourn Countrywide are a small number. Regulators that contained the damage. Neither Lehman total collapse on economy or excessive intervention. Read more →

President Obama Warns Americans about Threat from Financial Terrorists

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I first suggested that AIG’s masters of the universe had strapped themselves in semtex-lined vests in this post. I then noted that they had issued further threats on the pages of the WaPo.

Apparently, Obama has noticed the semtex-lined vests, too.

But today, President Obama took that rhetoric in a different direction. He actually upped the ante explaining that AIG is like a suicide bomber.

“We had to step in, it was the right thing to do, even though it is infuriating,” Obama said, explaining why the government needed to bail out the troubled banks.

“The same is true with AIG,” he said. “It was the right thing to do to step in. Here’s the problem. It’s almost like they’ve got — they’ve got a bomb strapped to them and they’ve got their hand on the trigger. You don’t want them to blow up. But you’ve got to kind of talk them, ease that finger off the trigger.”

Thing is, I’m not really sure we’re making any progress at talking them out of their terrorist attack, and I’m not convinced the terrorists have full control over whether or not their vests go off. 

The Fear-Mongering to Silence the AIG Employees

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The memo AIG sent to employees offering safety tips might lead you to believe that AIG is concerned about its employees’ safety. And, true, it offers really practical advice about how to limit the chances that someone is going to attack an AIG employee: hide your badge, alert security if people are hanging around.

I do hope AIG employees–and all the banksters–remain safe.

But there’s one fact that suggests this memo is simply a scare tactic.

Edward Liddy, someone who has been on TV as the public face of AIG, took the train to DC for his testimony.

Whatever Liddy’s personal record — he is taking $1 in salary this year without a bonus and took the train to Washington for the hearing — lawmakers didn’t stop in their quest for the names.

If you are genuinely concerned about the safety of your employees, you do not let the most public of those employees take public transportation on a widely-publicized trip.

So I would suggest that the warnings from AIG might serve a completely different purpose (aside from instilling a sense of defensiveness that might draw employees closer together). Consider this warning, for example, ostensibly designed to keep employees safe:

Avoid public conversations involving AIG and do not engage any media personnel regarding the company.

You see, all but a few of the warnings AIG gave its employees have a dual effect: they remind employees to guard their personal safety (and I do hope they remain safe). But they also ensure that anyone trying to report on AIG will be regarded as a physical threat.

And the net effect of such fear-mongering is articles like this one, in which the employees at the highest risk AIGFP employees quoted as being concerned about their privacy and safety (in an article, funnily enough, that provides names and towns of residence), are ignoring the guidelines AIG gave them on protecting themselves. They are talking to the press!!!!

But I’m guessing that’s not exactly what happened–that Jackpot Jimmy somehow ignored the warnings and instead decided to gab to the press. You see, I find it rather curious that the two AIGFP employees described in the article–Jackpot Jimmy and Douglas Poling, the latter of whom got the biggest bonus–are now returning those bonuses. Read more →

Is AIG’s Reinsurance Side a House of Cards, Too?

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The other day, Atrios pointed to this passage, explaining that AIG was reinsuring some of its own insurance businesses.

Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.

Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators’ own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging. [my emphasis]

Masaccio pointed me to these two passages in AIG’s 10K, which sound like they may describe what Gober is talking about:

Various AIG profit centers, including DBG, AIU, AIG Reinsurance Advisors, Inc. and AIG Risk Finance, as well as certain Foreign Life subsidiaries, use AIRCO as a reinsurer for certain of their businesses, and AIRCO also receives premiums from offshore captives of AIG clients. In accordance with permitted accounting practices in Bermuda, AIRCO discounts reserves attributable to certain classes of business assumed from other AIG subsidiaries. (10)

Read more →

Wah! Wah! Wah! And More Semtex from AIGFP

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The WaPo is out with a story about how the remaining people at AIGFP are being unfairly lumped in with the banksters who broke the world economy.

A solitary flat-screen television hangs on the back wall of the trading floor inside the headquarters of AIG Financial Products here. Wednesday afternoon, the most-talked-about employees in America huddled around it to find out just how despised they have become. 

[snip]

A sense of fear hung in the room — the palpable, unsettling kind that flashes across people’s eyes. But there was anger, too. No one would express it publicly, of course. Who wants to hear a wealthy financier complain? And yet, within those walls off Danbury Road lies a deep sense of betrayal — first by their former colleagues, now by their elected leaders.

