AIG situation: What does it mean to you? - Tilted Forum Project Discussion Community

Cynthetiq · 03-19-2009, 08:26 PM

I've not posted much about AIG, mostly because it's happening so fast and I've been too busy that I keep missing a good starting point.

What does it mean to you? How do you feel about the bonus situation? What do you think should happen?

I've been really upset about the AIG bailout from the beginning. As the companies that come out of this that show the monies that AIG paid out to German banks, Goldman Sacks, Merril Lynch, would have shown how the dominos would fall. I'm a believer that if you're taking risk, you should be taking that risk. When the bet is called and you lost. You lost plain and simple. Your company goes belly up.

The bonuses, is just unconscionable. Congress fucked up and didn't due the due diligence. Congress should not abrogate the contracts and fishing a 90% tax is all just puffering and PR.

Don't pin this on the Obama administration, he's got little to do with it because Congress voted for TARP. But stop feigning outrage... that's just stupid. You had your chance to vote when you were a senator and vocalize your concerns and opinions. And nothiong.

inBOIL · 03-19-2009, 08:45 PM

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Congress fucked up and didn't due the due diligence.

Pretty much. Congress was in such a hurry to do something that the plan they came up with was heavily flawed. They could have designed a bailout with a severely reduced moral hazard that would still have softened the blow to the economy as a whole. Instead they moved forward quickly with a deeply flawed plan, just like they did with the Patriot Act.

mixedmedia · 03-19-2009, 09:00 PM

Since when are bonuses to failing executives such a scandal? These guys are only expecting what has given before them.

Yet another perfect example of America giving a shit too little, too late. Only when it becomes a glaring offense to them personally does it become an issue.

The more I learn about psychology, the more I realize that our advantages have kept us trapped inside the egocentric stage of development.

SecretMethod70 · 03-19-2009, 09:08 PM

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Originally Posted by mixedmedia

Since when are bonuses to failing executives such a scandal? These guys are only expecting what has given before them.

Yet another perfect example of America giving a shit too little, too late. Only when it becomes a glaring offense to them personally does it become an issue.

The more I learn about psychology, the more I realize that our advantages have kept us trapped inside the egocentric stage of development.

QFT!

Eliot Spitzer actually wrote a good article on the AIG issue. He's clearly not a perfect man, but Wall Street was sure happy when he was ousted as governor.

The Real AIG Scandal | The Big Money

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The Real AIG Scandal
It's not the bonuses. It's that AIG's counterparties are getting paid back in full.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:

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What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.

Willravel · 03-19-2009, 09:10 PM

What does it mean to me? It's another MSM red herring. Of all the things that have happened around the economy and Wall Street, this is what people seem to agree is worth getting angry about? It's silly. Scratch that, it's stupid. Within the context of the spending recently, $165 million isn't even a pittance, a scintilla. It's nothing. Sure, one could argue it's symptomatic, but even as far as symptoms go, it's really tiny. Instead of concentrating on the huge problems that lead us to where we are now, instead of fixing the system which if left unfixed will lead to a true collapse of our economy, we're concentrating on $165 million in bonuses.

ratbastid · 03-20-2009, 03:34 AM

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Originally Posted by Willravel

What does it mean to me? It's another MSM red herring. Of all the things that have happened around the economy and Wall Street, this is what people seem to agree is worth getting angry about? It's silly. Scratch that, it's stupid. Within the context of the spending recently, $165 million isn't even a pittance, a scintilla. It's nothing. Sure, one could argue it's symptomatic, but even as far as symptoms go, it's really tiny. Instead of concentrating on the huge problems that lead us to where we are now, instead of fixing the system which if left unfixed will lead to a true collapse of our economy, we're concentrating on $165 million in bonuses.

XKCD this morning nailed it:

samcol · 03-20-2009, 05:03 AM

Man, I wish the media and the majority of Americans had a grasp on this issue like this board does. I'm amazed and apalled at the ability of the media and government to distract things that aren't that important in context.

snowy · 03-20-2009, 08:05 AM

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Originally Posted by ratbastid

XKCD this morning nailed it:

I love xkcd.

It feels like a circus act. The media have been all over this story, pumping it up. Like will said, it's a red herring, a distraction. There's really not a whole lot going on here, but the media sure does a good job of making it seem like there is.

powerclown · 03-20-2009, 08:37 AM

While compensating people with bailout money to the tune of 165 Million should be put into proper context, I don't think it unreasonable for people to still be pissed about it. Its just one more screwup in the whole sordid affair, taxpayer money still being thrown down the toilet. It's effed up that these people are getting compensated and its effed up that AIG is receiving billions of taxpayer dollars to keep it afloat. Ok we get it, one is petty larceny and the other is grand theft. What's the point in trying to downplay the compensation scenario anyway? What is it a distraction from?

roachboy · 03-20-2009, 09:00 AM

what it's a distraction from is easy: the brouhaha about the bonuses is a version of the "bad apples" theory.

aig is interesting in that it marked the point where even within the one-dimensional world of mass media coverage of capitalism, that shangri-la, that a frame problem surfaced--so wait, yer tellin me that a downturn in the amurican real estate market effects the transnational trafficking in "mortgage backed securities" (think of it as a traffic in holes, kinda in the way the beatles talked about with reference to albert hall in "a day in the life") effects global capital flows? so there is no "american economy" that's not intertwined with the global economy?

this triggers other problems, really quite basic ones, which have to do with the extent to which people think in terms of objects and the extent to which televisual presentation of "reality" reinforces thinking in terms of objects...a corporation is a bounded entity, a thing: an economy is a bounded entity, a thing. a nation-state is a bounded entity, so a thing...

but hey, why think about that when you can point to a group of mostly anonymous individuals (things) who cause the problems because of an inward defect ("greed") and who represent in that inward defect the kind of attribute that can be purged from the existing system and restore it to rationality, because we all know, following the "bad apple" theory, that the existing order is legitimate because it exists, no matter what it is, and that problems are caused by distortions introduced by Bad People--so there are not and cannot be system problems, basic problems...

it'd be funny if the game that was being played did not have such high stakes.

powerclown · 03-20-2009, 09:24 AM

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Originally Posted by roachboy

what it's a distraction from is easy: the brouhaha about the bonuses is a version of the "bad apples" theory.

It's like critiquing the reasons for a sinking ship, while you're busy invalidating the molecular properties of the water in the ocean. Well of course the ship isn't working properly, the damn water is all wrong. The whole argument is fundamentally flawed and will remain so until we refill the ocean with strawberry jello.

aceventura3 · 03-20-2009, 10:00 AM

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Originally Posted by Cynthetiq

What does it mean to you?

I think it illustrates how selective our government can be first when it comes to "bailouts" (many businesses/people fail and get no help from government, why AIG?) and second when it comes to tax policy (picking small groups of people for special taxation either higher rates or special deductions) - I think our government should treat all people the same.

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How do you feel about the bonus situation?

My sympathy is with the people who made a decision based on a reasonable expectation that they would get paid for their work under the right conditions and now after the fact the rules get changed. Personally, if I were in charge I would not have promised bonuses until after the "bailout" money was returned. If I was offering the "bailout" money, I would have offered it only under certain conditions, including knowing a detailed plan for every penny - and would have given AIG a list of priorities, bonuses would have been at the very bottom of the list - but if all conditions were met including the return of the "bailout" I would gladly allow the payment of bonuses.

