The Huge Looming Fight Over Financial Regulations

Today's the anniversary of 9-11, I guess. Why don't they just make it the following Monday and give us all a three-day weekend?

But another anniversary looms around this same time. On September 14, 2008, Lehman Brothers collapsed, and it sparked the biggest financial crisis since the Great Depression. America and other countries committed trillions in resources to keep the biggest banks afloat, and as a result we have rescued the system without fundamentally changing it or ensuring that the same bubble-and-crash couldn't happen again. Instead of taking advantage of the crash and responding to the bailout by immediately moving to financial regulatory reform, to prove that the banksters weren't getting free reign, the Administration waited, and is now trying to move forward without the urgency created by the crisis. Which is why you see high-fiving in the financial media that this regulatory reform effort will not succeed.

Large staffs of lobbyists with powerful financial interests behind them will use time-honored techniques to water down or kill anything that would drain profits and force the banksters to stop gambling with our money. The same interests killed a proposed Consumer Protection Agency in the 1970s with irrational fears about how it would harm ordinary Americans. And in the Senate, that same kind of coalition is forming to kill the Consumer Financial Protection Agency proposed by the Administration.

Nonetheless, I have a couple reasons to be optimistic, as this article in The Hill was the other day. First of all, the push to empower the Fed as a single regulator for a banking sector that it basically is enjoined to has faded rapidly.

The Obama administration's vision for revamping the nation's financial regulatory system could face significant revisions in the Senate, where proposed reform legislation departs from the White House proposal on several key points, according to staff members, lobbyists and a lawmaker briefed on the plans.

A bill taking shape in the Senate Banking Committee could give the Federal Reserve far less authority than the administration sought in the reform proposal it unveiled in June. Senators on both sides of the aisle have expressed a lack of confidence in the Fed in the wake of the financial crisis, challenging everything from the central bank's transparency to its ability to protect consumers.

Some lawmakers oppose giving the Fed responsibility for monitoring systemic risk in the economy, as proposed by the administration, favoring instead vesting that authority with a council of regulators.

"We really do take what the administration did as advisory. We have our own ideas," said one Democratic staff member familiar with the legislation who was not authorized to speak on the record. "We've been thinking about this a long time."

The second reason why I'm sanguine is that the Justice Department is finally stepping up with enforcement - and I think AIG represents the beginning, not the end.

U.S. investigators are probing the former head of American International Group Inc's (AIG.N) Financial Products unit, Joseph Cassano, and other executives for securities fraud, a law enforcement source familiar with the case said on Friday.

The source said that a grand jury may be impaneled this month in New York to consider potential charges that executives failed to disclose the value of toxic assets to the bailed-out insurance company's outside accountants and shareholders.

"The investigation is really who knew what and when about these assets," said the source, who asked not to be identified because the probe was ongoing. "They were holding toxic credit default swaps and may not have disclosed their real worth."

I don't think there's a single part of this sector that couldn't be probed in the same way. Look at this horrow show of overdraft fees on debit cards, for example. You cannot literally promise lighter enforcement in exchange for tighter regulation, but I think the firms get the message.

This actually will be a more expensive fight than health care reform in terms of lobbying, once everyone gets down to it. Chris Dodd's centrality to it while he fights for his political life is a bit worrying, but he's not the real problem here. It's the Mark Warner types who can deep-six anything meaningful.

...Yves Smith is not so hopeful.

Whaddya Know, They Found An Asshole To Run AIG

You'd think we weren't paying this guy $7 million dollars to do his job.

(Robert) Benmosche told employees that he “had the luxury to say to the government, I’m not going to rush to do this. I’m appalled at how much pressure has been put on all of you to just sell it no matter what, because the Fed wants out, or the Treasury wants out. If they want out in a hurry, they shouldn’t have come in in the first place.”

He's not being rushed at all, actually. He's starting his tenure with a two-week vacation to his Croatian villa.

Also, the government "came in" because AIG was hundreds of billions in the hole and begging for a rescue. These Masters of the Universe have still deluded themselves into thinking that the big bad government intruded on their party, and everything was going just fine until the crippling weight of socialism came to bear. In fact, we have socialism for the rich, and scraps for everyone else. And guys like Benmosche aren't even satisfied with that.

Yves says:

The government owns 79.9% of AIG. Any private sector owner who had an overwhelming majority interest and got that kind of attitude from a CEO would fire him immediately. But no, we live in a world where arrogant members of the financial services industry engage in looting, dictate terms to the government, and try to rewrite history to make baldfaced lies seem plausible. Why shoudn't the government pressure AIG? The idea that owners don't pressure companies (the subtext of this remark) is an absurd misrepresentation. Go talk to the management of any underperforming company owned by a PE or venture capital firm. For the most part, they do not play nice, and would never tolerate Benmoshe's posturing, and he knows that. He is simply playing the media and the public for fools.

Matt Taibbi details the web of lies that Benmosche has thus far subscribed to in his public statements. It's absolutely stunning that anyone would try to peddle a fiction that AIG was a super-awesome business and their only problem was that their regulator failed to rein them in. That's actually what the argument is.

One, let’s not forget that AIG went out of its way to cherry-pick the weak and understaffed OTS as its primary regulator by chartering an S&L called the AIG Federal Savings Bank in Wilmington, Delaware back in 1999. By this little maneuver AIG got itself declared a thrift holding company, which made the OTS, which only had one insurance expert on its staff, the primary regulator for the world’s largest insurance company.

Two, the notion that AIGFP was AIG’s only problem is bananas. It may not even have been AIG’s biggest problem. This legend obscures the fact that playing a nearly equal role in the demise of AIG was AIG’s securities-lending business, headed by yet another bombastic narcissist (AIG must lead the world in the hiring of these to senior management) named Win Neuger. Neuger back in the earlier part of this decade issued a clarion call to his subordinates, announcing a plan he called “10 cubed” — securing 1000 million (i.e. $1 billion) dollars a year in profits. Back in 2005 he told his staff that anyone who wasn’t on board with the plan to make a billion in profits a year could hit the road, literally, saying, “If you do not want to be on this bus, it’s a good time to step off.” [...]

This was a company that was tired of the boring, safe insurance business and decided not only to take its assets and bet them on the residential housing market, but to borrow massively and double and triple down on those bets. This was a systemic, company-wide insanity. So for Benmosche to blame all of this on the OTS is… well, it’s characteristic of what these people are like. On some level they really believe that if the government is not kicking their doors in and wrapping them all up in hoods and zip-ties, then whatever they are doing is not only okay but good business.

And we, the taxpayer, just hired this guy. Unbelievable.

Where's My Pitchfork?

At a time when economic news, including today's report on retail sales, has dampened hopes of a recovery this year and raised the near-certainty of double-digit unemployment, we can all comfort ourselves with the great success of Goldman Sachs:

Comfortably beating analysts’ forecasts, Goldman Sachs earned second-quarter net profits of $3.44 billion, or $4.93 a share, the bank announced on Tuesday.

The results continue a robust turnaround for the firm since it rode out the final tumultuous months of last year with the aid of a federal rescue. They come just one month after it paid back its $10 billion in federal aid.

Goldman’s profit was lifted by record quarterly revenue of $6.8 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded, the bank said in a statement. This business has performed well since the bank has taken on greater levels of risk since the end of last year.

