Lessons from AIG

March 19, 2009

Lessons from AIG
By Robert Weissman

Watch out if you live in or visit Washington, D.C.

If you see a camera or microphone, be careful not to be trampled by a politician rushing to shout their “outrage” at AIG, and its brazen scheme to pay $165 million in bonuses to employees at the company unit responsible for driving the company to the edge of insolvency.

March 19, 2009

Lessons from AIG
By Robert Weissman

Watch out if you live in or visit Washington, D.C.

If you see a camera or microphone, be careful not to be trampled by a politician rushing to shout their “outrage” at AIG, and its brazen scheme to pay $165 million in bonuses to employees at the company unit responsible for driving the company to the edge of insolvency.

Maybe the politicians really are outraged. (They definitely know their constituents are.) But it would have helped if they had expressed some outrage — and opposition — during the decades-long period of deregulation that brought us the AIG collapse and the financial meltdown.

It is indeed unfathomable that AIG went ahead with the bonus payments, and that the Treasury Department and Federal Reserve failed to act to stop the bonus payments before they were made.

What is vital now is that the public’s righteous anger is not expressed only as “no.” There are a lot of things to which We The People do need to say “no.” But we need a lot of “yes’s,” too. We need to demand that policymakers impose public controls over the financial sector. The financial sector restraint, shrinkage and displacement agenda is long and diverse, but there are a number of lessons that flow directly from the AIG debacle.

First, the government must exercise much more direct control over the firms it is bailing out (many of which, like AIG, are very likely to be subjected to government takeovers of one kind or another in the coming months). If the government exercised control commensurate with its ownership stake, it could simply refuse to permit outrages like the AIG bonus payments to occur. Beyond preventing outrages, there should be affirmative demands imposed on the beneficiaries of bailout funds. These should include, for commercial banks, the mandatory write down of principal on home mortgages where the outstanding loan amount now exceed the value of the home, and the end to usurious interest rates on credit cards.

Second, there must be far-reaching reform of compensation arrangements in the financial sector. Never again should anyone get away with saying this is a symbolic issue. The AIG bonus payments, and the manic response from the financial sector to modest executive pay restrictions added by Senator Chris Dodd to the financial bailout reauthorization legislation, demonstrate that the guys on Wall Street certainly don’t think it’s symbolic. Real reform must go beyond giving shareholders a say on pay to imposing public controls. There should be high tax rates on excessive compensation. Most importantly, there should be a prohibition on incentive pay that is linked to short-term performance. Bonuses based on annual performance give traders and others an incentive to take unreasonable risks — threatening the viability of their firms, and the overall financial system.

Third, the regulatory black holes in the financial system must be eradicated. One black hole concerns regulation of financial derivatives — the exotic instruments that threw AIG into virtual insolvency. During the Clinton administration, Fed Chair Alan Greenspan, Treasury Secretary Robert Rubin and Deputy Treasury Secretary (now director of the National Economic Council) Larry Summers crushed an effort by independent-minded regulators to adopt modest regulation of financial derivatives. In 2000, Congress prohibited such regulation by law. When regulations are finally adopted this year, as they almost certainly will be, they should prohibit certain kinds of financial derivatives altogether, and require that new ones prove their safety and social value before being placed on the market.

Fourth, we need a revitalized antitrust and competition policy to break up and shrink the size of the mega financial institutions (and, not so incidentally, we also need to shrink the size of the overall financial structure). These too-big-to-fail institutions are, as has been said, just too big. Or amended: they are too big and too interconnected. Their very existence poses unacceptable social costs, made worse by the fact they take greater risks knowing that they benefit from an implicit public insurance.

AIG itself has acknowledged the problem. In a company presentation apparently prepared to persuade the federal government to keep the bailout funds coming, AIG explained, “what happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means.”

AIG CEO Edward Liddy has drawn the proper conclusion: “Where safeguards are lacking” — and it should be added, it has proven far beyond the capacity of regulators to impose sufficient safeguards — “such companies need to be restructured or scaled back so they no longer come close to posing a systemic risk.”

Finally, renewed attention must be paid to corporate structure and prohibitions on whole categories of activity. Insurance companies should be prohibited from operating affiliates that function as de facto hedge funds. Commercial banks husbanding depositors’ assets should be prohibited from operating securities firms (as was law until 1999) or making securities firm-style speculative bets.