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What do you think should happen?

I would hope the AIG people would voluntarily return the bonuses and AIG then promise to pay the bonuses including reasonable interest if the company survives and pays the government back.

I hope the Senate votes no on the tax billed passed in the House.

If the bill is passed I hope it is challenged in court and over turned as unconstitutional.

The_Jazz · 03-20-2009, 04:32 PM

What does it mean to me? It's one of the major reasons I haven't been around much recently. It's revealed a lot of flaws in the insurance market. AIG is one of my major trading partners, and it's been a wild ride.

The bailout had to happen. If it hadn't, approximately 50% of the US airline fleet would have been grounded since the owners of the planes require the hull insurance to be rated "A" or better by AM Best (the standard insurance rating service). If AIG had declared bankruptcy, none of those planes could have flown since AIG writes roughly 50% of that business. That's not to count all the other corporate business that AIG writes that have similar covenants.

The bonuses were stupid. AIG could have gotten out of them. Dodd's an idiot for allowing them to happen.

blktour · 03-20-2009, 09:56 PM

The_Jazz: Good info, though I don't know why I haven't heard about the Tie with AIG and the air fleet.

I will have to research this some more.

Back to OP:

What does it mean to me? Well that we have to start questioning the people who pass these bills instead of AIG.

How do I feel about the Bonus situation? Take it all back. I know if the government gave me money and I wasn't due this? They they WOULD take it back. What is so different here? Though we know this may not happen. So pissed I guess.

What do I think should happen? Um.. well appoint Peter Schiff or someone of the likes who has a track record of knowing how we got here. I feel he could reverse it. Though no one really wants to hear his side, since it will take sacrifice on our part. Even when they ( The Gov.) put us here.

SecretMethod70 · 03-21-2009, 12:11 AM

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Originally Posted by The_Jazz

The bailout had to happen. If it hadn't, approximately 50% of the US airline fleet would have been grounded since the owners of the planes require the hull insurance to be rated "A" or better by AM Best (the standard insurance rating service). If AIG had declared bankruptcy, none of those planes could have flown since AIG writes roughly 50% of that business. That's not to count all the other corporate business that AIG writes that have similar covenants.

Thanks for the enlightening information. Good thing we have you here, cause the news networks sure aren't doing their fucking jobs.

tisonlyi · 03-21-2009, 01:52 AM

I think we're all about to have a harsh lesson on the nature of the web of our social contracts.

Mr Stewart was wrong. The entire economic edifice that has ever been and ever will, no matter the gains it has or will bring us, is at its root a game. There were a handful of people consciously playing the game at the highest levels, but a game they were playing.

Money, even money backed by shiny metals, has no real, intrinsic value other than what we all somehow agree to place upon it. It's only a social contract, though mostly a hidden one.

As we sit here the players, en mass and conscious as well as unconscious, have pushed the game into an irrecoverable position for certain social contracts in the world. Social contracts like the dollar and the pound will either not survive, or won't be recognisable as what they once were not too long from now.

The total sums being magicked into existence to combat the current crisis in loans, bailouts, guarantees and insurance is roaring up towards 100% of US GDP over on your side of the pond, and way over 100%, more like 200% of GDP of the UK over on this side of the pond, mostly through black box entities and schemes that have very little details published, if any.

There's no going back, and there's only a yawning abyss out in front of us - for the social contracts.

The_Jazz · 03-21-2009, 12:09 PM

I've been thinking about this thread today, and I'm going to comment some more. This is something that I've been talking about at least once a day every working day since I was in San Diego in mid-September.

The vast majority of AIG was run very well and very profitably. When this first started last year, AIG was, without a doubt, the best run insurance company out there with the best talent in the industry (on the carrier side, at least). Unfortunately, a lot of very smart people have been tarred with the same brush used on the Financial Services guys.

If you think that the Financial Services guys are scum of the earth, think again. Basically, the guys at Goldman Sachs et al came up with the credit default concept. They convinced the Financial Services guys, who were a very small unit, to write the coverage for the swaps. The same folks had also convinced Congress that the concept was legal AND a good idea. The head of AIG at the time, Hank Greenberg (IMO one of the great insurance minds in history) personally signed off on each and every deal they wrote until he was basically pushed out in the Spitzer investigations about 5 years ago (something completely unrelated to this). His successor, Michael Sullivan, signed off on the rest of the swaps.

It turns out that the checks that they all thought were in place actually weren't. In reality, a bunch of very smart people were swindled in one of history's greatest cons. Even better, the Goldman guys were so brazen that they started buying the swaps at the end, only on the side that bet that the mortgages that this whole mess drew from were actually worthless. They made money on the front end AND the back end, and they had the foresight to make sure Congress made that completely legal.

As I posted in the other thread, AIG declaring bankruptcy would have been horrific. First, the rating agencies would have been forced to downgrade AIG. In my world, if you go below "A-", you might as well be dead. At the time, they were "A". A bankruptcy, in the best of circumstances, would have seen them go to "B++" (more likely "B"). A lot of commercial loans require insurance by an "A" or better carrier. In Florida alone, AIG writes about 20% of the commercial Property market. Think about the turmoil of all of those loans having to be either rewritten or the insurance replaced.

But that's just inconvenient. The real problem is that the 50% of the commercial air passenger planes are covered by AIG (they also own a bunch of them). The same rules apply (because as the owner, AIG insisted on it). That would have grounded about half of the commercial airplanes in this country. Think about that.

It goes on, too. Ships. The cargo on them. Trains in some countries. Big construction projects that have to stop. It would have been a nightmare.

I have more, but it's time to take the boys to the playground. I may revisit this, though.

Cynthetiq · 03-21-2009, 06:59 PM

Thanks Jazz that's some good insight to why it is important that they didn't fail as an insurance company. I think that some media should have explained why in the exact same manner.

tisonlyi · 03-21-2009, 08:15 PM

there are no facts there, just narratives.

JP Morgan basically invented CDS's, they were taken up with gusto at AIGFP.

If you really believe the PoorAIG! stuff, then please explain their exposure to naked CDS's. Did someone at GS and countless other institutions convince AIG to take money on what they considered to be long odds bets on a game neither AIG or the other gambling addicts had any skin in?

AIGFP were horrifically greedy, and insanely stupid if that's the narrative of least resistance you want to go through... there are basically no other narratives that even begin to hold water unless you want to get into deep conspiracy territory on whichever side.

Though i agree there is a decent division of AIG in traditional sorts of insurance which should be spun out pdq.

Willravel · 03-21-2009, 09:08 PM

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Originally Posted by tisonlyi

Fantastic.

flstf · 03-21-2009, 09:25 PM

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Originally Posted by tisonlyi

If you really believe the PoorAIG! stuff, then please explain their exposure to naked CDS's. Did someone at GS and countless other institutions convince AIG to take money on what they considered to be long odds bets on a game neither AIG or the other gambling addicts had any skin in?