Its equity underwriting business also generated record net revenue, worth $736 million in the second quarter, it said, as Goldman benefited among other things from a rush by other troubled banks to issue shares and raise their capital levels.

“We are performing well across the board,” said David A. Viniar, chief financial officer, who said the strong performance reflected “blocking and tackling every day” by Goldman’s employees.

Glenn Greenwald ably details the extraordinary actions taken on behalf of Goldman Sachs during the financial crisis right on through until today, so I need not repeat them. Even if they had not done so, Goldman would be in an excellent position to capitalize on the failures of other firms because of the implosion of Lehman Brothers and Bear Stearns - their competition has been euthanized, essentially. But that wasn't enough. They were allowed to change themselves into a bank holding company to qualify for Federal Reserve largesse. They received billions in federal money passed through AIG to pay off on their credit default swaps, putting them in a better position that any other US financial institution. They used their contacts throughout government to get favorable terms and handouts in virtually every program aimed at rescuing the financial system.

And to this day, the Treasury Department refuses to answer Congressional queries about accepting the recommendations of bailout auditors, nor will the Federal Reserve divulge the whereabouts of the trillions of dollars in funds they've let out since last September. I have a feeling that we'd throw an even bigger fit if we had more transparency. But what is already known, frankly, is enough.

In a related story, like everyone else I recommend Michael Lewis' article on AIG and Joseph Cassano in Vanity Fair. It focuses on understanding the past crisis rather than the credibility crisis we now face as a consequence of bailing out banks over people, but it's worth reading.

The Financial Regulations

The President unveiled his regulatory overhaul today, refraining from leaving the details to Congress and instead putting together an extremely detailed document. The idea on the top line was to streamline the bureaucracy, as evidenced by the elimination of the Office of Thrift Supervision, a small regulatory agency which has become something of a scapegoat since they were the regulator for AIG. But Felix Salmon says that there is anything but streamlining in these rules:

Were you hoping that the present alphabet soup of regulators would get rationalized and downsized? I know that I was. But there’s only one place that’s going to happen: the OCC and the OTS are going to be folded into a new regulatory entity called the National Bank Supervisor (NBS), which (along with the Fed, natch) will oversee federally-chartered banks.

The National Bank Supervisor will not oversee state-chartered banks: those will remain under the umbrella of the FDIC, which is not being folded into the NBS. And the NBS will similarly not oversee credit unions: the NCUA will retain its independence and continue to regulate those itself.

Why perpetuate these distinctions between federally-chartered banks, state-chartered banks, and credit unions? I have no idea. But in order to get some measure of cohesion over all this, a second brand-new regulatory entity, the Financial Services Oversight Council, or FOSC, which will consist of the leadership of the NBS; the FDIC; the NCUA; the SEC and the CFTC (yes, they are remaining separate too); the FHFA (that, too, gets to remain independent for no obvious reason); the Treasury; the FOMC; and the brand-new Consumer Financial Protection Agency.

Or, to put it another way, FOSC = NBS + FDIC + NCUA + SEC + CFTC + FHFA + FOMC + CFPA + Treasury.

I know what you’re thinking — it can’t possibly be as simple as that. And you’d be right! There’s also a Financial Consumer Coordinating Council, which comprises the Consumer Financial Protection Agency, the Federal Trade Commission, and the SEC’s Investor Advisory Committee.

Oh, and I almost forgot, they’re also creating an Office of National Insurance.

It's so dense it requires a glossary of terms. And in addition, the Fed has kind of oversight provisions over the entire system, by becoming a systemic risk regulator (because they didn't miss the whole thing the first time around).

The streamlining matters less to me than whether or not this thing will actually work. And I think it has a chance. Rhetorically, its heart is in the right place (even Geithner and Summers' take). Obama means to base the regulation of banks on what they do and not what they say they are; seeks to end banks shopping around for their own regulator; and create a Consumer Financial Protection Agency to "protect consumers across the financial sector from unfair, deceptive, and abusive practices." There's also a fair bit on increasing international cooperation on these issues, which is crucial. This excerpt from an interview with Obama is a good look at his thinking on the subject:

Pres. OBAMA: No. I think that what we focused on was, number one, do we have the tools to prevent the kinds of risks that we saw back in September? And our conclusion was we didn't, and we had to make sure that we had a systemic risk regulator. So that is in place. We asked, do we have the resolution authority if an individual institution like an AIG breaks down, to quarantine them so that they're not bringing the whole system down? We didn't have that authority; we wanted to put that in place. Did we have a means of anticipating problems and properly regulating the nonbank sector of the financial system, which obviously has grown massively over the last decade? And we concluded we didn't have that power. So we got those things in place.

Were we sufficiently focused on consumers? And it turned out that consumer protection, investor protection was scattered among a whole bunch of different agency; we wanted to streamline, consolidate and give somebody line responsibility for that. So what we've started off with was identifying what were the biggest problems that we had, and are we putting in place the tools to prevent the kind of crises that we've seen from happening again?

HARWOOD: But you don't...

Pres. OBAMA: Now...

HARWOOD: ...have a single bank regulator, and some people have talked about judge shopping among banks for favorable regulation.

Pres. OBAMA: This is something that we've been concerned about in the past. What we do have, under our proposal, is that for tier one institutions, the big institutions who, if they fail, require us to shore them up, for those folks they are going to be under a single regulatory body. When it comes to some of the smaller banks, community banks, the FDIC has done a good job on that, and we feel confident that they can continue doing what they do. So our overall concept has been not to completely abandon those aspects of the system that worked, but rather focus on those aspects of the system that didn't, try to close gaps. Did, you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don't want to tilt at windmills, we want to make sure that we're getting the best possible regulatory framework in place so that we're not repeating the mistakes of the past.

I guess the best that can be said is that the banking lobby hates it. Unfortunately, they'll have another bite at the apple - Congress has to approve all this, and in so doing they could easily de-fang it.

Robert Reich has some good first principles that any financial regulation should include.

...Kevin Drum, er, doesn't like this much at all.

Best Democracy Money Can Buy

For your reading pleasure, some snapshots of the banks and financial interests controlling our economy and eating up hundreds of billions in public money:

Their lobbyists:

A review of lobbying reports filed indicates that finance, insurance and real estate (FIRE) interests paid over $42 million to lobbyists who worked to defeat mortgage write-down in bankruptcy (cramdown) in the first quarter of 2009, as well as other anti-consumer legislation such as capping credit card interest rates.

$13 million of that comes from TARP recipients.

Then we have the bonus babies:

The 2008 AIG bonus pool just keeps getting larger and larger.

In a response to detailed questions from Rep. Elijah Cummings (D-Md.), the company has offered a third assessment of exactly how much it paid out in bonuses last year.

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008.

That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.

And there are the fraudsters:

New York AG Andrew Cuomo just issued 100 subpoenas to investment firms in his expanding investigation of pay-to-play schemes that defraud public employee retirement funds, and announced the participation of 100 officials in 36 states' attorney general offices in the probe.

(This pension fund placement agent scandal looks like a doozy.)

And finally, you have the good old American greedheads:

The White House, auto executives and union representatives were all able to come to an agreement last week to keep Chrysler out of bankruptcy. But the car company's creditors -- Wall Street banks and hedge funds -- refused repeated compromises and drove the company under.