Will the outraged politicians demand these and other reforms? Will their outrage last once the media move on to the next story? That will depend almost entirely on whether an organized and focused public demands it.

Consumer Advocates Call on President to Fire Treasury Secretary Geithner

March 19, 2009

For Immediate Release

Consumer Advocates Call on President to Fire Treasury Secretary Geithner

In a letter issued today, two consumer advocacy groups called on President Obama to obtain Treasury Secretary Timothy Geithner’s resignation.

March 19, 2009

For Immediate Release

Consumer Advocates Call on President to Fire Treasury Secretary Geithner

In a letter issued today, two consumer advocacy groups called on President Obama to obtain Treasury Secretary Timothy Geithner’s resignation.

The letter, from Harvey Rosenfield, the California-based consumer advocate who authored the state’s insurance rate rollback Proposition 103, and Jim Donahue of the Washington-based WallStreetWatch.Org, asserts that Geithner has been unable to transcend his earlier role, while Chair of the New York Fed, as an architect of the failed Bush Administration Wall Street bailouts — including the initial $80 billion AIG bailout.

Moreover, it appears the Treasury Department was aware of the latest round of bonus and retention payments but failed to announce them until after AIG issued $160 million in checks. Pointing out that the President has often called for “an open, honest government that would fight” for people, not special interests, it concludes that “In these grave days of national reckoning, the citizenry deserves better.”

“It is clear that Treasury Secretary Timothy Geithner cannot provide the requisite independence that is required in an environment in which financial institutions and other businesses are demanding trillions of dollars of taxpayer money,” the letter to President Obama states. “With respect, we urge you to ask for his resignation.”

Two weeks ago, WallStreetWatch.Org issued a 231-page report pinpointing twelve policy decisions by the federal government that led directly to the current financial calamity – and how those policies were dictated by Wall Street through over $5 billion in campaign and lobbying expenditures between 1998 and 2008 by many of the same firms who are receiving American taxpayer dollars.

The letter calling for Geithner’s resignation, and “Sold Out: How Wall Street and Washington Betrayed America,” follows:

———————

March 19, 2009

President Barack Obama
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear President Obama,

It is clear that Treasury Secretary Timothy Geithner cannot provide the requisite independence that is required in an environment in which financial institutions and other businesses are demanding trillions of dollars of taxpayer money. With respect, we urge you to ask for his resignation.

As you know, Mr. Geithner helped orchestrate the first bailout of AIG by the Bush Administration. Both the arrangement itself and the recipients of the first $80 billion of taxpayer money provided to AIG were, and until last weekend remained, a secret. Now we know that billions of dollars were transferred from AIG to banks and other financial firms without any indication that these firms, domestic and foreign, were themselves in need of American tax dollars. Indeed, many on the list released by AIG are considered in healthy financial condition. There is no evidence that the Treasury has developed a plan to determine how and to what extent AIG’s counterparties should be paid.

The revelation of $500 million in payments of bonus and “retention” money to executives and traders who may have been directly responsible for AIG’s collapse is a profound insult to the hardworking American taxpayers who are paying for Wall Street’s excesses.. It suggests that Mr. Geithner, simply does not recognize the taxpayers’ rightful expectation that this money will not be wasted. Why wasn’t the Treasury Department ahead of this issue, making sure that taxpayer money would not be wasted on unjustifiable bonus payments?

Moreover, it would appear that the Treasury was aware that the bonuses would be disseminated by AIG on Friday – but did not release the information to the public until Saturday, when it would at least ostensibly be “too late” to do anything about it. Such a cynical strategy of deliberate non-disclosure – along with cavalier statements by representatives of the Administration that it is legally bound to honor these outrageous compensation deals – has severely undermined the credibility of the Treasury Secretary.

This crisis is the direct result of ten years of bipartisan capitulation by Washington to the demands of Wall Street to be free of proper regulation or restraint, as recently documented in our report, “Sold Out: How Wall Street and Washington Betrayed America.” You cannot be held responsible for the litany of policy errors that occurred on your predecessors’ watch. Nor was it unreasonable for you to believe that upon assuming the duties of Treasury Secretary, Mr. Geithner would bring to bear his past experience – without being limited by it. Unfortunately, that supposition has not proven out. Serious mistakes are being made on your watch. In these grave days of national reckoning, the citizenry deserves better.