I am beginning to understand a little how these credit default swaps work but there must be much I have yet to learn. Why in the world would someone sell swaps (insurance) on mortgage based investments when everyone knew that real estate was way over-priced and many of the mortgages they were based on were shaky at best. And then to increase the risk, sell these naked to anyone all the while not having enough capital on hand to begin to pay up when claims were made.

Surely they knew these were a recipe for disaster. I would surmise that this was a very stupid thing to do but it seems like many of those involved personally made lots of money and probably do not need to work anymore so perhaps for them the risk of destroying their company was worth it. Unfortunately they took the rest of us down as well.

tisonlyi · 03-22-2009, 09:55 AM

There are two options most likely, imho:

1) Their ridiculous abstractions and fairy story devices, or 'financial modelling tools' were engineered to prevent the idea that reality may ever intervene in the housing and other markets. In fact, I hear that the prediction software frequently deployed by one or to two institutions forbade the entry of negative house price increases...

2) They knew what they were doing. They were being paid per transaction, hence they didn't care about the outcomes... they were earning more than enough 'fuck you' money to see out the rest of their lives in ease. The only question was how much luxury would the rest of their lives contain?

Currently, The US govt is rating that at about 12 trillion dollars or 'all in'.

The_Jazz · 03-22-2009, 10:16 AM

First and foremost, AIGFP was a tiny division of one of a huge multinational company, both in terms of number of people and in revenue. It's not like this was National Union or American Home (two of the big insurance divisions).

I don't think that there are many people, with the benefit of hindsight, that would call the swaps anything but a bad idea. However, at the time, that wasn't quite so obvious. You need to realize that the AIG mindset played a big role here. Think of the nastiest, dirtiest thing to insure that you can, and AIG probably writes it. Gun manufacturers. Hotels on the beach in Key West. California condominium builders. They have written new coverage for buildings that are actually on fire at the time knowing that they will have to pay a loss. Basically, they'll do anything for a price.

AIGFP had most of their employees in London for a reason. London insurance, while not really unregulated, operates as the ultimate insurance market, where anything can be bought, which is why you see people insure their legs or hair or whatever there. In London, it is not unknown (though it is a little unusual) for someone to bet against something.

If you think that the AIGFP folks were gambling addicts, I think that you need to examine the very nature of the business. The entire thing is a gigantic gamble, especially when you're dealing with something that doesn't have a proven track record.

If you want to examine mistakes that were solely AIG's (i.e. no one conned them), then basically it was that they moved away from their core business model on these deals and didn't do the underwriting necessary to understand exactly what was going on with the mortgages. That said, there hadn't been a negative housing market since the 1930's, and there was no reason to think that one was even possible until mid-2007.

flstf · 03-22-2009, 12:04 PM

It seemed obvious to me (from a layman's point of view) that houses were way over priced as early as 2003 when we sold our house in Seattle. The local paper even ran an article about how 50 to 70% of the people in our area would not qualify to buy their own house at the current prices.

Isn't it obvious that most people cannot afford much more than 3 times their annual earnings without a crazy adjustable rate (time bomb) mortgage. Surely the professionals that dabble in these things knew prices had to come down. Just because someone making $75,000 a year can get a mortgage for $400,000 does not mean they can afford it. Especially if they are denied refinancing before the monthly payment resets and goes up.

tisonlyi · 03-22-2009, 01:14 PM

AIGFP were totally, utterly out of control.

If the Rolling Stone article is a tad too low brow or lengthy to cast your eye over, then maybe this one is ok, or at least the part in bold:

The Rise And Fall Of AIG's Financial Products Unit

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The Rise And Fall Of AIG's Financial Products Unit
By Zachary Roth and Ben Buchwalter - March 20, 2009, 9:36AM

As we delve into the back-story behind the collapse of AIG, we thought it might be useful to lay out some key factual information about the firm's Financial Products unit, known as AIGFP, whose disastrous credit default swaps brought the company to its knees. How and when did AIG Financial Products get started? Who ran it, and from where? How did it get into credit default swaps, and what exactly are they, anyway? And how did this group of derivatives traders eventually wind up bringing down one of the most admired financial firms in the world?

So here's a rundown of some of the key developments in AIGFP's tumultuous history -- many gleaned from a superb three-part December 2008 Washington Post series on the unit (parts 1, 2, and 3):

From a Humble Start, A Swift Rise

- AIGFP was founded on January 27, 1987, when three Drexel Burnham Lambert traders, led by finance scholar Howard Sosin, convinced AIG CEO Hank Greenberg to branch out from his core insurance business by creating a division focused on complex derivatives trades that took advantage of AIG's AAA credit rating.

- In addition to his two partners, Randy Rackson and Barry Goldman, Sosin brought 10 other staffers from DBL with him -- including future AIGFP CEO Joseph Cassano. The team of 13 set to work in a windowless makeshift room, at first without full-size desks and chairs, in an accounting office on Third Avenue. AIGFP's first significant deal, made in July 1987, was a $1 billion interest-rate swap with the Italian government.

- In its first 6 month of existence, the unit earned more than $60 million. Under the agreement that Greenberg and Sosin had signed, 38 percent of that went immediately to AIGFP, with the remaining 62 percent going to AIG proper. Crucially, the agreement also called for AIGFP received its profits up front, even though its deals generally took years to play out. AIG itself, not AIGFP, would be on the hook down the road if things went wrong. This arrangement would be modified, but only partially, after Sosin left in 1993.

Picture Subject- AIGFP soon moved to a swanky Madison Avenue office. A few years later, it would relocate again to Wilton, Conn, which remains the unit's headquarters today.

- By 1990, AIGFP had expanded, opening offices in London, Paris and Tokyo.

- In 1993, Sosin left AIGFP, in part thanks to a strained relationship with Greenberg. (He got a reported $150 million payout). Tom Savage -- a Midwestern math whiz who had joined AIGFP in 1988, after beginning his career at First Boston writing computer models for collateralized mortgage obligations, the very instruments that would later help cause the current crisis -- soon took over as CEO.

- By that year, AIGFP employed 125 people, and was consistently raking in more than $100 million each year.

- By 1998, the unit had a revenue of $500 million. But it still had never made a single credit default swap.

The Seed Of Ruin Is Planted

- That year, JP Morgan approached AIG, proposing that, for a fee, AIG insure JP Morgan's complex corporate debt, in case of default. According to computer models devised by Gary Gorton, a Yale Business Professor and consultant to the unit, there was a 99.85 percent chance that AIGFP would never have to pay out on these deals. Essentially, this would happen only if the economy went into a full-blown depression, in which case, the AIGers believed, the counter-parties would be wiped out, and therefore would hardly be in a position to demand payment anyway. With the backing of Cassano, then the COO, Savage greenlighted the deals. Credit default swaps were born.

- In 2000, Congress passed the Commodity Futures Modernization Act, which further reduced the already weak regulation of derivatives like credit default swaps*.

- Later that year, Cassano, now based in London, who in addition to serving as COO had been running AIGFP's Transaction Development Group, replaced Savage as CEO. Cassano, the scrappy son of a Brooklyn cop, was no expert in the sophisticated computer models that assessed risk, but he had a gift for credit and accounting, and a fierce drive to succeed. At this time, the unit brought in $1 billion a year, and had 225 employees. By 2005, it would have 400.