The refusal doomed a major American auto company to bankruptcy, but it may have been a smart business move for the lenders.

Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG.

AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example.

Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer?

Like one of these hedge fund managers recently said, "This is America!" It sure is. The land of the "we're going to bring down your car company so taxpayers can indirectly bail us out with our credit default swaps from the company paying out millions in bonuses, freeing us up with more money to put into defrauding public pension funds, and our lobbyists will ensure it."

Making Money Coming And Going

You'll lack surprise when you discover that Edward Liddy, the head of AIG installed after the company imploded, owns a large stake in Goldman Sachs, which has been bailed out by AIG counter-party payments.

Edward M. Liddy, the dollar-a-year chief executive leading the American International Group since its bailout last fall, still owns a significant stake in Goldman Sachs, one of the insurer’s trading partners that was made whole by the government bailout of A.I.G.

Mr. Liddy earned most of his holdings in Goldman, worth more than $3 million total, as compensation for serving on the bank’s board and its audit committee until he stepped down in September to take the job at A.I.G. He moved to A.I.G. at the request of Henry M. Paulson Jr., then the Treasury secretary and a former Goldman director.

I think this has to be the end of Mr. Liddy. When your alibi is that the $3 million is “a small percentage of his total net worth,” you're really grasping at straws. No really, that's his alibi, check the link.

The 100% pass-through of AIG counter-party payments to Goldman and other banks is absolutely insidious, maybe the worst part of this whole thing. This is why Goldman and these other banks can self-righteously claim to be renouncing government help while accepting it through pass-throughs and separate federal aid programs. They'd rather get their payoffs in black bags than in public, that's all they're whining about.

I don't necessarily think that Liddy is only making Goldman whole because of his financial stake; it's more that he's a bankster helping out his other bankster pals. It's the culture of coziness between elites that must be stopped.

Have we completely lost of sense of what is and is not a conflict of interest? Have we really built a system in which greed fully overshadows responsibility? Is it not time for a complete rethink of what constitutes acceptable executive behavior?

One of our country’s leading corporate attorneys made a telling point to me on Wednesday night, “the only way to control executive behavior is to criminalize it,” i.e., civil penalties do not change behavior - the prospect of jail time has to be on the table. His broader point was that antitrust action can make a difference in today’s world, but only if this includes potential criminal charges [...]

Let me be very clear on my position vis-a-vis AIG-Goldman and the broader Washington-Wall Street Corridor. I’m not saying that anyone has broken any laws, but rather that laws need to be changed. I’m not even saying that there have been transgressions against the prevailing code of ethics for executives and politicians - although surely we agree that this code needs to be dragged, kicking and screaming, into the 21st century.

I’m just saying that we have a problem - ultimately, with the belief system that underpins how big finance behaves - and we need to fix it.

...more AIG hilarity: Jake DeSantis, who "resigned" in a letter picked up by the New York Times, still works for the company. What a bunch of WATBs who want to rule the universe in secret like the good old days instead of under public scrutiny.

The Bondholder's Gamble

President Obama characterized the withholding of funds to GM as a chance to give them 60 days to submit plans for further restructuring, but clearly he has already decided that he would rather try an accelerated bankruptcy to force haircuts on all the key stakeholders. It looks like that will take the form of a good GM and a bad GM.

The Obama administration's auto task force has pressed General Motors to consider a form of bankruptcy that would split the company in two, with one entity containing the unprofitable units and the other in essence becoming the new GM consisting of the company's more successful brands, people familiar with the matter say.

The company prefers not to ever enter bankruptcy because the mere word would stir fear among consumers and further damage sales. But GM will be forced to do so if it fails to win concessions from its bondholders, union and dealers within 60 days. Then bankruptcy court would compel GM stakeholders to make sacrifices, rehabilitating the company by clearing away billions of dollars of debts from its balance sheet.

"They're all options. They're all being studied," Kent Kresa, GM's new chairman, said in an interview. "The preferred [option] is to do it outside of bankruptcy."

You would think this would be the last outcome sought by the bondholders, as their stakes would be crammed down in a bankruptcy court. However, I wondered earlier whether they think they have a better shot from a judge than from a negotiation. And Autoblog reports on another potential reason - they could cash in their credit default swaps.

The bondholders appear to be the biggest obstacle to restructuring. They're not allowing GM to reach its government-mandated target for debt reduction because they would lose much of their investment in the process. According to Denninger, however, the biggest and most savvy of those bondholders could get 100% of their investment back if GM files for bankruptcy. Those bondholders would have had their bonds backed by credit default swaps (CDS), which Denninger supposes would have been written in large part by insurance giant AIG. If that's the case, then we the taxpayers are on the hook to repay 100% of those bonds because the government has agreed to fulfill AIG's CDS collateral obligations.

Thus, these particular bondholders would have no reason to help GM stay afloat by reducing its debt obligations. If GM goes under, they would just wait for checks from the government to be made whole again. Denninger goes on to say that in such a scenario, these bondholders could make even more than 100% of their investment back because the government backing takes place "even if the bonds have a recovery in bankruptcy." The only way to stop this would be for the government to decline to back any more AIG obligations, which could then bankrupt the "too big to fail" AIG depending on its ultimate exposure, but would save GM. Decisions, decisions...

Wow. Just, wow.

Stop The Legalized Theft

Alan Grayson has a controversial idea: rich corporate executives should stop stealing public money.

I introduced a bill - the 'Pay for Performance Act' - to put an end to this theft. It's on the House floor today. It bans unreasonable and excessive pay to employees of financial institutions that are running on taxpayer money. The bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure. If the government owns a chunk of a bank, that bank must pay its employees reasonably, and all bonuses must be performance-based.

But first, let's be clear about what has happened. The government owns stakes in many companies through the TARP program, and Congress tried to put executive compensation restrictions on those companies. Big banks, though, were able to carve out an exception for any contract signed before February. AIG executives drove a truck through that exception and stuffed their pockets with our money. This bill closes that loophole [...]

Everyone agrees that Congress must act to reign in these excesses. These bad banks have come close to destroying our economy. They did so to enrich the small group of employees who made horrible, and in some cases, illegal bets. Calling these bad banks "casinos" is a disservice to casinos, who must actually by law hold money to back all the bets they've taken in. Calling these con artists "bank robbers" is a disservice to bank robbers, who can only steal as much money as the bank holds at the time, without tapping into taxpayer funds, too.

It's time for action, and Congress is acting.

Jane Hamsher has the rundown of the conservative howling on the floor of the House. I believe there's a case to be made that the government shouldn't be setting compensation targets for private firms. But the sad truth is that none of these firms are private anymore. Many are almost completely reliant on public money, and so long as the government is a top shareholder, they ought to be able to set the rules to protect their investment.

London is overrun with protesters right now, with thousands of people demanding a change to the rules of global laissez-faire capitalism which have nearly destroyed this economy, and Republicans can go ahead and stick their fingers in their ears and choose not to hear it. I would not advise the Obama Administration to do the same, however. And there are some very disturbing signs. Picking as number two at Treasury the guy who wrote the law deregulating the banks, for example. And putting the taxpayer on the hook for several trillions of dollars solely to save the financial system, often in total secrecy, too. Joseph Stiglitz' op-ed today gets right to the point:

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency [...]