It is time for Mr. Geithner to resign.

Sincerely,

Harvey Rosenfield,
President,
Consumer Education Foundation
PO Box 1855
Studio City, CA 91604

James Donahue
Research Director,
WallStreetWatch.Org
PO Box 19405
Washington, DC 20036

No Bonuses for AIG

March 17, 2009

The U.S. government should take control of AIG, abrogate its employee compensation contracts, and suspend all payments on credit default swaps until information concerning these matters is made available to the public and a judgment can be made whether any further bailouts are necessary, the Consumer Education Foundation (CEF) said today.

March 17, 2009

The U.S. government should take control of AIG, abrogate its employee compensation contracts, and suspend all payments on credit default swaps until information concerning these matters is made available to the public and a judgment can be made whether any further bailouts are necessary, the Consumer Education Foundation (CEF) said today.

Two weeks ago, CEF, along with Essential Information, published a 231-page report detailing the federal policies that led to the current debacle and how they were greased by $5 billion in political donations and lobbying by the Money Industry. The report, “Sold Out: Sold Out: How Wall Street and Washington Betrayed America,” is available online at: http://www.wallstreetwatch.org/soldoutreport.htm.

“It’s time for Washington to get tough with the Wall Street speculators who have pillaged our economy,” said consumer advocate Harvey Rosenfield, CEF president.

CEF urged the following plan:

  • Seize control. Americans own AIG — but, apparently in order not to offend Wall Street, we do not control the company. This charade has got to stop. The federal government should take over AIG through eminent domain.
  • Abrogate employment contracts. No one knows the terms of the compensation contracts between the company and its executives, including the speculators who now demand to be paid $165 million in bonuses, not to mention $600 million in “retention pay.” The government should abrogate all such compensation contracts, not just bonus deals. Let these individuals sue the United States for their money and let a jury decide whether their catastrophic mistakes deserve compensation.
  • Suspend payments for credit default swaps. Until we know the details, no more public money should be transferred to or from AIG. Treasury has committed $170 billion of public money to AIG, without disclosing to the public what AIG is doing with it. We now know that former Treasury Secretary Paulson’s firm got over $10 billion, but we still don’t have the complete list of recipients. We have no way to judge whether we have to continue to bail out AIG in order to avoid a collapse of the entire system, as Treasury Secretary Geithner has argued. Once in control of AIG, the federal government should publish the complete list of “counter-parties” — the “insurance” buyers on the other end of AIG’s swaps.

Avoiding Bailout Questions

March 13, 2009

By Ralph Nader

Indicators of avoidance are what come to mind while absorbing the various rescue, recovery, stimulus and guarantee programs coming out of the Obama Administration to slow and reverse a splintering and shattering economy. If the Obamites do not act now when the political time is ripest, to put into motion forces of deterrence and prevention, the casino capitalists of tomorrow will again be able to de-stabilize our economy.

March 13, 2009

By Ralph Nader

Indicators of avoidance are what come to mind while absorbing the various rescue, recovery, stimulus and guarantee programs coming out of the Obama Administration to slow and reverse a splintering and shattering economy. If the Obamites do not act now when the political time is ripest, to put into motion forces of deterrence and prevention, the casino capitalists of tomorrow will again be able to de-stabilize our economy.

The other day I saw Alan Greenspan, former chairman of the Federal Reserve, just about predicting another round of recklessness in about fifteen years. But he called it “human nature” not casino capitalism.

Here are seven avoidance indicators which outline what Washington is not doing to prevent another round of greed and misdeeds by the Wall Street few against the innocent many throughout the country.