- In 2002, the Justice Department charged that AIGFP had illegally helped another firm, PNC Financial Services, to hide bad assets from its books. To do so, AIGFP had set up a separate company, known as a "special purpose entity" to take on the assets. It had violated securities law, the Feds alleged, by setting up sham "companies" to invest in the entities, making them appear real. In 2004, AIG settled the charges by paying an $80 million fine, and gave back over $45 million in fees and interest it had earned on the deal. By the terms of its "deferred prosecution" agreement, it was placed on a short leash by the Justice Department. There is no evidence that anyone at AIGFP was formally sanctioned as a result of the episode.

- In March 2005, Greenberg, who had run AIG since 1968, stepped down as CEO, amid an investigation by New York Attorney General Eliot Spitzer into questionable accounting practices at the firm. Though the issue was unrelated to AIGFP, the unit would soon feel the ripple effects: the credit ratings agencies responded to Greenberg's departure, and the allegations of irregularities, by downgrading AIG's rating from AAA to AA. That, in turn triggered provisions in some of AIGFP's credt default swaps, requiring AIG proper to over $1 billion in collateral for the deals. It was the beginning of the end.

- Later that year, an AIGFP exec named Eugene Park took a close look at the firm's credit default swaps portfolio, and became alarmed. Many of the CDOs that were being insured contained too large a proportion of sub-prime mortgages, meaning the risk of default was high if the housing market collapsed. And with AIG proper's credit rating having been downgraded, there was an increased chance that it would have to come up with collateral to cover those bets. Park told Cassano and others about his concerns.

- In response, Cassano worked with researchers from the investment banks to assess the risk form subprime mortgages, and decided in late 2005 it was time to stop making credit default swaps. But he couldn't undo the nearly $80 billion worth of collateralized debt obligations that AIGFP had made swaps on that were already on its books*.

- Still, as late as August 2007, Cassano was sanguine about the deals, telling investors on a conference call: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions."

Things Fall Apart

Picture Subject- But that same month, with the housing market collapsing and sub-prime assets plummeting in value, Goldman Sachs demanded $1.5 billion in collateral from AIG, to cover the mortgage-backed securities that AIG's credit default swaps had insured. Under the terms of its contract, AIGFP was required to post more collateral than it would have had its credit rating remained at AAA. By October, it had posted almost $2 billion, and other counter-parties were beginning to make their own collateral demands.

-Between early October and mid November, AIG's stock price fell 25 percent. That month, AIGFP reported that its swaps portfolio had lost $352 million. A month later, Cassano put the figure at $1.1 billion

- Late that month, Pricewaterhouse Coopers, AIG's auditing firm, told AIG CEO Martin Sullivan that no one knew whether AIGFP's valuation of its derivatives portfolio was accurate. That process had been led by Casssano, who, it appears, had shut out the firm's internal accountant, Joseph St. Denis. (St. Denis would describe Cassano's high-handed behavior and unwillingness to allow AIGFP's transactions to be properly audited, in a letter (pdf) to congressional investigators sent the following year.)

- And yet, Cassano and Sullivan were continuing to paint a rosy picture for investors. At a December 5 presentation, Cassano declared: "It is very difficult to see how there can be any losses in these portfolios." Sullivan added: ""AIG has accurately identified all areas of exposure to the US residential-housing market ... we are confident in out markets and the reasonableness of our valuation methods." This presentation is currently being scrutinized by the Feds as evidence of possible fraud.

- In February 2008, AIG announced estimated losses of $11.5 billion, and that it had posted $5.3 billion in collateral.

- The following day, Sullivan announced that Cassano would step down, effective March 31. Only later, during a congressional investigation, did it come out that Cassano would get a $1 million a month consulting contract (the contract was cancelled in September 2008). It was also revealed that Cassano had made $43.6 million in salary and bonuses in 2006, and $24.2 million in 2007.

- That summer, it was reported that the Justice Department was investigating AIGFP for possible criminal fraud. The UK's Serious Fraud Office would later announced its own probe.

Picture Subject- In September 2008, AIG executives learned that the ratings agencies planned to downgrade the company's rating again. That would trigger more collateral calls, which AIG knew it couldn't begin to cover. Desperate negotiations to keep the company afloat -- including a possible $75 billion bridge loan from Goldman and JP Morgan, both major counter-parties on the credit default swaps -- ensued. Tim Geithner, then the head of the New York fed, called in. But in the following days, it became clear that AIG's level of exposure to its credit default swap losses was higher than anyone had yet understood. On Sept 16, the Federal Reserve Board, announced that it would take a nearly 80 percent equity stake in AIG -- effectively taking over the firm -- and would provide an $85 billion "loan".

- In October 2008, Gerry Pasciucco, a vice chair at Morgan Stanley, was brought in to wind down AIGFP. The unit, Pasciucco found, had $2.7 trillion worth of swap contracts and positions, and 50,000 outstanding trades with 2000 different firms, and 450 employees in six offices around the world.

- In March 2009, amid outrage over multi-million dollar bonuses for those employees, AIGFP would post armed guards outside Wilton headquarters.

AIGFP had $2.7trillion dollars of cds contracts as of 5 months ago. Even before the cds bonanza in the late 90's, AIGFP was pulling in half a billion per year in revenue... not earth shattering, but certainly not small. Their revenues on those cds's would have been pretty damned nice even at rates of 0.01% had they not lost their creditworthiness status due to those contracts being poisonous on a polloniumesque scale and their not having, say, $400bn-$1tn in reserve for what looks like blowing up. (Some of subprime CDO's that some of the Lehman CDS's were based on look like they have anything up to a 95% default rate. Ouch. We're barely into the season of Alt mortgages now and the infamous liar's loans that went with them for a time... I wonder what those default rates are going to look like...)

Characterise that as small if you like, but even if they only have to stump up 10% collateral on that $2.7tn, you're getting on for doubling the sums that have already been vaporised by the AIGFP Death Star.

The difference between AIG and AIGFP is like night and day, to try and characterise them as somehow equivalent is... well... inaccurate.

AIG the traditional insurer uses actuarial methods, tried and true underwriting, etc etc to provide well capitalized, well regulated, well understood insurance to real people and companies for real disasters through systems that have been around in one form or another since a couple of Scottish Enlightenment clergy types - who liked a wee dram or two - decided to set up a life insurance scheme for the widows of clergy around 200 years ago (it still exists as part of LloydsTSB-HBOS, but not for much longer most likely).

AIGFP is/soon-to-be-was totally unregulated and totally uncapitalised, went balls out to make sure it stayed that way, used financial products that i'm pretty certain none of the execs or traders had ever looked through, much less understood (anyone who has seen the incredibly large and densely mathematical pile of papers that makes up a real CDS will get the gist of that), the lack of collateral that their old AAA rating used to bring to rack up mountainous, ruinous piles of unbacked, unregulated and untested 'insurance' that was really nothing but a bet taken at something like 1:100 or 1:1000, based on insane statistical modelling that takes things which demonstrably occur every decade, generation or century or so and represent them as billions-to-1 likelihoods. (Markets, like most social phenomena, are not Gaussian)

These things are not similar in any way. Comparing them is like comparing an Acupuncturist to an MD. They both use needles, both in the area of healthcare, but one is ever so slightly more credible, tested and reliable in the curing business than the other.

