What Did Geithner Know and When Did He Know It?
I’m with Jane.
I do not think that anyone understands that some Rube Goldberg model, where we pay out a billion in bonuses, and then try to get the money back in taxes, is going to be a winner. But that appears to be what the administration wants, because both Nancy Pelosi and Barney Frank are saying the same thing. Then again, we’re talking about a bunch that thought this wouldn’t be a big problem in the first place, at least not one they couldn’t solve with faux "outrage" and blaming Chris Dodd.
I’m fairly confident they’ll have a chance to rethink this in the near future — somewhere around the time Tim Geithner’s "I knew nothing" story crumbles. The only question is how much public rage they’ll have to suck up before they face that reality. [my emphasis]
The Administration is shortly going to be dealing with the uncomfortable job of admitting Tim Geithner knew a lot more about bonuses a lot earlier than he has let on.
And while news outlets like Time are chasing down precisely when Geithner learned the details of AIGFP bonuses, I’m more interested in an earlier round.
As Elijah Cummings described in the waning moments of yesterday’s hearing, Edward Liddy approved a round of retention payments back in September.
On September 18, 2008 AIG’s compensation committee of the Board of Directors approved retention payments for 168 employees.
Cummings’ point is important, because it shows that, however distasteful Liddy may find paying off the banksters who broke the world economy, he’s willing to pay retention bonuses himself, even at a time when AIG was engorging itself on the federal teat.
But the retention contracts negotiated in September also put them squarely in the time when Tim Geithner was intimately involved in bailing AIG out. We learned yesterday that he recused himself from matters pertaining to AIG once he was picked to be Treasury Secretary (that nomination was announced on November 24). But back on September 18, when this round of bonuses was approved, Obama hadn’t even won the election yet, much less picked Geithner to be Treasury Secretary. Back on September 18, Geithner was in charge of the well-staffed (his current excuse–that he’s not staffed up yet, doesn’t work here) NY Fed, and in charge of negotiating this bailout. Back on September 18, Geithner was one of the people at the Fed–the entity which, Liddy told us yesterday, channeled all communication regarding bailouts–working closely with AIG.
I appreciate that the bonuses are, to some extent, a shiny object. But uncovering how those bonuses got approved is going to get us to how the bailout of the big players got approved, too.
From everything we’ve learned about AIGFP, these bonuses were not the exception to some rule, but one in a series of crazy deals strung together by the putative MOTU — this time with their one-time so-called bosses. With the interconnectedness of the various branches of AIG, including the ridiculous notion of one arm handling the re-insurance for another, I’d bet these bonuses are NOT one bad apple, but a symptom of the systemic disease.
Instead of being a diversion, I suspect they are the first loose thread in a garment that’s ready to come apart at the seams.
I just can’t escape the feeling that all this high dudgeon about the bonuses is a form of misdirection from what we should really be looking at. Yah yah, I’m as disgusted as the next person about specious, lavish “merit” or “retention” bonuses for people who either fucked up or committed fraud royally, but the order of magnitude of the wastage is miniscule compared to where the rest of the money disappeared to.
oh duh. your last paragraph…yes
Agree 100%.
…
Fav quip of Pelosi presser: when Rangel asked why 90%… “what’s special about that number”, he said (from memory): “We figured the states would get back the remaining 10%.”
That was Elliot Spitzer’s point the other day.
And the tax thing may not work anyway since AIGFP is in London, unless we can get the Brits to pass similar legislation.
The problem with this whole business is the Fed. The Federal Reserve act of 1932 (Hoover) is what kept AIG alive in the first place (85 bn.) It was bad poplicy then and still is now. Those jokers have us all on the hook for something like 10 tn. Greenspan’s Randian fetish has fucked the world with him just Andrea Mitchell.