  1. Where are the resources for comprehensive law enforcement against the Wall Street crooks, swindlers and purveyors of costly deceptive practices? Isn’t there a need to add two to three hundred million dollars for more FBI agents, prosecutors and corporate crime attorneys under the Justice Department to obtain the fines and disgorgements which will far exceed in dollars what is spent by the forces of law and order?Americans want justice. They want jailtime not bailtime for these crooks. Look how many of the swindled just turned out in a New York City winter to let Bernard Madoff have a piece of their mind as he entered the courtroom and immediate imprisonment.There has been very little movement so far in Congress or the White House toward this necessary action.
  2. Where are the anti-trusters to revive the moribund divisions in the Justice Department and Federal Trade Commission? Failed banks, brokerage firms, and now insurance companies are being taken over by shaky acquirers, often with the encouragement of the federal government. Other industries are experiencing similar mergers and acquisitions in an already over-concentrated economy.Our government needs to be on top of this accelerating creation of more companies deemed to be “too big to fail.” A variety of antitrust policies are needed to prevent, restructure or, at least, require spinoffs to minimize the anti-competitive effects of the “urge to merge.”
  3. What about Congress and Obama shifting some power to the investors and shareholders who are paying for all these losses? The corporate bosses have made sure for many years that shareholders, who own their companies, have little or no right to control them. Had there been less of a gap between ownership and control, the bosses could never have engaged in such reckless speculation, looting and draining of the trillions of dollars with which they were entrusted. These include mutual funds, pension funds and various trusts. Power to the owners seems to be off the table.
  4. The federal officials are talking up stronger regulation and re-regulation proposals but we have not yet been informed of their specific plans. There is not much talk of regulatory prohibition. That is, flat-out prohibition of banks, insurance companies, and other fiduciary institutions from speculating in derivatives or, to be more specific, bets on debts and the even more hyped creations of bets on bets on debts on debts.
  5. By now, Washington should be devising ways to pay for these gigantic deficits and bailouts. A fraction of one percent sales tax on the hundreds of trillions of dollars in derivative transactions annually would produce hundreds of billions of dollars in revenue and tamp down some of this Wall Street gambling with other peoples’ money.Such a tax on speculative trades in these abstract instruments can make the Wall Streeters pay for their own bailouts and reduce some of the taxes on human labor.
  6. Our government doesn’t highlight not-for-profit institutions like the 8000 credit unions that are increasing their loans and continue to serve over 80 million Americans without a single insolvency. One would think that with the financial goliaths in a free fall, despite ever-larger bailouts from the federal government, that the cooperative model of credit unions would become a useful teaching instrument.

In his new paperback book, Agenda for a New Economy, David Korten makes an important distinction between the “phantom wealth” of Wall Street and the “real wealth” of Main Street.

His twelve-point agenda raises the fundamental question of why Wall Street is needed and how the functions of a just and progressive economy can be fulfilled with a sensible transition to a “real wealth” economy engaged by and accountable to real people striving for the necessities and wants of life through environmentally friendly, more efficient institutions.

Lest any remaining doubters out there are thinking about our country returning to business as usual Wall Street style, please read the confidential powerpoint presentation “AIG: Is the Risk Systemic?” by the AIG financial giant grasping $180 billion, so far, in federal aid and guarantees

In 21 pages of very large type, you will see why the AIG bosses believe that failure of their gigantic corporation would only “trigger a cascading set of further failures which cannot be stopped except by extraordinary means.” In other words, AIG says to Uncle Sam and you the taxpayer save it or be prepared for a global collapse through a dominoes effect of unknown catastrophic sequences. For the full astonishing AIG text, see: http://www.aig.com/Related-Resources_385_136430.html. Right from the horse’s mouth!

$5 BILLION IN POLITICAL CONTRIBUTIONS BOUGHT WALL STREET FREEDOM FROM REGULATION, RESTRAINT, REPORT FINDS

Steps to Financial Cataclysm Paved with Industry Dollars

March 4, 2009

The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, “Sold Out: How Wall Street and Washington Betrayed America,” shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

“The report details, step-by-step, how Washington systematically sold out to Wall Street,” says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. “Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price — trillions of dollars — for that betrayal.”

“Congress and the Executive Branch,” says Robert Weissman of Essential Information and the lead author of the report, “responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape.”

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. “Sold Out” details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

  1.  In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
     
  2. Regulatory rules permitted off-balance sheet accounting — tricks that enabled banks to hide their liabilities.
     
  3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives — which became the basis for massive speculation.
     
  4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
     
  5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
     
  6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal “risk-assessment models.”
     
  7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
     
  8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
     
  9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
     
  10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
     
  11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
     
  12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy

During the period 1998-2008:

  • Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
  • Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
  • Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
  • Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).

The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector’s 2008 election cycle contributions.

The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone.

These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, “Sold Out” finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.

*  *  *

Essential Information is a Washington, D.C. nonprofit that seeks to curb excessive corporate power. The Consumer Education Foundation is a California-based nonprofit that supports measures to prevent losses to consumers.