Rolling US Economy Into The Shitbin Thread

http://www.nytimes.com/2009/03/11/business/economy/11bailout.html

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago....

bankers be wantin their bonuses

conditions have become so onerous that they want to return the bailout money

Praise be! How about paying some nominal rate of interest, too? I mean wtf did they take the money for in the first place, if they can get along fine without it?

It's like, "Well, if you're just handing money out, Mr. Paulson, we'll be happy to take our share... What? You're putting conditions on this $120 million we took?! Fie on it!"

I'm not quite sure what these intermediate non-default steps would be. I mean if it's just more regulation to keep this from happening in the first place, is this really a moral hazard issue we're talking about?

yes, more or less. i still don't think you understand the point of the guys leonhardt's talking about. the system defaults to bailout because for certain financial entities there isn't (or hasn't been) some step at which the size of an entity or the scale of its leveraging triggers punitive constraints (in the form of stricter government oversight, say, or in the case of a large quarterly loss, some degree of immediate regulatory takeover). instead the regulators have gone the other way, taking away constraints and encouraging recklessness.

you get what you regulate, basically. the lack of regulation implies a lack of consequences, because there's no defined punishment for any given infraction.

my understanding of the OG version of TARP was that Paulson basically just shoved the money in banks' hands, whether they needed it or not. i remember reading just after the first helping of TARP that the lol "stronger" banks like Wells Fargo and Bank of New York were saying that they didn't want or need the funds but that they were being strong-armed into taking it by Treasury.

i know that i sound like a broken record on this, but Paulson & Co. really needs to be subject to a Congressional subpoena and investigation re the initial administration of TARP -- and this needed to be done several months ago. there are just too many unanswered questions at too late a time for this to be acceptable.

Eisbaer, TARP 1.0 was Bush -- O is about the present!

xpost: i mean, there are basically two different moral-hazard arguments. one (the right-wing one) is that you shouldn't bail out banks (or anyone), you should just let them go bankrupt, let the market work its magic, because every bailout just reinforces bad behavior. that's the argument surowiecki is addressing. the other argument is that the lack of regulation and threat of consequences within the system creates its own form of moral hazard, and sets up a situation that makes bailouts inevitable. the right-wing (or at least, the austrian school) answer would be, don't regulate or bailout, just let the market dole out rewards and punishment. the liberal response is more like, regulate and bailout, because the consequences of not doing either of them can be dire for society.

yes, more or less. i still don't think you understand the point of the guys leonhardt's talking about. the system defaults to bailout because for certain financial entities there isn't (or hasn't been) some step at which the size of an entity or the scale of its leveraging triggers punitive constraints (in the form of stricter government oversight, say, or in the case of a large quarterly loss, some degree of immediate regulatory takeover). instead the regulators have gone the other way, taking away constraints and encouraging recklessness.

the system defaults to bailout because there is no other option than bailout - so we should implement rules that constrain entities from ever being capable of reaching that point. yes.

but I don't think the system defaults to bailout because it *expected* a bailout - and that's the moral hazard argument.

nobody *expected* anything essentially, because nobody expected any of this to happen in the first place

I'm not sure if we really disagree about anything but the use of that term

Didn't there used to be a lot more regulations about banks that was jettisoned by Reagan and co. back in the 80s? It led to the Savings & Loan problem, but I wonder if some of those regulations would have prevented this mess to some degree.

let's see if we can survive . . . the 2nd friday the 13th in a row

http://upload.wikimedia.org/wikipedia/en/b/bc/Friday_the_13th_part2.jpg

that has never looked so unsettling

i got drunk and put my entire tax return + a couple hundred more into my IRA when the market nose-dived last week. this was a dumb idea y/n

― now is the time to winterize your manscape (will), Thursday, 12 March 2009 15:45 (Yesterday)

http://adfundal.files.wordpress.com/2008/11/recensie_blink_malcom_gladwell1.jpg

now there's your book - an anecdotal history of impaired decison making: instances where booze/drugs have usurped intuition or careful consideration, to varying degrees of success

visualizing 1 trillion dollars

and here

KILL AIG NOW

http://www.pagetutor.com/trillion/pallet_x_10000.jpg

TOP... men...

Don't you think that AIG is legally obligated to pay those bonuses??

A bankrupt AIG would not be oblilgated to pay those bonuses. For all practical purposes AIG is a bankrupt company that skipped the critical step of declaring bankruptcy and went stright into receivership. Which is one reason the TARP and all the improvised bailouts up to now are so fucked up.

aimless otm, it's technically still in business, so technically (apparently) still on the hook for existing contracts. although it kinda seems like geithner didn't do as much arm-twisting and head-bashing as he could have. at the very least the administration could publicly shame the people who are accepting the bonuses -- they could refuse them.

but there are reasons it hasn't been allowed to go bankrupt. of course, aig from the beginning has been using scare tactics -- if we collapse, everything falls down with us -- but i've read enough things by smart people who at least halfway believe that that i can understand why nobody's been willing to take that step. one of the major regulatory things that needs to come out of all this is to prevent any company from ever getting involved in the stuff aig was, at least not at anywhere near that level and definitely not with no actual reserves.