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Even if this thing works in the short term, we will have lost because the behemoth of the financial sector will be restored to its former glory. The need is to restructure and re-balance the economy.

...Grayson's bill, the Pay For Performance Act, passed the House by a vote of 247-171. Check out Grayson's floor speech. "We should not be paying arsonists to put out his own fire." Nice.

Taibbi FTW

Earlier this week, Jake DeSantis, an executive at the AIG Financial Products division, quit, and published his resignation letter in the New York Times. Matt Taibbi has the ultimate response.

DeSantis has a few major points. They include: 1) I had nothing to do with my boss Joe Cassano's toxic credit default swaps portfolio, and only a handful of people in our unit did; 2) I didn't even know anything about them; 3) I could have left AIG for a better job several times last year; 4) but I didn't, staying out of a sense of duty to my poor, beleaguered firm, only to find out in the end that; 5) I would be betrayed by AIG senior management, who promised we would be rewarded for staying, but then went back on their word when they folded in highly cowardly fashion in the face of an angry and stupid populist mob.

I have a few responses to those points. They are 1) Bullshit; 2) bullshit; 3) bullshit, plus of course; 4) bullshit. Lastly, there is 5) Boo-Fucking-Hoo. You dog.

There's the big piece of fiction, that DeSantis knew nothing about the exotic financial deals at his 377-person unit, but had to be retained (and compensated with a bonus) to unwind those very same exotic deals. Then there's this other fiction that DeSantis and other Wall Street bonus babies could have gotten all kinds of other good offers from competing firms, even though half of Wall Street is out of work at the moment. But Taibbi focuses on the third argument:

But all of this is really secondary to the tone of DeSantis' letter. He acts like he's a victim because he didn't get to keep his after-tax bonus of $742,006.40 in the middle of a global depression. And he really loses his fucking mind when he writes:

"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."

First of all, Jake, you asshole, no plumber in the world gets paid a $740,000 bonus, over and above his salary, just to keep plumbing. Second, try living on a plumber's salary before you even think about comparing yourself to one; you're inviting a pitchfork in the gut by even thinking along those lines. Third, Jake, if you were a plumber, and the electrician burned the house down -- well, guess what? If you and that electrician worked for the same company, you actually wouldn't get paid for that job.

Out in the real world, when your company burns a house down, you're not getting paid by that client. It's only on Wall Street, where the every-man-for-himself ethos is built into an insanely selfish and greed-addled compensation system, that people like you expect to get paid in a bubble -- only there do people expect their performance bonuses no matter how much money the shareholders lose overall, no matter how many people get laid off after the hostile takeover, no matter how ill-considered the mortgages lent out by your division were.

That sense of entitlement has sparked the public anger. It's part of a mindset that assumes the virtue of selfishness and striving for the most dollars as an end in itself. It leads to perversities like Goldman Sachs bailing out their own executives even while the company was being bailed out themselves. It leads to self-interest being valued over the public interest. And it's led, in a very real sense, to the current crisis.

Two Of A Kind

I don't think it's possible to improve upon this Digby post, so I'll just offer an excerpt.

Read this petulant whine from someone who made a $750,000 bonus from AIGFP and feels so hurt and betrayed by all the mean things that are being said about him that he's going to quit and give his bonus to charity. No word about whether he thinks he should get his charitable deduction, but I'll bet he'll scream bloody murder if he doesn't get it.

This person said that despite the fact that he worked for AIGFP he was in the commodities division and had nothing to do with the CDOs and is, therefore, blameless. And for all I know, that's true. But what he seems not to want to recognize is that the whole company would have gone down without the government intervening and he would have been left with nothing. It happens every day. Bonus contracts with bankrupt companies really aren't worth the paper they're printed on.

This crisis in AIG required that people such as this, who admittedly made a ton of money over the years, work for very little for a time until they could get the company back on its feet. They might not be rewarded to the tune of 750 thousand dollars for a years work, but if they made arrangements for deferred compensation down the road, after the taxpayers were repaid, I have little doubt they would have made out very well in the long run. Instead they are having a public tantrum at a time when they should be keeping the lowest possible profile. (Why are we supposed to believe these people are so smart that thes ecompanies can't do without them, again? I keep forgetting.)

Not only that, but apparently all of the subsidiary businesses of AIG are in serious trouble and aren't profitable, so I'm struggling to understand how essential this guy's service was. All of the supposedly sound parts of the business are coming to the government for bailouts one by one, so the possibility of the whole enterprise going under, leaving this guy with nothing, was and remains very real.

Digby concludes:

The smart move for all of them is to shut up rather than whine publicly at a time like this. But corporate narcissists can't help themselves. All you have to do is think of names like Kenny Boy Lay, Jeff Skilling, Bernard Ebbers,Bernie Madoff, Joseph Cassanno and the list goes on, to know that this personality type is rampant among our Masters of the Universe. Rather than being the rational heroes of their Randian dreams (who would be smart enough to STFU at this moment) they are actually seriously screwed up human beings who found the perfect outlet for their disorder in our millennial gilded age.

Risk and growth are absolutely necessary for a dynamic capitalist economy. But this isn't that. This is an organizational and cultural disease and it's landed the economy on life support. These people either need to submit to the cure or be quarantined in their gated communities.

This personality disorder was further explored by Moe Tkacik today. The market goes up 20% and suddenly these creeps are cock of the walk again, telling politicians and the unwashed masses where to stuff it. In a New York magazine profile of Tim Geithner that Tkacik mentions, the sense of entitlement just breaks through your computer screen:

A lot of the pushback he's getting from Wall Street is about their lack of self-awareness about how the world has changed...They feel marginalized and put-upon by the administration's rhetoric about the greedy bankers...They see their taxes going up and their compensation going down. And what they don't do is go to the New York Times and say, 'My feelings are hurt. I don't like what the new president is saying about our character and our competence.' What they say is, 'These guys are incompetent, we need a real policy, the Treasury secretary has got an unsteady hand--he's not up to the job.' They're thinking one thing and saying something quite different."

It does pain my heart so to see their feelings hurt in all of this. After all, they only destroyed trillions of dollars' worth of wealth and very nearly the entire global finance system. They don't deserve a bad word.

Through this all I have wondered why the Obama Administration, but really why Barack Obama, a guy who spent two years talking to Americans all over the country who have essentially been traumatized by this behavior on Wall Street, someone who is able to talk about how an expanded middle class is the key to a stable economic future, could possibly take this bilge and decide to placate the investor class rather than knocking a two-by-four over their heads. I think Ezra Klein comes close to explaining it.

My sense of the situation is that this is the artifact of a fairly odd wrinkle in the Wall Street recruitment process: In recent years, the most constant talent pipeline has come from Ivy League schools where students had generally liberal politics and a background social conscience. They didn't, of course, have so much in the way of liberal politics that they decided to do turn down hundreds of thousands of dollars the very year they graduated college in order to do something that wasn't working at a hedge fund, but they have enough in the way of liberal politics that they wanted to find a way to quiet that gnawing sense that their life choices are increasingly defined by greed and materialism. As such, they often become very enthusiastic fundraisers for liberal politicians -- like Obama -- which in turn gave them some access and contacts in the eventual administration and assured some level of continuing communication when their industry became politically salient.