As for this only getting worse, prepare to see a lot more of this sort of thing. (80% drop in the price of a house)

Quote:

Originally Posted by flstf

Isn't it obvious that most people cannot afford much more than 3 times their annual earnings without a crazy adjustable rate (time bomb) mortgage. Surely the professionals that dabble in these things knew prices had to come down. Just because someone making $75,000 a year can get a mortgage for $400,000 does not mean they can afford it. Especially if they are denied refinancing before the monthly payment resets and goes up.

Can't you hear the song?

Oooooohhh.... ve ver ohnalee obeeeyink ohrders....

Godwin! It's there!

--

As a complete aside... you've got to love this shot of the current AIGFP head, the one who came in after the govt takeover:

Tully Mars · 03-22-2009, 07:55 PM

Quote:

Originally Posted by The_Jazz

They have written new coverage for buildings that are actually on fire at the time knowing that they will have to pay a loss.

Seriously? Please tell me you're joking.

roachboy · 03-23-2009, 07:10 AM

thanks jazz--very interesting stuff.

the traffic in holes (debt bundling) required a wholesale separation between the fees that could be made through the circulation of the devices and what the devices actually represented. it seems to me like the entire way of trading was not that different from juggling--so long as the elements within the system kept moving and folk were only thinking about quarterly returns, shareholder profits and commissions/bonuses things were *kinda* functional--but once the machinery started to come undone, suddenly there were enormous bags and firms left holding them and epic levels of debt, backed to the hilt by outfits like aig....it's lunacy if you look at it, but i don't think anyone was looking at it so long as the wheels inside the wheels kept moving---cowboy capitalism is not about rational planning or action if rational requires thinking in durations longer than a quarter. traders make heaps of cash, p&l looks good, everyone's fat and happy--that's as far as thinking went, as far as it had to go. add to that the fact that there was and still is no clearinghouse through which the traffick in these devices had to pass, so no transparency as to valuation and so no transparency as to meaning----this is an automated world of numbers, so abstractions.

it really was and is lunacy.

samcol · 03-23-2009, 09:30 AM

Quote:

Originally Posted by The_Jazz

First and foremost, AIGFP was a tiny division of one of a huge multinational company, both in terms of number of people and in revenue. It's not like this was National Union or American Home (two of the big insurance divisions).

I don't think that there are many people, with the benefit of hindsight, that would call the swaps anything but a bad idea. However, at the time, that wasn't quite so obvious. You need to realize that the AIG mindset played a big role here. Think of the nastiest, dirtiest thing to insure that you can, and AIG probably writes it. Gun manufacturers. Hotels on the beach in Key West. California condominium builders. They have written new coverage for buildings that are actually on fire at the time knowing that they will have to pay a loss. Basically, they'll do anything for a price.

AIGFP had most of their employees in London for a reason. London insurance, while not really unregulated, operates as the ultimate insurance market, where anything can be bought, which is why you see people insure their legs or hair or whatever there. In London, it is not unknown (though it is a little unusual) for someone to bet against something.

If you think that the AIGFP folks were gambling addicts, I think that you need to examine the very nature of the business. The entire thing is a gigantic gamble, especially when you're dealing with something that doesn't have a proven track record.

If you want to examine mistakes that were solely AIG's (i.e. no one conned them), then basically it was that they moved away from their core business model on these deals and didn't do the underwriting necessary to understand exactly what was going on with the mortgages. That said, there hadn't been a negative housing market since the 1930's, and there was no reason to think that one was even possible until mid-2007.

From this it sounds like they knew they were going to be bailed out years before they actually did. How else could they even operate for any significant amount of time like this? Something tells me this whole mess was a long time coming, and unlike you I think most people who dealt with this day to day knew.

Cynthetiq · 03-23-2009, 09:35 AM

Quote:

Originally Posted by samcol

From this it sounds like they knew they were going to be bailed out years before they actually did. How else could they even operate for any significant amount of time like this? Something tells me this whole mess was a long time coming, and unlike you I think most people who dealt with this day to day knew.

Unlike a casino where they must have enough cash to cover all the chips that are out on the floor in case they are all cashed in at the same time, it appears to me that Insurance doesn't operate like that.

From what I understand there is a risk that a percentage of claims will be made and that never or rarely will the risk equal the entire holdings of the company.

Is that a correct assesment?

roachboy · 03-23-2009, 09:47 AM

in "looting"--i made a thread about it a little while ago--the argument is that deposit insurance eliminated "moral hazard" at the level of banks which involved themselves in this lunatic trade in debt securities---but i think compartmentalization at the level of organizational culture was more important. that and the assumption that these devices would stay in motion.

samcol · 03-23-2009, 10:48 AM

Quote:

Originally Posted by Cynthetiq

Unlike a casino where they must have enough cash to cover all the chips that are out on the floor in case they are all cashed in at the same time, it appears to me that Insurance doesn't operate like that.

From what I understand there is a risk that a percentage of claims will be made and that never or rarely will the risk equal the entire holdings of the company.

Is that a correct assesment?

Ya, I suppose it sounds that way. It seems like a business enterprise like this should be allowed to fail rather than have tax payers bail them out. Also this reminds me of franctional reserve banking

flstf · 03-23-2009, 01:56 PM

You know, the more I think about it, maybe it is not so risky when there is someone waiting in the wings to replenish all the money you gambled away. Perhaps these guys are very smart and worth additional bonuses for the win/win situation they created for themselves and their companies.

The_Jazz · 03-23-2009, 04:31 PM

Quote:

Originally Posted by samcol

From this it sounds like they knew they were going to be bailed out years before they actually did. How else could they even operate for any significant amount of time like this? Something tells me this whole mess was a long time coming, and unlike you I think most people who dealt with this day to day knew.

No, not at all.

Yes, AIG has written coverage for buildings that are on fire at the time. They did it for a friend of mine, and it wasn't the first time. It was very expensive, it was very specific and they ended up making money on the deal.

Another case in point - years ago, they wrote an excess liability policy for me over one specific claim that had already occurred. My insured owned a truck that had hit a worker in a construction zone. She was in a vegatative state and would need care for the rest of her life, between 10 and 30 years. There was a suit in court by her family, and my insured was in the process of selling their company to someone. The new owners were concerned about successor liability and wanted to see if they could cap the claim. AIG wrote $5M excess of the $5M that the insured had in place at the time of the claim after reviewing the facts and discussing it with their accuaries. That's fucking ballsy in my book.

Here's the thing about insurance, regardless of whether or not it's liability, property, auto or whatever. If all your policyholders have an insurable limits loss (the maximum payout of the policy) at the same time, the insurance company is going out of business. No exceptions. The AIGFP folks thought that there was no way that it could happen to them. Clearly they were wrong. Really what they were doing wasn't insurance at all, though. It was an altogether different type of risk transfer on something that really should have been a business risk.