By "the stuff aid was" involved in, I assume you mean credit default swaps. If I understand it right (and I might not), CDS's are why AIG failing would start a long line of economic dominos falling.

Sorry . . . "the stuff aig" was" involved in.

yeah, at least at the level and with the total lack of actual collateral they had for them. what they were doing was insane.

Daniel OTM.

Ohio court can't afford paper to process citations, won't accept new case filings

Coincidence! I just got a case that's very likely going to be litigated in Ohio.

Maybe I'll submit motions via smoke signal. Or carrier pigeon.

it is amazing that the Justice Department could find the most tenuous of legal interpretations to justify torture and rendition, but cannot find anything to justify rescission of any contractual obligations on AIG's part to pay bonuses. it's been a while since law school (daniel or any current-day law school students here?), but i seem to remember a concept called "disgorgement." i really don't have time to crack open a contracts treatise, though.

Not being in the remotest sense a lawyer or having studied law, my guess would be that disgorgement would apply only to ill-gotten gains. Sad to say, what AIG did with CDOs was in a wholly unregulated market, and while it was reckless in the extreme and wrote obligations FAR beyond what it could ever redeem, the fees from the insurance it wrote was not in any sense ill-gotten, but only suicidal. Now the USA taxpayer has, like the proverbial Bible deflecting a bullet to the heart, interposed between AIG and its legal obligation to commit seppuku.

are the names public at least?

with the internet + the fact that 95% of the country despises these people, how hard would it be to start a campaign to publicly demonize 400 people / find their addresses, numbers etc.

someone on digg or whatever needs to get on it

like if we could send fb msgs to some exec's daughter at yale asking her how she feels about her daddy ruining the world economy...I dunno, I think it'd be fun. not like $100 million fun, but still sorta fun.

are the names public at least?

that was my first thought. the administration could at least go in for some public shaming. i'll be surprised if somebody doesn't dig up at least the bigger ones.

a simple guide to the banking crisis

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html?chan=top+news_top+news+index+-+temp_news+%2B+analysis

it is amazing that the Justice Department could find the most tenuous of legal interpretations to justify torture and rendition, but cannot find anything to justify rescission of any contractual obligations on AIG's part to pay bonuses. it's been a while since law school (daniel or any current-day law school students here?), but i seem to remember a concept called "disgorgement." i really don't have time to crack open a contracts treatise, though.

like if we could send fb msgs to some exec's daughter at yale asking her how she feels about her daddy ruining the world economy...I dunno, I think it'd be fun. not like $100 million fun, but still sorta fun.

I think there are differing senses of justice at work here

NO-BRAINER, from nYT:

President Obama vowed to try to stop the faltering insurance giant American International Group from paying out hundreds of millions of dollars in bonuses to executives, as the administration scrambled to avert a populist backlash against banks and Wall Street that could complicate Mr. Obama’s economic recovery agenda.

“In the last six months, A.I.G. has received substantial sums from the U.S. Treasury,” Mr. Obama said. He added that he had asked Treasury Secretary Timothy Geithner “to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole.”

http://www.nytimes.com/2009/03/17/us/politics/17obama.html

it is amazing that the Justice Department could find the most tenuous of legal interpretations to justify torture and rendition, but cannot find anything to justify rescission of any contractual obligations on AIG's part to pay bonuses. it's been a while since law school (daniel or any current-day law school students here?), but i seem to remember a concept called "disgorgement." i really don't have time to crack open a contracts treatise, though.

Sorry, hadn't seen this before. Yeah, disgorgement is a remedy to force someone to repay ill-gotten gains. But the basis for it can't merely be that it's indefensible for AIG to give bonuses with gov't-furnished bailout money. If AIG breached an agreement with the gov't concerning the bailout money or induced the gov't into giving it bailout money by falsely representing that it wouldn't pay bonuses, then a remedy for that wrong might be disgorgement.

More to the point, it seems to me, is that anything short of a slam-dunk win would put the gov't in a very unflattering position if it were to sue AIG over this. Not only would it be unseemly, it would undermine confidence in the gov't (which, I'd guess, would come to be seen as bumbling for not having forced such a promise in the first place) and the markets. I think that's why you see this passage in the NYT article Dr. M linked above:

White House officials said that the administration is not looking to take A.I.G. to court to stop the company from paying out the bonuses. But they said the Treasury Department would be trying to figure out what they can do to block A.I.G. from making the payments within the legal confines of A.I.G.’s contractual obligations to the executives.

An alternative route, it seems to me, would be to refuse future bailout dollars -- which AIG v. likely needs -- forcing the insurance company to become desperate and opt for a quasi-receivership model, where the gov't would hold a power position over issues like compensation.

Too many "it seems to me," it seems to me.