These are, in general, the folks Obama's staffers are talking to, and they are sympathetic to them: A Democratic-leaning high-achieving Ivy League economics major who decided to seek political success relates more intuitively to a Democratic-leaning high-achieving Ivy League economics major who decided to become very rich than he is to someone who isn't a high achieving Ivy League economics major with the ambition to excel in a high profile industry. I'm not sure how to correct for it or what the precise impact is, but there's a class sympathy that's been evident in the response to this crisis -- oh, don't take their bonuses, they did nothing wrong -- and will continue to affect the federal response.

Not to totally put Obama on the couch, but this makes sense to me. Aside from racial and even class divides in this country, there remains a socio-cultural divide, where those high-achieving Ivy Leaguers of a certain age have a certain kinship to one another, and seek to understand their concerns perhaps more than someone not of that world. The rub being that the recent past shows us that high-achieving Ivy Leaguers, by and large, run the government, and so that perspective will be reflected in policies well into the future.

Goldman Will Shut It Down

As exasperated as I am with Congress, they do seem to know how to investigate, if they don't always get the follow-through right. And they seem to be looking in the right places. For instance, Elijah Cummings wants to know about the counter-party payments from AIG:

He's currently circulating (and I have obtained) a letter to colleagues, seeking their support for a TARP inspector general investigation into every aspect of the payments AIG made, with government money, to counterparties whose risky investments it had insured.

"Goldman Sachs claimed in September that they had no material exposure to AIG; however, after AIG released the counterparty information on March 15, we found out that Goldman Sachs received almost $13 billion in counterparty payments.

The Special Inspector General for the Troubled Assets Relief Program was created to ensure that transparency and accountability stay firmly rooted in the government's efforts to revive and sustain the American economy. This letter proposes that the Special Inspector General examine the nature of the counterparty payments - including the recipients, the process by which they were made whole, and the justification, if any, for that level of payment."

In addition, investigators for the House Oversight Committee are delving into Joseph Cassano, the former head of the AIG Financial Products unit and essentially Patient Zero of the global financial crisis.

Investigators for the House Oversight committee intend to interview Cassano about his role in the firm's collapse, and have already contacted his lawyer, a committee staffer told TPMmuckraker.

As CEO of AIG Financial Products, Cassano, based in the unit's London office, was the prime mover behind the credit default swaps, whose implosion brought the firm to its knees. He stepped down in March 2008, signing a $1 million-a-month "consulting" contract with the firm. (The contract was canceled last September.)

Federal investigators, as well as Britain's Serious Fraud Office, are also probing AIGFP. The Feds are reportedly focused in particular on whether Cassano and then-AIG CEO Martin Sullivan made false or misleading pubic statements about the company's potential exposure to losses on its credit default swaps. A December 2007 shareholder presentation the two men made is said to be of special interest.

The focus appears to be those counter-party payments from AIG, and how they made big international banks whole on their CDS bets. What worries me is that all roads lead to Goldman Sachs, which clearly has its tentacles around the Administration. Goldman vowed yesterday to return all the TARP money it received while neglecting to mention that they received even more government relief from AIG and other sources. And Goldman is a linchpin to the Geithner plan for toxic assets:

Tim Geithner suggested that Goldman Sachs could be one of five institutions helping to manage the public-private partnership program to buy up a bunch of toxic legacy assets from ailing banks.

Goldman has played a central role in this drama. As an institution, it's been extremely close to the Treasury department. And, as Josh noted, it's also about to pay off all of its TARP money (with the help, perhaps, of the other government money it received as an AIG counterparty) which will free it up to return to a status quo of paying enormous bonuses.

It's also, of course, one of the institutions that helped bring the financial system to its knees--it holds many of the toxic assets in question and may be well placed to bid them up and inflate their prices at auction. (How you manage the fund to rescue financial institutions with toxic assets while you yourself hold those same assets has yet to be sussed out by committee members.)

My point is that Goldman may be the eventual white whale for Congressional investigators, but the Treasury Department as currently structured will work overtime to shield them from any harm.

Sigh.

More Regulatory Authority? How About Using What You've Got

At their joint hearing with the House Financial Services Committee, both Tim Geithner and Ben Bernanke advocated for regulatory authority over non-bank financial institutions. I'm trying to get a handle on this. First of all, the investment banks all went under this past fall, so Goldman Sachs, under current law, is a bank. JP Morgan is a bank. So is Merrill Lynch. AIG stands out as the exception to the rule, but regulating their PRODUCTS would seem to be the key, not granting emergency authority to seize them. What's more, states regulate insurance companies, and while I think there ought to be a federal overseeing authority, that could get messy. And as you'll read below, the financial products unit did have federal oversight. Then there are hedge funds and the like, but again, I see the regulatory needs in the product line and not necessarily the ability to seize. FWIW here's Bernanke's argument:

The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG's pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.

Yves Smith sounds the right notes in her skepticism.

AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG's when its own agency was responsible for the doomsday machine part of AIG.

And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act [...] The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions [...] Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.

After the events of last week, Congress has little appetite for giving Treasury or the Fed more authority. Steny Hoyer shot it down today. Regulations are nice, but regulatory will appears to be what's lacking here, and giving the same people who want to bail out the whole sector with no strings attached more power doesn't seem advisable.

Give Us Free Money Or We'll Shoot This Economy

Pretty much cementing his status as New York State's next governor, Attorney General Andrew Cuomo has clawed back a significant portion of the AIG bonuses. I imagine this takes the Senate and the President off the hook, at least in their mind, to pass the House's bonus tax bill.

The New York State attorney general, Andrew M. Cuomo, said on Monday that he had persuaded nine of the top 10 bonus recipients at the American International Group to give the money back, as the Senate retreated on plans to tax such bonuses.

Mr. Cuomo said he was working his way down a list of A.I.G. employees, ranked by the size of their bonuses, and had already won commitments to pay back $50 million out of the total $165 million awarded this month. But in a reversal of the stand he took last week, he said he did not intend to release any names.

“If the person returns the money, I don’t think there’s a public interest in releasing the names,” Mr. Cuomo said in a conference call with reporters.

In Washington, the Senate majority leader, Harry Reid, said that efforts to recover bonuses like the ones at A.I.G. through punitive taxes would be delayed. Other officials said momentum in Congress had slowed considerably, given misgivings voiced by President Obama.

Cuomo expects something like $80 million to come back to the US government once this is all said and done. Economic problem solved!!!

I hope the larger issue doesn't vanish, that the compensation system on Wall Street distorts outcomes, and the size of the financial sector relative to the economy makes no sense for an industrialized nation. The bonuses, and the particular bonus tax bill, are entirely besides the point.

But this story from the WSJ suggests that the Big Money Boyz got Obama and his team in a room and unfurled a movie screen and played the Kennedy assassination from an angle they've never seen before*.

In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets.

But weeks of searing criticism by politicians and the public had left bankers leery of working with the government. After brainstorming about what to do about that problem, the White House resolved to try to take control of the debate, according to several administration officials. In weekend television appearances, President Barack Obama and other administration officials tempered their criticisms of the financial sector.

Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. They told executives they don't favor using the tax code to retroactively penalize specific individuals who had received bonuses, according to people familiar with the calls. They asked officials to sign on "in pencil, not ink," and to "validate" or "express support" for the plan, these people say.

Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.

The banksters have a gun to the head of the executive branch. There's no other way to say it.

* - h/t to Bill Hicks.

P.S. Maybe those Wall Street tycoons should get themselves to France, where the Parliament has introduced an executive-pay limit law after businesses failed to accept a voluntary agreement. The difference being that French politicians actually pay attention to their citizens.

The Truth Behind The Armchair Constitutionalists

Whenever I hear media stars like Lawrence O'Donnell and Howard Fineman pontificating over whether something is Constitutional or not, I get extremely wary, particularly considering they have spent several years arguing about detainee policy and wiretapping and torture in mostly POLITICAL terms instead of the constitutional aspects. Suddenly when Congress tries to set tax policy toward a particular class of wealthy people the media gets out their social studies texts. I imagine there can be a fair amount of reasonable argument around this, but Scott Lemieux, claims the Constitutional concerns are groundless.

Ed -- regrettably echoing the hapless Charles Krauthammer -- says that "Bills of attainder" and "ex post facto" are two phrases well-known to high school freshmen taking mandatory civics classes, so they must certainly be known to Congressmen." The ex post facto clause, however, has been held since the early 19th century to apply exclusively to criminal cases. The prohibition on bills of attainder is even less relevant; it certainly prohibits Congress from convicting AIG traders of criminal offenses without a trial, but says absolutely nothing about Congress's ability to set tax policy.

Another blogger, in addition to the clearly erroneous claims, asserts that the bill violates the equal protection clause. The obvious problem with this argument, however, is that it proves too much. The tax code discriminates in countless ways -- against renters and wage earners and in favor of homeowners and investment income earners, for example. It was been well-settled for decades that such discrimination require only some rational relationship to a legitimate government interest. The policy taxing bonuses for corporations that would have gone bankrupt without public support bears a much clearer relationship to a legitimate public objective than a law preventing anyone but an optometrist or ophthalmologist from putting lenses in glasses frames, which the Supreme Court upheld unanimously.

The debate about whether a large excise tax is good public policy ought to go forward. But let's be clear what these Constitutional questions are all about. The average salary of practically everyone you see on the teevee is well beyond the national average, and in most cases beyond the $250,000 a year cited in the House bill, and used as a dividing line in Obama's budget to reset marginal tax rates from 35% to 39%. And so, for Overton Window purposes, characterizing any effort to reduce income inequality as unconstitutional makes a whole lot of sense. Take a look at Mark Haines, CNBC's latest hero, arguing that no company can be "run well" by anyone making under $250,000 a year. Because they've been run so well by the overclass to this point.



Here's a separate interview between Haines and Rep. Brad Sherman (D-CA):

HAINES: It does not go far enough, sir?

SHERMAN: Absolutely -- it doesn't deal with the Merrill Lynch bonuses, since they were paid in December, and worse than that it doesn't deal with million-dollar-a-month salaries. More importantly, we should have AIG in receivership, they should've been put in receivership months ago, and we would have saved tens of billions of dollars. We wouldn't see tens of billions going to the richest on Wall Street, and overseas -- and of course, these bonus contracts would have been voided. We need receivership, and we need limits on salaries as well as bonuses.

HAINES: Well, receivership ... I think most people agree, that would have caused some systemic problems.

SHERMAN: Most people on Wall Street agree. But most people on Main Street do not.

HAINES: And what do the people on Main Street know about running a financial system?

SHERMAN: What do AIG executives know about running a financial system? [crosstalk] They only know how to destroy one.

HAINES: This is witch-huntery. I'll be perfectly honest with you.

SHERMAN: We don't have to hunt the witches. We know who they are.

HAINES: You and people who share your opinions seem to think, you know, let's hold salaries on Wall Street to $100,000. Do you have any idea what Wall Street would look like if you do that?

SHERMAN: Well, first of all, I wouldn't set the limit at $100,000.

HAINES: Well, whatever. $250[,000]. All the business would go -- all the business would go overseas, that's the bottom line.

SHERMAN: Obama's position is $500,000 plus unlimited restricted stock. That's where I'm at as well, although I was actually at a higher level before Obama's statement. But for you to assume that Wall Street is acting in the national interest flies in the face of recent reality.

There's a multi-pronged attack here. Congress cannot tax exorbitant bonuses of companies they bailed out because it's unconstitutional. Corporations can only be run well by the rich because greed is virtuous. Only investor participation can save the financial system, so government had better not get any ideas about capping executive compensation. And those executives must be kept happy and lavished with gifts because they are so wise in the ways of exotic financial instruments that they are the only ones who can defuse them, a fairly ridiculous idea.

Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.

In South Korea, cozy relationships between banks and the large conglomerates called chaebols were a major reason for the crisis. But after the crisis hit, Korean bankers and companies insisted that the complexity of chaebols like Samsung and LG — with their many separate but interwoven businesses — meant that outsiders would not be able to distinguish good loans from bad.

In Thailand, some argued that the preponderance of family-owned businesses — and the lack of clarity about precisely which family members were really in charge — meant that only bankers already working in big institutions like Bangkok Bank and Siam Commercial Bank could determine which borrowers were creditworthy.

The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses.

We have a major inequality problem in this country. Wages for workers have stagnated while the rich grow ever richer. It is well within the public interest to address that, and because this has become so extreme as to affect consumer spending and economic activity, it's more vital now than ever. Wall Street has decoupled salary from performance and perpetuated a culture of greed in the belief that such greed made sense for the overall economy. But an oversized financial sector that produces nothing but imagined wealth actually debilitates a country. Simply put, astronomical profits from making side bets on the economy should be discouraged, making the same profits from inventiveness and innovation would be encouraged in the exchange.

If it turns out that you can make a comfortable living at zombie institutions but can’t earn big bucks there, then smart, confident, ambitious, greedy people will leave their jobs and go do other things. In a good way! Maybe they’ll start small businesses. Maybe they’ll join non-enormous, better-managed firms and help them grow and prosper. That’s the kind of thing smart, confident, ambitious, greedy people ought to be doing. Putting their talents to work in the pursuit of profitable market exchanges. Not putting their talents to work trying to run scams at taxpayer expense.

There are promising signals that the Administration is taking concerns about executive compensation seriously, although there are far better ways than having a secretive institution like the Federal Reserve "oversee" giant corporations (which they failed to do in the run-up to this crisis). Perhaps one way is to actually tie pay to performance through Silicon Valley-style compensation schemes, but the best way is through the tax code with rates at the highest marginal levels (I'd insert an additional rate above $1 million or more) that look more like the pre-Reagan era. Which is why those who wed themselves to the establishment elite get so nervous with clawback provisions like the AIG bonus tax. They don't want anyone in Washington getting any funny ideas about marginal tax rates. After all, it's unconstitutional.

Why Not Anger?

Shorter everyone who presumes to speak for everyone: This rabble-rousing is sure making it harder to continue with our legalized theft!

I don't want to completely dismiss the pushback from those who find the public anger over the AIG bonus babies distasteful. Without question, the larger scandal concerns the counter-parties and the use of AIG as a conduit to reward multinational banks, especially because the company made the counter-parties whole instead of forcing them to take a haircut. Joe Nocera makes additional good points. But whines that people are angry about the wrong thing hardly obscures the fact that people ought to be angry, extremely angry, at the hash financial, political and media elites have made of our collective economic well-being.