Cyn, you're right about how insurance is supposed to work. It should be almost impossible for the gears to sieze like it did with AIGFP. In most insurance (maybe not so much with what I do), it is actually pretty much impossible on this scale. Even if Fargo, ND burns to the ground (for instance), there should be enough spread of risk that no one carrier takes it on the chin so badly. Even Katrina, the biggest property loss that's ever happened in the US, didn't put anyone out of business. Then again, Reliance Insurance, who had been in business since the 1860's, went down because of a reinsurance spiral on Workers Compensation back in the 90's (they bought insurance on books of business from themselves - just stupid really), so companies do dumb things all the time.

tisonlyi · 03-25-2009, 06:46 AM

Bernanke Bombshell: AIG Insurer Exposed to FP | The Big Picture

Quote:

In researching and think about AIG, I have been writing about them as if it were two separate companies: A well regulated Insurer, and a rogue derivatives products firm (FP).

The working assumption has been that the regulated insurer was run fairly conservatively, and the structured financial product side run like a giant hedge fund. The 32% net profit retention on the FP side is actually better than what most hedge funds see.

This dichotomy is mostly true, but with now has an interesting twist to it. In congressional testimony today, Ben Bernanke implied that had the Fed allowed AIG too fall, he detailed what might have happened had AIG been allowed to fail:

"The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure."

If we are to take Bernanke at face value, he is saying that AIGFP had buried their own firm with junk paper. BB does not define what “substantial derivative exposure” meant — but given the $2.7 trillion dollars in derivatives exposure that FP had, even a tiny percentage might amount to an enormous sum.

That the collapse of AIG Financial Products would have damaged the other Insurance half of the firm is a frightening development.

Even more fascinating is this “lesson learned”

"To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now."

In other words, we should have nationalized them from the beginning . . .

Maybe those assumptions on the traditional side of AIG aren't entirely correct either...

The mess just seems to keep getting messier.

The_Jazz · 03-25-2009, 10:21 AM

http://www.nytimes.com/2009/03/25/op...=2&ref=opinion

Quote:

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in - or responsible for - the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company - during which A.I.G. reassured us many times we would be rewarded in March 2009 - we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I'd like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute's generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.'s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable - in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.'s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity - directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country's call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn't defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That's probably why A.I.G. management assured us on three occasions during that month that the company would "live up to its commitment" to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts "distasteful."

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts - until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It's now apparent that you either misunderstood the agreements that you had made - tacit or otherwise - with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You've now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.'s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.'s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to "name and shame," and his counterpart in Connecticut, Richard Blumenthal, has made similar threats - even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There's no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn't disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.'s or the federal government's budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less - in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company's diverse businesses - especially those remaining credit default swaps. I'll continue over the short term to help make sure no balls are dropped, but after what's happened this past week I can't remain much longer - there is too much bad blood. I'm not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I'll leave under my own power and will not need to be "shoved out the door."

Sincerely,

Jake DeSantis

Perhaps you've already seen this; it was on The Consumerist and pretty prominently featured on the NYT home page. It goes to show how small the core group was that caused the AIG mess. If nothing else, it sheds new light on some of the politicians involved.

Cynthetiq · 03-25-2009, 10:50 AM

I read this earlier and I'm confused as to how their bonuses are derived. It could be because I've not achieved that level of employment.

But my bonus eligible positions at 10% or 15% of my annual salary was stated as simply that. Accountants muckied with that and eventually it was a percentage of the target of the pool or something stupid like that. Ultimately I never got the full 15% ever.

Eventually, as the economics changed in 9/11 they just said, no bonuses. Yet I had a piece of paper that said, I was to get a 15% bonus.

I definitely didn't want the government to abbrogate the contracts, but the company could have done something I'm sure of it.

tisonlyi · 03-25-2009, 10:51 AM

Of course, he knew nothing about it. He was in the other room while they were gassing the prisoners.

Godwin II

flstf · 03-25-2009, 04:13 PM

Quote:

Originally Posted by The_Jazz

Perhaps you've already seen this; it was on The Consumerist and pretty prominently featured on the NYT home page. It goes to show how small the core group was that caused the AIG mess. If nothing else, it sheds new light on some of the politicians involved.

I don't think Mr. DeSantis quite understands that the government now owns 80% of AIG and is estimating that even more bailout money may be necessary. AIG should be in bankruptcy and doesn't have the money to pay him. It is not AIG who is on the hook for his million dollar bonus but the American citizens, some of whom will not make that much in a lifetime of working. I wonder if he can even imagine how the guy working at a fast food restaurant for below poverty wages must feel when being told he has to contribute to Mr. DeSantis's million dollar bonus. It shouldn't take an MIT grad to comprehend the disconnect of his hurt feelings with the anger of those he expects to pay his bonus.

That being said I don't agree with the rushed through 90% tax either. The government should have made withdrawing the bonuses a condition for getting the bail out in the first place. I think AIG should not pay any bonuses while being kept alive by the taxpayers and instead let those who think they are owed bonuses fight it out in court for the next 5 years. AIG might still be around in some fashion and if not they can get in line with everyone else owed money including the American people.

03-19-2009, 08:26 PM	#1 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	AIG situation: What does it mean to you? I've not posted much about AIG, mostly because it's happening so fast and I've been too busy that I keep missing a good starting point. What does it mean to you? How do you feel about the bonus situation? What do you think should happen? I've been really upset about the AIG bailout from the beginning. As the companies that come out of this that show the monies that AIG paid out to German banks, Goldman Sacks, Merril Lynch, would have shown how the dominos would fall. I'm a believer that if you're taking risk, you should be taking that risk. When the bet is called and you lost. You lost plain and simple. Your company goes belly up. The bonuses, is just unconscionable. Congress fucked up and didn't due the due diligence. Congress should not abrogate the contracts and fishing a 90% tax is all just puffering and PR. Don't pin this on the Obama administration, he's got little to do with it because Congress voted for TARP. But stop feigning outrage... that's just stupid. You had your chance to vote when you were a senator and vocalize your concerns and opinions. And nothiong. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

03-19-2009, 09:00 PM	#3 (permalink)
mixedmedia has all her shots. Location: Florida	Since when are bonuses to failing executives such a scandal? These guys are only expecting what has given before them. Yet another perfect example of America giving a shit too little, too late. Only when it becomes a glaring offense to them personally does it become an issue. The more I learn about psychology, the more I realize that our advantages have kept us trapped inside the egocentric stage of development. __________________ Most people go through life dreading they'll have a traumatic experience. Freaks were born with their trauma. They've already passed their test in life. They're aristocrats. - Diane Arbus PESSIMISM, n. A philosophy forced upon the convictions of the observer by the disheartening prevalence of the optimist with his scarecrow hope and his unsightly smile. - Ambrose Bierce

03-20-2009, 05:03 AM	#7 (permalink)
samcol Junkie Location: Indiana	Man, I wish the media and the majority of Americans had a grasp on this issue like this board does. I'm amazed and apalled at the ability of the media and government to distract things that aren't that important in context. __________________ It's time for the president to hand over his nobel peace prize.