The FED people need to answer questions about recipients in public, screw the it would hurt the banks if people knew about them. Bernnake, Geithner and the rest of the robber baron protection racket should be appearing in congress and at a local grand jury near you. ( Along with Yoo btw )
All the players listed as too big to fail need breaking up.
I actually don’t blame Geithner nor Bernanke as much as I blame Paulson.
If I am correct that Paulson was behind bringing derivatives to Goldman Sachs, then he was Mr. Derivative, in the same sense that Ken Go-Go Lay and Sen. Phil How-Much-Would-You-Like-To-Leverage-Today Gramm were.
I still am of the view that while Geithner may not be perfect, he had to deal with Paulson, who seems like a phenomenally egotistical, grandiose person. Ufff.
My neighboring governor Mr Corzine would agree with your characterization of Paulson exactly. Him, along with Christopher Cox truly fucked up. And like degenerate gamblers they doubled down until they couldn’t make it back. So, they cheated and socialized their loses. I think one of the most annoying pictures of the TARP signing was of a jubilant Paulson pumping W’s hand. Geithner, Bernnake and the rest pretty much knew this, it was their social set after all.
Trivia quiz who was the guy who brought down Baring’s Bank in late 90’s from a trading desk in asia. hmmmm sounds kind of familiar here.
answer: Nick Leeson. He wrote the book on it Rogue-Trader. I wonder if any of these guys ever read his book.
The bonuses say a lot about the culture of Wall Street and finance, and it also says a lot about the huge overemphasis the US has placed on ‘capital’ (as opposed to labor or IP) since at least Reagan’s rise to power in 1980.
But the bonuses are really a metaphor IMHO.
And a distraction.
We don’t value teachers, cops, or businesses with sound, low, long term rates of return. We fleece them, using ‘capital’ to do it.
This is predatory capitalism, but the bonuses probably tell this story better than anything to date.
I agree. It will shine a bright light on facts that may suggest criminal as well as financial wrongdoing. No one’s giving up without making everybody go down. Being too big to fail, as Teddy Roosevelt concluded about Standard Oil a hundred years ago, is not something the American government should tolerate. As the saying goes, steal a thousand from the bank, they put you in jail. Borrow a billion and not repay it, you own the bank.
According to this source, Treasury urged the changes to the Dodd Amendment.
http://rawstory.com/news/2008/….._0319.html
Yep. A shiny object, but a symptom of the larger problem.
Why did Geithner get Treasury? My guess is that he was chosen to maintain the old guard while apprearing to represent something new. Same old, same old.
I state the obvious.
The thing is, the retention contracts were not negotiated last September. They were negotiated in January 2008 when AIG started closing down the Financial Products division and when AIG terminated its FP’s head, Joe Cassano.
The problem was, as I gleaned from Liddy’s testimony yesterday, the product that AIGFP sold was the key ingredients in those delicate bundles of derivatives, each unique and each requiring daily monitoring, with sales or purchases of small contracts in the markets on a daily basis to hedge AIG’s investments contained there. Failure to manage the these unique bundles on a daily basis would almost certainly lead to default.
Default would mean the loss of all funds invested in each bundle as well as truly horrific penalty payments for AIG. Each of those bundles represents a large investment of AIG funds that can be recovered with a profit only after the final contract ends, probably one, two or three years after the bundle was first created. If the bundle goes into default on any day prior to the end of the contracts, all is lost and penalties are charged. There is a single individual trained to manage each bundle from its birth to its grave, and if he leaves for another job at any time, default is extremely likely. No one else can step in and learn the job on the fly.
AIG realized by the end of 2007 that the risk to the firm that the Financial Products division represented was too great. They decided to shut it down. But there was a massive investment in the assets created, sold and managed by AIGFP. Worse, if those assets were not intensively managed on a day-to-day basis by specially trained experts, everything there would be lost and the defaults were more than large enough to take down both AIG and much of the world banking system.