The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.

In it, Gerry Pasciucco contradicts the story Edward Liddy told yesterday, denying that the remaining AIGFP employees were irreplaceable.

"They are replaceable," Pasciucco acknowledges. "If we were running a long-term business, we could probably replace them over time, not all at the same time." 

Yet in the middle of this big sob story about how maligned these poor quants and their secretaries are, they return to the threats they issued in the white paper demanding the bonuses.

"Nobody is going to give it back and then stay," said one of the firm’s employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG’s counterparties." 

Let’s see, aside from the fact that these guys’ contracts undoubtedly have confidentiality agreements–making such cooperation with counterparties a gross breach of contract–assuming their counterparties actually did anything with this information, they’d all be breaking the law. 

Don’t get me wrong–I believe Liddy when he says the US government stands to be exposed to the tune of $1.6 trillion if this happens. I believe this threat is real. 

But make no mistake. The kind of people who would threaten to do this are threatening to bring down the global finance system. Again. Read more →

What Did Geithner Know and When Did He Know It?

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 I’m with Jane.

I do not think that anyone understands that some Rube Goldberg model, where we pay out a billion in bonuses, and then try to get the money back in taxes, is going to be a winner. But that appears to be what the administration wants, because both Nancy Pelosi and Barney Frank are saying the same thing. Then again, we’re talking about a bunch that thought this wouldn’t be a big problem in the first place, at least not one they couldn’t solve with faux "outrage" and blaming Chris Dodd.

I’m fairly confident they’ll have a chance to rethink this in the near future — somewhere around the time Tim Geithner’s "I knew nothing" story crumbles. The only question is how much public rage they’ll have to suck up before they face that reality. [my emphasis]

The Administration is shortly going to be dealing with the uncomfortable job of admitting Tim Geithner knew a lot more about bonuses a lot earlier than he has let on.

And while news outlets like Time are chasing down precisely when Geithner learned the details of AIGFP bonuses, I’m more interested in an earlier round.

As Elijah Cummings described in the waning moments of yesterday’s hearing, Edward Liddy approved a round of retention payments back in September.

On September 18, 2008 AIG’s compensation committee of the Board of Directors approved retention payments for 168 employees. 

Cummings’ point is important, because it shows that, however distasteful Liddy may find paying off the banksters who broke the world economy, he’s willing to pay retention bonuses himself, even at a time when AIG was engorging itself on the federal teat. 

But the retention contracts negotiated in September also put them squarely in the time when Tim Geithner was intimately involved in bailing AIG out. We learned yesterday that he recused himself from matters pertaining to AIG once he was picked to be Treasury Secretary (that nomination was announced on November 24). But back on September 18, when this round of bonuses was approved, Obama hadn’t even won the election yet, much less picked Geithner to be Treasury Secretary. Back on September 18, Geithner was in charge of the well-staffed (his current excuse–that he’s not staffed up yet, doesn’t work here) NY Fed, and in charge of negotiating this bailout. Read more →

Gary Peters: Why Is It Okay to Abrogate UAW Contracts But Not Wall Street’s Contracts?

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Gary Peters asks the question all Michiganders have been asking since September. Why are UAW’s line workers forced to renegotiate their contracts and GM’s engineers forced to forgo bonuses, but not the banksters who ruined the economy?

Financial Services AIG Hearing Liveblog, Member Blowhard Statements

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The hearing can be view on the committee stream or CSPAN3.

The witnesses are:

Panel one

  • Mr. Scott Polakoff, Acting Director, Office of Thrift Supervision 
  • The Honorable Joel Ario, Insurance Commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners 
  • Ms. Orice M. Williams, Director, Financial Markets and Community Investment, Government Accountability Office 
     

Panel two 

Liveblog

Barney starts by warning the hecklers.

Three other members included–I missed the first one [oh, I think it was Joseph Crowley], but Marcy Captur and Elijah Cummings are in there.

Kanjorski: AIG unique. Not a bank, and has received much more assistance than any other bankster. Treasury and Fed could not accommodate us. "We need to hear form them, directly and publicly." Full committee hearing on March 24. 

[Note, AIG’s much greater assistance was really assistance for the banks via other means. That Kanjorski statement does not inspire confidence in me, because it hides the degree to which this is still about the JP Morgans and Goldman Sachs of the world.]

Garrett: Where was the outrage when Bush was demanding money from taxpayers? I think I’ll blame it on Democrats.