03-20-2009, 09:00 AM	#10 (permalink)
roachboy Super Moderator Location: essex ma	what it's a distraction from is easy: the brouhaha about the bonuses is a version of the "bad apples" theory. aig is interesting in that it marked the point where even within the one-dimensional world of mass media coverage of capitalism, that shangri-la, that a frame problem surfaced--so wait, yer tellin me that a downturn in the amurican real estate market effects the transnational trafficking in "mortgage backed securities" (think of it as a traffic in holes, kinda in the way the beatles talked about with reference to albert hall in "a day in the life") effects global capital flows? so there is no "american economy" that's not intertwined with the global economy? this triggers other problems, really quite basic ones, which have to do with the extent to which people think in terms of objects and the extent to which televisual presentation of "reality" reinforces thinking in terms of objects...a corporation is a bounded entity, a thing: an economy is a bounded entity, a thing. a nation-state is a bounded entity, so a thing... but hey, why think about that when you can point to a group of mostly anonymous individuals (things) who cause the problems because of an inward defect ("greed") and who represent in that inward defect the kind of attribute that can be purged from the existing system and restore it to rationality, because we all know, following the "bad apple" theory, that the existing order is legitimate because it exists, no matter what it is, and that problems are caused by distortions introduced by Bad People--so there are not and cannot be system problems, basic problems... it'd be funny if the game that was being played did not have such high stakes. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-20-2009, 04:32 PM	#13 (permalink)
The_Jazz Asshole Administrator Location: Chicago	What does it mean to me? It's one of the major reasons I haven't been around much recently. It's revealed a lot of flaws in the insurance market. AIG is one of my major trading partners, and it's been a wild ride. The bailout had to happen. If it hadn't, approximately 50% of the US airline fleet would have been grounded since the owners of the planes require the hull insurance to be rated "A" or better by AM Best (the standard insurance rating service). If AIG had declared bankruptcy, none of those planes could have flown since AIG writes roughly 50% of that business. That's not to count all the other corporate business that AIG writes that have similar covenants. The bonuses were stupid. AIG could have gotten out of them. Dodd's an idiot for allowing them to happen. __________________ "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin "There ought to be limits to freedom." - George W. Bush "We have met the enemy and he is us." - Pogo

03-19-2009, 09:10 PM	#5 (permalink)
Willravel ... a sort of licensed troubleshooter.	What does it mean to me? It's another MSM red herring. Of all the things that have happened around the economy and Wall Street, this is what people seem to agree is worth getting angry about? It's silly. Scratch that, it's stupid. Within the context of the spending recently, $165 million isn't even a pittance, a scintilla. It's nothing. Sure, one could argue it's symptomatic, but even as far as symptoms go, it's really tiny. Instead of concentrating on the huge problems that lead us to where we are now, instead of fixing the system which if left unfixed will lead to a true collapse of our economy, we're concentrating on $165 million in bonuses.

03-20-2009, 08:37 AM	#9 (permalink)
powerclown Junkie Location: Detroit, MI	While compensating people with bailout money to the tune of 165 Million should be put into proper context, I don't think it unreasonable for people to still be pissed about it. Its just one more screwup in the whole sordid affair, taxpayer money still being thrown down the toilet. It's effed up that these people are getting compensated and its effed up that AIG is receiving billions of taxpayer dollars to keep it afloat. Ok we get it, one is petty larceny and the other is grand theft. What's the point in trying to downplay the compensation scenario anyway? What is it a distraction from?

03-20-2009, 09:56 PM	#14 (permalink)
blktour Psycho Location: Anchorage, AK	The_Jazz: Good info, though I don't know why I haven't heard about the Tie with AIG and the air fleet. I will have to research this some more. Back to OP: What does it mean to me? Well that we have to start questioning the people who pass these bills instead of AIG. How do I feel about the Bonus situation? Take it all back. I know if the government gave me money and I wasn't due this? They they WOULD take it back. What is so different here? Though we know this may not happen. So pissed I guess. What do I think should happen? Um.. well appoint Peter Schiff or someone of the likes who has a track record of knowing how we got here. I feel he could reverse it. Though no one really wants to hear his side, since it will take sacrifice on our part. Even when they ( The Gov.) put us here.

03-21-2009, 01:52 AM	#16 (permalink)
tisonlyi Nothing	I think we're all about to have a harsh lesson on the nature of the web of our social contracts. Mr Stewart was wrong. The entire economic edifice that has ever been and ever will, no matter the gains it has or will bring us, is at its root a game. There were a handful of people consciously playing the game at the highest levels, but a game they were playing. Money, even money backed by shiny metals, has no real, intrinsic value other than what we all somehow agree to place upon it. It's only a social contract, though mostly a hidden one. As we sit here the players, en mass and conscious as well as unconscious, have pushed the game into an irrecoverable position for certain social contracts in the world. Social contracts like the dollar and the pound will either not survive, or won't be recognisable as what they once were not too long from now. The total sums being magicked into existence to combat the current crisis in loans, bailouts, guarantees and insurance is roaring up towards 100% of US GDP over on your side of the pond, and way over 100%, more like 200% of GDP of the UK over on this side of the pond, mostly through black box entities and schemes that have very little details published, if any. There's no going back, and there's only a yawning abyss out in front of us - for the social contracts. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}-- Last edited by tisonlyi; 03-21-2009 at 02:16 AM..

03-21-2009, 12:09 PM	#17 (permalink)
The_Jazz Asshole Administrator Location: Chicago	I've been thinking about this thread today, and I'm going to comment some more. This is something that I've been talking about at least once a day every working day since I was in San Diego in mid-September. The vast majority of AIG was run very well and very profitably. When this first started last year, AIG was, without a doubt, the best run insurance company out there with the best talent in the industry (on the carrier side, at least). Unfortunately, a lot of very smart people have been tarred with the same brush used on the Financial Services guys. If you think that the Financial Services guys are scum of the earth, think again. Basically, the guys at Goldman Sachs et al came up with the credit default concept. They convinced the Financial Services guys, who were a very small unit, to write the coverage for the swaps. The same folks had also convinced Congress that the concept was legal AND a good idea. The head of AIG at the time, Hank Greenberg (IMO one of the great insurance minds in history) personally signed off on each and every deal they wrote until he was basically pushed out in the Spitzer investigations about 5 years ago (something completely unrelated to this). His successor, Michael Sullivan, signed off on the rest of the swaps. It turns out that the checks that they all thought were in place actually weren't. In reality, a bunch of very smart people were swindled in one of history's greatest cons. Even better, the Goldman guys were so brazen that they started buying the swaps at the end, only on the side that bet that the mortgages that this whole mess drew from were actually worthless. They made money on the front end AND the back end, and they had the foresight to make sure Congress made that completely legal. As I posted in the other thread, AIG declaring bankruptcy would have been horrific. First, the rating agencies would have been forced to downgrade AIG. In my world, if you go below "A-", you might as well be dead. At the time, they were "A". A bankruptcy, in the best of circumstances, would have seen them go to "B++" (more likely "B"). A lot of commercial loans require insurance by an "A" or better carrier. In Florida alone, AIG writes about 20% of the commercial Property market. Think about the turmoil of all of those loans having to be either rewritten or the insurance replaced. But that's just inconvenient. The real problem is that the 50% of the commercial air passenger planes are covered by AIG (they also own a bunch of them). The same rules apply (because as the owner, AIG insisted on it). That would have grounded about half of the commercial airplanes in this country. Think about that. It goes on, too. Ships. The cargo on them. Trains in some countries. Big construction projects that have to stop. It would have been a nightmare. I have more, but it's time to take the boys to the playground. I may revisit this, though. __________________ "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin "There ought to be limits to freedom." - George W. Bush "We have met the enemy and he is us." - Pogo