This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing.

It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments.

While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying.

Consider that AIG is currently suing the federal government, which owns the company, for the return of $306 million in tax overpayments. I don't see these same elites shaking their heads soberly at AIG for their "populist anger" at trying to get $300 million from the entity that handed them $185 billion. Oh yeah, and with the real amount of the bonus increasing (now it's $218 million), before long the amount in bonuses and the amount requested from the government in tax overpayments will be equal, I'm willing to bet.

I agree that the fact that populism moved the House to pass the admittedly crude excise tax bill represents a great hope that finally, politicians are more worried about the public perception than their standing among the elites (the Senate remains out of reach, but only for now). People understandably reject a government and an economy owned by elites, and desire a voice in their affairs again.

And that's the point: only this true, intense, and -- yes -- scary public rage can serve as a check on ongoing pilfering by the narrowed monied factions who control our Government for their own interests and who otherwise have no reason to stop. Who else is going to impose those checks? The bought-and-paid-for, incomparably subservient, impotent and inept Congress? The establishment-loyal, vapid political press? An executive branch run by the very people who are most vested in, dependent on, and loyal to the financial system that produced these disasters? Only a healthy fear of the populace -- exactly what has been missing -- can achieve that.

Now rage can lead to bad outcomes, but I struggle to see how it could be functionally worse than the society of the pwned in which we live currently.

Lucian Bebchuk and Dean Baker have more.

Dodd Held Hostage

I really feel bad for Chris Dodd getting caught up in the populist fury over AIG, in a way that is truly unfair to him. He wrote an executive compensation amendment for the stimulus. He was hounded by Treasury officials and Administration leaders to water it down, and wanting to keep at least some of the provisions in the bill he did so. There was no indication that AIG executives stood to benefit when he made changes to the bill. In fact, language that is LAW TODAY would still allow the Treasury Department to claw back bonuses if they found compelling public interest (which, according to Dodd, is happening as we speak). Despite the media and conservative jabber he's been completely consistent on this issue, the facts of which have been well-known for over a month. The flip-flop from the conservative business press, which a month ago were calling Dodd's amendment too restrictive and are now calling it a giveaway, is astonishing.

Here he is at a press conference today. Sadly, I'm not sure it'll be enough. The right was already smearing Dodd for a sweetheart mortgage he apparently received through Countrywide, and this offered another opportunity to pile on. Instead of the greater lesson that executive compensation is a festering problem that we must deal with (good again on Ben Bernanke for addressing that today), commentators are pointing fingers and deciding on Dodd as the scapegoat. "He gets all that campaign money from AIG!" No shit, so the chairman of the Senate Banking Committee gets campaign contributions from financial services interests? They apparently swayed him so much that he only offered an amendment to take all their bonuses away!

The end of Dodd's statement is particularly good:

"Standing in a community of my state, this isn't about my job, it's about their jobs. It's about their future and their children. And I'm not in the business of getting re-elected to office, I'm in the business of doing my job that I got elected to do. And I'm going to do my job."

I think he understands the reality, and that this all may cost him re-election. Scapegoating is a very easy and familiar action, but it doesn't make it right. And anyway, plenty in government knew about these bonuses. Talk to them for a minute.

Why AIG Matters

I didn't think it was necessary to spell out why $165 million dollars in bonuses for individuals who tore down their companies is probably a bad thing. But there does appear to be a mild backlash against the over-the-top nature of the public anger, including from White House officials. And given that the numbers are a fraction of one percent compared to the bailout money AIG took from the government (that will never get paid back) or the Fed's huge program to buy up mortgage-backed securities, they may have a point. So, OK.

Obviously there's a political importance because the nation is following the issue so closely. But far more essential than that is how this is tied to income inequality and the stratifying gap between the rich and poor. Kevin Drum is absolutely correct to note that the standard practice in corporate boardrooms is to call bonuses a reward for performance right up until the moment that the performance tanks, at which point they become necessary for retaining talent.

Of course they got their comp locked down when they saw the storm ahead of them. This is what executives always do. Back during the dotcom bubble, corporations handed out trainloads of cheap stock options even though the practice was heavily criticized. Why? Because the stock market was going up and it was a nearly guaranteed way to make lots of money. After the bust, they suddenly took the criticisms to heart and largely stopped the practice. Why? Because the stock market was going down and it wasn't easy money anymore [...]

What happened at AIGFP is standard practice throughout corporate America. America's corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it's not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.

The AIG traders who got this sweetheart deal are nothing special. Management probably didn't even think twice about it. Of course you switch from performance bonuses to retention bonuses when the market looks stormy. What else would you do?

The decoupling of risk and profit is the issue here. Corporate titans never rise and fall on the merit of their superior intellect, and there has been a great shift to mke sure profits, both personal and corporate, are kept in private hands, while the risk is socialized. When times are flush nobody really cares about or at least pays attention to this; when the same people who wrecked the economy feel entitled to their ungodly profits, people get understandably upset.

And the tone-deafness on this from the Administration, therefore, while striking, does not surprise. The Treasury Secretary is now admitting that he asked Chris Dodd to take out the executive pay caps from the stimulus. His rationale? "We wanted to make sure it was strong enough to survive legal challenge." Actually, they wanted to make sure Wall Street didn't pull the pin out of the grenade.

If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains?

"It would become the biggest naked position on Wall Street," one longtime Financial Products executive said, "and everybody would exploit it." [...]

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

The sense of entitlement to a system that rewards them regardless and shovels massive amounts of money and power in their direction. Heck, we learned today that 13 bailed-out companies owe $220 million in back taxes and lied to Congress about it. OF COURSE they did. That's the system they've created - protections for their corporate bottom line, riches for them personally, crumbs for everyone else. Reaganomics basically set this in motion 30 years ago, and the system has been in place for so long that any alternative path is like the true forms on the outside of the cave instead of the shadows on the inside we think represent reality. But the public knows intuitively that they've been getting a raw deal for decades, and the bonuses are only a small part of the story.

James Galbraith has an amazing piece about the limitations of the Obama economic team to reinvent a new economic ideal, rewarding work instead of wealth, returning the business of finance to its narrow role of facilitating capital flows, etc.

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) [...]

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work [...]

The government must take control of insolvent banks, however large, and get on with the business of reorganizing, re-regulating, decapitating, and recapitalizing them. Depositors should be insured fully to prevent runs, and private risk capital (common and preferred equity and subordinated debt) should take the first loss. Effective compensation limits should be enforced—it is a good thing that they will encourage those at the top to retire. As Senator Christopher Dodd of Connecticut correctly stated in the brouhaha following the discovery that Senate Democrats had put tough limits into the recovery bill, there are many competent replacements for those who leave.

Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now [...]

This cannot be made to happen over just three years, as we did in 1942–44. But we could manage it over, say, twenty years or a bit longer. What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to "normal," no going back to a world run by bankers—and no alternative to taking the long view.