Yglesias makes a similar point. His think-tank has an interesting page on AIG. In part, it argues that the dust-up over bonuses strengthens the case for bank nationalization:

What this weekend's disclosures highlight is the shortcomings of the Treasury's current strategy to prop up the financial system. Basically, the federal government continues to pump billions of dollars into these institutions without receiving full control over how taxpayer dollars are spent in return. Bank nationalization has been floated by people such as Krugman and NYU economist Nouriel Roubini, to former Fed chairman Alan Greenspan and Sen. Lindsey Graham (R-SC). Geithner, however, has so far refused to say that nationalization is on the table. But it should be. "The American taxpayer would be ill-served to receive anything less for putting in the vast amount of money needed to restructure and recapitalize [the banks]," explained Adam Posen, Deputy Director of the Peterson Institute for International Economics. "And the American taxpayer, just like any acquirer of distressed assets, deserves to reap the upside from their eventual resale."

Actually, I'd guess that everything we're seeing now is part of a process. Subject the banks to this "stress test" (hopefully an honest and rigorous one), quietly put people into place to manage big failed banks, have a steady drumbeat of experts condition the public that nationalization is a good -- and likely inevitable -- option to restore the banking system, and then, on a Friday, nationalize a slate of banks, clean them up fast (a process, I admit, that still is a mystery to me) and then re-privatize them. Sort of like a college football coach who says, over-and-over again during recruiting season, "I'm committed to staying at this school, I have no interest in the NFL, and my recruits can take comfort in my words." Then -- boom! -- Butch Davis leaves U.M. to coach the Browns (oh, sorry; the hypothetical coach leaves to run an NFL team).

yeah but the coaches who stay also say that

Yeah, that's true. Come home, Butch Davis, all is forgiven.

(Actually, I like our new coach, FWIW. Off-topic, I know.)

British anti-terror legislation was used to declare an Icelandic bank, Landsbanki, which held a British bank a terrorist organization and freeze its assets in the UK. When that was done, the UK government was able to go in and basically do anything it wanted. Whether this was the right thing to do has yet to be determined.

However, the US government, as we've seen in the last eight years, can do anything it wants.

One can see why the US government wouldn't want to do this. It would immediately pit Wall Street irreversibly against everyone else. They'd think, OMG! They think we terrorists! They'll come for us next! And then everyone would run for the hills with everything they could grab.

But the Obama administration has said it wants Detroit to break contracts with the unions and renegotiate them with as part of a requirement for continued government aid.

So how is that different from wanting AIG contracts broken? Or breaking them? The difference is there is a fear of AIG and what Wall Street would or could do if the government turns on them.

This probably has to be weighed against a total collapse of trust for the Obama administration's bailout plans among the general populace.

the Obama administration has said it wants Detroit to break contracts with the unions and renegotiate them with as part of a requirement for continued government aid.

So how is that different from wanting AIG contracts broken?

yeah, i wondered the same thing

Have they given Detroit the money yet?

British anti-terror legislation was used to declare an Icelandic bank, Landsbanki, which held a British bank a terrorist organization and freeze its assets in the UK.

Nope. It used section 4 of the Anti-Terrorism, Crime and Security Act 2001. This includes a bunch of stuff that is nothing to do with terrorism, some of which was used in this case. It absolutely DID NOT declare Landsbanki a terrorist organisation!

The point was that the Icelandic govt were going to guarantee the first £16,000 of Icelandic savers' assets, but would not make the same to commitment to British ones, which is wrong and illegal whichever way you look at it.

So it's a completely different issue from contractual obligations to pay bonuses.

What confuses me is how the contracts were written that would allow for bonuses when such losses were being racked up - surely there must be SOME connection between performance and bonuses?

What confuses me is how the contracts were written that would allow for bonuses when such losses were being racked up - surely there must be SOME connection between performance and bonuses?

my guess -- at least this would seem to be the most palatable rationale -- is that the bonuses were for performance up to late 2007/early 2008 (which may be before all hell broke loose at AIG). the present AIG CEO has inherited these bonus agreements, he didn't initiate them.

(doesn't make them any more right -- i'm just thinking aloud right now.)

WSJ: Treasury Will 'Hold Up' 30 Billion to Pressure AIG To Rescind Bonuses.

Interesting comment from a (seemingly knowledgeable) TPM reader:

You're missing the point on AIGFP's bonuses. The reason the government has no bargaining power is that failure to pay the bonuses -- which, like it or not, AIG is contractually obligated to pay -- would constitute a "cross-default" under AIG's derivative contracts. Cross-default is considered an "event of default" under the standard ISDA Master Agreement (see sec. (5)(a)(vi)), which means that failure to pay the bonuses would allow AIG's counterparties to terminate the CDS contracts and demand a full payout from AIG. With a derivatives portfolio of over $1.5 trillion, this is no small deal. Venting over AIGFP's bonuses is fine, but urging the government to take an action which would result in hundreds of billions in losses to AIG (and thus the taxpayer) just because it would make you feel better is bad policy. Don't let cheap populism become expensive populism.

I have no idea if this is true. But if it is, I wonder why Ed Liddy's letter to Sect. Geithner -- which is posted on TPM -- didn't mention that all the credit-default swaps are wired to explode if AIG doesn't pay its executives their bonus money (he could have worded it delicately).

he should totally use "wired to explode" though