[Note, the Republicans are going to be out for Geithner’s head here. He’s not going to have much fun when he testifies on Tuesday.]

Frank: I hope we can focus on the subject at hand, but I have to respond to Garrett’s complaint that he didn’t get a hearing quick enough. We did have the hearing in July 2008. At that hearing he asked no questions at that hearing. He declined to ask any questions about it. I suppose he’s disturbed that we didn’t give him a chance to ask questions a month earlier. 

Garrett: My understanding is that I went into other issues as well.

Frank: Not according to my reading of the transcript. Covered bonds hardly seemed to be the major topic that the gentleman wanted to have the hearing about. The committee had a hearing on this well before the Fed went into AIG. It is important for us to amend that statute, but doing it in the midst of that uncertainty is probably not a good idea. I guess we’ll just release the transcript. I guess a lot of people left their fight in the gym. Time to exercise our ownership rights.  Read more →

Cassano’s Golden Parachute and the Retention Bonuses

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As you likely know, Joseph Cassano is the guy who created the AIGFP mess.

He was fired on March 11, 2008–probably at the same time or slightly after the retention bonuses for the other guys who screwed up AIGFP were negotiated. That means Cassano’s termination contract may provide some insight into those bonus contracts.

For example, this paragraph sheds some light on how AIG treated one of the three categories of those who would get bonuses–those "terminated without cause.

You are retiring effective March 31, 2008. You will retain your rights to all payments due under the AIG Financial Products Corp. 2007 Special Incentive Plan (the "SIP’), and your retirement will be treated as a ‘Without cause’ termination of employment for purposes of the SIP, unless I (or my successor) and the General Counsel of American International Group, Inc. both determine, in good faith on or before September 30, 2008, that Cause (as defined below) for the termination of your employment existed at the time of your retirement. Cause means your intentional misconduct, fraud, knowing violation of the Company’s Code of Conduct or conviction of or entry of a plea of guilt or no contest to a felony. In the event such a determination of Cause is made, you will have the right to contest that determination.

Make no mistake, Cassano was being fired in this contract, and it was clear at the time his division was utterly screwed up. Yet even as he was being fired, Cassano was being categorized in such a way that made him eligible for his past bonuses (I’m presuming the 2007 SIP is not part of the bonuses handed out last week).

That means, of course, that those 11 people who are still getting million dollar "retention" bonuses even though they’re gone also may have been fired. We don’t know whether they were or were not (there are two other categories they may have fallen under, in addition to "terminated without cause"). But it’s possible that you and I just paid $4.6 million to some guy who was fired.

But this passage also suggests the probable limits AIG put on bonuses received by those terminated without cause: if they’re found guilty of fraud or felony, they lose their bonuses. So what is DOJ waiting for?

Now look at the language describing Cassano’s "consulting" payments. 

You will provide consulting services to the Company as reasonably requested by the Company for a period of nine months, commencing on April 1, 2008 Read more →

AIG: “Retention” Payments for Leaving?!?!?!

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I wanted to make one more point about the revelation from Andrew Cuomo’s letter to Barney Frank that some of those getting "retention" bonuses are gone from AIG.

Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million;

"Retention" bonuses for those who left? That’s even nuttier than paying the guys who broke the global finance system millions for staying!

Here’s what AIG said about the purpose of those bonuses.

In the first quarter of 2008, AIGFP adopted a retention plan for about 400 employees that provided guaranteed payments to employees if they worked through specified payment dates (or either resigned for good reason or was terminated without cause before the relevant dates). At the time, AIGFP was expected to have a valuable, on-going role at AIG. The plan was implemented because there was a significant risk of departures among employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders.

Now, we still don’t know shit about these contracts–even Cuomo, who has at least seen the contracts, doesn’t know who got them. But assuming this white paper is not lying (which I wouldn’t guarantee), then the people who have left AIG but got the "retention" bonuses fall into one of three categories:

  1. Still employed by AIGFP as of a specified payment date, but left after that date
  2. Terminated without cause
  3. Resigned "for good reason"–whatever that means

In other words, either they’ve got the retention bonuses tied to dates that mature long before the bonuses themselves do (which seems unlikely, but so do these bonuses more generally), some of these 11 people were terminated without cause even knowing they’d get humongous bonuses anyway, or they resigned "for good reason." Since the first two seem so stupid, I’m going to guess that these 11 people fall into the last category (but that’s just a wildarsed guess).

So what does "for good reason" mean?