The AIG scandal represents a reminder of the way things WERE, when Masters of the Universe ruled the world and dared anyone to challenge them. There are raw economic benefits to getting executive compensation under control - the economic burst that would come from a steep reduction in the inequality gap, with a concurrent stronger middle class, reindustrialization, and the rise of labor unions. But there are even bigger implications. It means wresting control over our country away from the ones who ruined it, who are trying to threaten, cajole and intimidate their way into maintaining control. For two years a campaign captivated America with the promise that the people have power, that mass collective action can create change. But we don't. And the bonus babies have proved it. Now there's a choice, that policymakers will eventually have to make but which can be pressured from the bottom.

Who runs this country?

Republicans In Disarray

They had no idea what to do. Vote yes and turn away from antitax ideology and upset almighty Limbaugh. Vote no, and wind up on the wrong side of the public, whose anger is palpable.

The answer? They split almost exactly down the middle on taxing bonuses for executives who received TARP money. The vote was 328-93, with 85 Republicans for it, and 87 Republicans against it.

Beautiful. Who knew this could be a wedge issue? I knew that Republicans had a long record of opposing executive pay caps, but turning on a dime never bothered them before. Meanwhile, even the efforts to blame the Obama Administration for the bonuses are becoming complicated:

Bloomberg News reports that Neil Barofsky, inspector general for the Troubled Asset Relief Program (TARP), told the House Ways and Means oversight subcommittee today that the Bush administration “specifically contemplated” paying bonuses to AIG employees in its November agreement to provide federal bailout funds to the failing insurance giant:

The TARP contract between AIG and Treasury “specifically contemplated the payment of bonuses and retention payments to AIG employees, including AIG’s senior partners,” Barofsky said.

I'm somewhat agnostic on this legislation - hopefully it begins the process of dealing with compensation rather than ends it - but Republicans have no idea how to deal with this.

Watch The GOP Blow This

House Democrats offered the excise tax for bonuses from firms that took TARP Money, the "Stuff AIG Act," and based on the chatter on the floor this morning, it looks like the Republicans will block it, which is frankly AMAZING. Because the bill came up without a rule, it requires a 2/3 vote, so this is a rare opportunity for House Republicans to obstruct and they can't miss out on that. But with the country pretty dead-set against AIG execs keeping their bonus money, you have to wrack your brain to think of a stupider position that allowing the bonuses to go forward.

Looks like the Republicans may throw their weight against the TARP bonus tax.

Yep. Boss Limbaugh has issued his veto, and the GOP pays fealty.

But talk about trying to have your cake and eat it too! Limbaugh says they have to reject the bill as excessive, but Republicans are afraid to do that. Despite being idiots, they're not idiots.

So what's the hook? They oppose the 90% tax, they claim, because... it's not 100%!

Yep. That's actually it. That's what Boehner just said on the floor.

Republicans are upset because they wanted higher taxes. Mark your calendars [...]

Not looking good. Simply not enough GOP votes to get this through, so far. Sometimes they don't come to the floor to speak when they're afraid, so there could be some hidden GOP votes out there, hiding from Boss Limbaugh. But we'll need about 60 of them.

Just hilarious. The ads write themselves.

Check out team laundry collector Eric Cantor this morning unable to commit to any solution, wanting to sound all fiery and populist but without a clue how to actually produce:



When faux populism runs up against bank lobbyists and rigid ideology, I think we can divine who wins. Somehow they believe they can turn this into a confiscatory taxation issue. Um, allow me to let you in on something: nobody in the country cares if AIG executives have to pay a lot of taxes. I mean, good luck with it, I'm sure you'll be just as successful as you were in the 2006 and 2008 elections, but here on Planet Earth, the proper political move is clear.

Late on today I can explain why bonuses representing a pittance of the overall bailout matter. For now, let us savor the implosion of the GOP, who found a nicely wrapped present under their tree and threw it in the garbage.

...Barney Frank said this two years ago during a similar vote on the Executive Compensation Act, which gave shareholders more say over CEO pay. It applies today:

I often disagree with my colleagues on the other side, but I have rarely been as baffled by the illogic of their arguments as I am today. I do not recall the last time I heard such a hodgepodge of inconsistency and innaccuracy. This is a bill that has been condemned for being A) bullying and intrusive and B) toothless. The toothless bully is, I guess, a new concept.

...Grover "Thou Shalt Not Tax" Norquist:

Grover Norquist, the top anti-tax activist in the Republican Party, has given ABC an answer about whether Republicans can vote for the AIG-bonus tax and still be in accordance with the anti-tax pledge that the vast majority of them have signed with Norquist's group, Americans for Tax Reform.

The answer: Yes, you can -- but only if it includes additional offsetting cuts in taxes or spending, too. Norquist seems to acknowledge here that the AIG tax is itself a kind of spending decrease -- the government is taking back money it already spent -- but he wants more tax decreases, too.

"If your goal is to recoup the resources that you've given people that you hadn't thought would be spent this way, you can make it not a tax increase simply by having an offsetting tax cut on honest taxpayers," Norquist explained. "Or you could do the same thing by cutting the amount of money that you were going to give AIG in the next tranche that they'll demand, so you can have the withdrawal of the resources done in less spending."

Regardless of the particular matter at hand, it's fascinating to watch Republicans drown in a pit of their own ideology.

Dodd Was Pushed - Who Pushed Him?

Chris Dodd's "admission" that he was asked by unidentified Administration officials to take out the limits on executive compensation and bonuses from the stimulus package is being treated like a bombshell, for reasons which escape me. Let's start with his statement (via email):

“I’m the one who has led the fight against excessive executive compensation, often over the objections of many. I did not want to make any changes to my original Senate-passed amendment but I did so at the request of Administration officials, who gave us no indication that this was in any way related to AIG. Let me be clear – I was completely unaware of these AIG bonuses until I learned of them last week.

Reports that I changed my position on this issue are simply untrue. I answered a question by CNN last night regarding whether or not a specific date was aimed at protecting AIG. When I saw that my comments had been misconstrued, I felt it was important to set the record straight – that this had nothing to do with AIG.

Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers. Again, I have led the fight to curb excessive executive compensation, and will continue to do so.”

Dodd is classier than whatever Administration official tried to rat him out on this. But the fact remains that Dodd devised the amendment capping bankster salaries, authored it, got it passed through the Senate, and then someone in the White House asked him to nix part of it, which he did, reluctantly, while keeping in the forward-looking language. And by the way, this was all public knowledge in the run-up to the conference committee on the stimulus. I fail to understand how there could be a grand conspiracy on such a well-covered subject.

The only question that remains is: Who?Who asked Dodd to take out the amendment?

The anti-bonus provision has been the subject of several posts in the liberal blogosphere today, after an anonymous administration official was quoted in the New York Times Sunday appearing to place the blame on Dodd for the weakening of the language.

Jane Hamsher cites two contemporaneous articles on the stimulus that identify top administration opposing to Dodd's original, tougher language. This one from the Wall Street Journal reports that Timothy Geithner and Lawrence Summers "had called Sen. Dodd and asked him to reconsider."

And this one, from The Hill, says President Obama himself wanted changes in the provision.

If those reports -- both anonymously sourced -- are accurate, contacts with Dodd occurred well above the "staff level." Something tells us we'll be hearing more about this.

The reporters from the WSJ and The Hill who anonymously sourced their stories could actually shed the most light on this by simply giving up their sources, but of course that's not going to happen. So we wait. Tim Geithner or Larry Summers have an opportunity to clear their names as well.