03-21-2009, 06:59 PM	#18 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	Thanks Jazz that's some good insight to why it is important that they didn't fail as an insurance company. I think that some media should have explained why in the exact same manner. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

03-21-2009, 08:15 PM	#19 (permalink)
tisonlyi Nothing	there are no facts there, just narratives. JP Morgan basically invented CDS's, they were taken up with gusto at AIGFP. If you really believe the PoorAIG! stuff, then please explain their exposure to naked CDS's. Did someone at GS and countless other institutions convince AIG to take money on what they considered to be long odds bets on a game neither AIG or the other gambling addicts had any skin in? AIGFP were horrifically greedy, and insanely stupid if that's the narrative of least resistance you want to go through... there are basically no other narratives that even begin to hold water unless you want to get into deep conspiracy territory on whichever side. Though i agree there is a decent division of AIG in traditional sorts of insurance which should be spun out pdq. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--

03-22-2009, 09:55 AM	#22 (permalink)
tisonlyi Nothing	There are two options most likely, imho: 1) Their ridiculous abstractions and fairy story devices, or 'financial modelling tools' were engineered to prevent the idea that reality may ever intervene in the housing and other markets. In fact, I hear that the prediction software frequently deployed by one or to two institutions forbade the entry of negative house price increases... 2) They knew what they were doing. They were being paid per transaction, hence they didn't care about the outcomes... they were earning more than enough 'fuck you' money to see out the rest of their lives in ease. The only question was how much luxury would the rest of their lives contain? Currently, The US govt is rating that at about 12 trillion dollars or 'all in'. __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--

03-22-2009, 10:16 AM	#23 (permalink)
The_Jazz Asshole Administrator Location: Chicago	First and foremost, AIGFP was a tiny division of one of a huge multinational company, both in terms of number of people and in revenue. It's not like this was National Union or American Home (two of the big insurance divisions). I don't think that there are many people, with the benefit of hindsight, that would call the swaps anything but a bad idea. However, at the time, that wasn't quite so obvious. You need to realize that the AIG mindset played a big role here. Think of the nastiest, dirtiest thing to insure that you can, and AIG probably writes it. Gun manufacturers. Hotels on the beach in Key West. California condominium builders. They have written new coverage for buildings that are actually on fire at the time knowing that they will have to pay a loss. Basically, they'll do anything for a price. AIGFP had most of their employees in London for a reason. London insurance, while not really unregulated, operates as the ultimate insurance market, where anything can be bought, which is why you see people insure their legs or hair or whatever there. In London, it is not unknown (though it is a little unusual) for someone to bet against something. If you think that the AIGFP folks were gambling addicts, I think that you need to examine the very nature of the business. The entire thing is a gigantic gamble, especially when you're dealing with something that doesn't have a proven track record. If you want to examine mistakes that were solely AIG's (i.e. no one conned them), then basically it was that they moved away from their core business model on these deals and didn't do the underwriting necessary to understand exactly what was going on with the mortgages. That said, there hadn't been a negative housing market since the 1930's, and there was no reason to think that one was even possible until mid-2007. __________________ "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin "There ought to be limits to freedom." - George W. Bush "We have met the enemy and he is us." - Pogo

03-22-2009, 12:04 PM	#24 (permalink)
flstf Easy Rider Location: Moscow on the Ohio	It seemed obvious to me (from a layman's point of view) that houses were way over priced as early as 2003 when we sold our house in Seattle. The local paper even ran an article about how 50 to 70% of the people in our area would not qualify to buy their own house at the current prices. Isn't it obvious that most people cannot afford much more than 3 times their annual earnings without a crazy adjustable rate (time bomb) mortgage. Surely the professionals that dabble in these things knew prices had to come down. Just because someone making $75,000 a year can get a mortgage for $400,000 does not mean they can afford it. Especially if they are denied refinancing before the monthly payment resets and goes up.

03-23-2009, 07:10 AM	#27 (permalink)
roachboy Super Moderator Location: essex ma	thanks jazz--very interesting stuff. the traffic in holes (debt bundling) required a wholesale separation between the fees that could be made through the circulation of the devices and what the devices actually represented. it seems to me like the entire way of trading was not that different from juggling--so long as the elements within the system kept moving and folk were only thinking about quarterly returns, shareholder profits and commissions/bonuses things were kinda functional--but once the machinery started to come undone, suddenly there were enormous bags and firms left holding them and epic levels of debt, backed to the hilt by outfits like aig....it's lunacy if you look at it, but i don't think anyone was looking at it so long as the wheels inside the wheels kept moving---cowboy capitalism is not about rational planning or action if rational requires thinking in durations longer than a quarter. traders make heaps of cash, p&l looks good, everyone's fat and happy--that's as far as thinking went, as far as it had to go. add to that the fact that there was and still is no clearinghouse through which the traffick in these devices had to pass, so no transparency as to valuation and so no transparency as to meaning----this is an automated world of numbers, so abstractions. it really was and is lunacy. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-23-2009, 09:47 AM	#30 (permalink)
roachboy Super Moderator Location: essex ma	in "looting"--i made a thread about it a little while ago--the argument is that deposit insurance eliminated "moral hazard" at the level of banks which involved themselves in this lunatic trade in debt securities---but i think compartmentalization at the level of organizational culture was more important. that and the assumption that these devices would stay in motion. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-23-2009, 01:56 PM	#32 (permalink)
flstf Easy Rider Location: Moscow on the Ohio	You know, the more I think about it, maybe it is not so risky when there is someone waiting in the wings to replenish all the money you gambled away. Perhaps these guys are very smart and worth additional bonuses for the win/win situation they created for themselves and their companies.

03-25-2009, 10:50 AM	#36 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	I read this earlier and I'm confused as to how their bonuses are derived. It could be because I've not achieved that level of employment. But my bonus eligible positions at 10% or 15% of my annual salary was stated as simply that. Accountants muckied with that and eventually it was a percentage of the target of the pool or something stupid like that. Ultimately I never got the full 15% ever. Eventually, as the economics changed in 9/11 they just said, no bonuses. Yet I had a piece of paper that said, I was to get a 15% bonus. I definitely didn't want the government to abbrogate the contracts, but the company could have done something I'm sure of it. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

03-25-2009, 10:51 AM	#37 (permalink)
tisonlyi Nothing	Of course, he knew nothing about it. He was in the other room while they were gassing the prisoners. Godwin II __________________ "I do not agree that the dog in a manger has the final right to the manger even though he may have lain there for a very long time. I do not admit that right. I do not admit for instance, that a great wrong has been done to the Red Indians of America or the black people of Australia. I do not admit that a wrong has been done to these people by the fact that a stronger race, a higher-grade race, a more worldly wise race to put it that way, has come in and taken their place." - Winston Churchill, 1937 --{ORLY?}--