The problem that existed in January 2008 was keeping the individuals who conducted the day-to-day monitoring and managing of each bundle from moving to other companies where their skills had some future. AIG was getting out of the business. To replace them, the training in financial derivative contracts had to be matched with someone who knew the derivative markets intimately in a hands-on manner (already not a large group of people), and then matched with specialized hands-on experience at understanding a single unique bundle of derivatives, each of which were especially designed by Cassano to protect the overall bundle from adverse changes in the market. I haven’t found out, but my bet is that the training of each hands on manager was something Cassano did for each bundle as he built it and sold the products in it. Those hands-on day-to-day managers were the glue that made the total package or bundle into an asset. Without that manager, each bundle was a guaranteed loss. So how do you keep that guy on the job through the end of the contracts in his bundle?
You give him a contract that pays a balloon payment once the bundle has reached its final contract date. In Wall Street culture, you call this a Bonus for staying until completion.
The guys who have completed fulfilling their contract have qualified for the balloon payment. They don’t get it until after they are finished performing the work called for in the employment contract, and once it is finished they move on to some place else that needs their training and experience. AIG doesn’t. They are closing down and getting out of that business. The payoffs are worth it. The services are completed before they get the payoffs. If they don’t stay and finish the job, no payoff.
AIG may have offered too great a balloon payment, but remember, this was written in January 2008. The streets on Wall Street were still paved with Gold. Moving on for more money was easier then. I’m sure the top AIG managers felt that it was cheap protection for their investments in the derivative bundles to guarantee that irreplaceable individuals stayed until the job was finished. Overpaying a little at that point was not out of line. In fact, I have no doubt they still see those payouts as cheap payments to protect what are expected to be very profitable investments – IF they avoid Default prior to the end of the contract.
Unfortunately, the term “Bonus” has become loaded after the credit crisis and banking system collapse of the Fall of 2008. It was a Wall Street term that was probably very attractive to the 163 technical bundle managers got the lucrative employment contracts (It meant these back-office managers were getting paid as well as the front office sales-turkeys like Cassano. It’s not very often that back-office pukes like this can command such large payoffs.)”Bonus” as a word means something completely different to the financially ignorant reporters who are writing for the public on the subject.
If I were an AIG top manager right now, my biggest concern would be handling the media circus surrounding the unfortunately named balloon payments while also doing my damnedest to figure out ways to keep the remaining bundle managers each on the job until the successful completion of the contracts in the bundle each is managing. As a taxpayer, I damned sure don’t want to see the fall-out of a series of defaults caused because those managers decide to find quieter, less stressful jobs with a greater future. What I really want to see, and I think all of us do, is to see AIG finally successfully complete the process of getting out of the derivative business without defaults, and that will mean profits big enough to pay off the money the taxpayers have given AIG.
And for those of you who are driven by cynicism, and think I have been brainwashed here, you simply don’t understand the real problem that Cassano and the previous AIG management created. Liddy is running the clean-up crew, not trying to wring the last dime out of widows and children for their own benefit like the earlier management was. The media, and especially the financial media, consist of greedy, ignorant fools who don’t see the personal profit in understanding and reporting what is really going on here. Instead they are happy to jump onto the media circus bandwagon and increase their advertising revenues.
So basically they needed [need?] to keep paying their people to stay at the roulette wheel and continue doubling-down?
BTW, thanks for your explanation.
It’s not so much doubling down. As near as I can tell, the core of each bundle is most likely a set of CDS, since that was the business AIG was in with AIGFP. The bundle itself is then a collection derivatives designed around the CDS to hedge the specific package of CDS and protect them from market fluctuations. The core of the bundle is going to be static. No doubling down or anything like that, because the intent is to have a predictable return of investment over the period of the contract.
I’d guess that the package of derivatives are hedges specifically geared to the particular customer or customers who are counter parties. The hedges are designed to protect against the various default risks each customer presents over time. The problem that is being dealt with is that the risk of default each customer represents changes over time, requiring changes in the hedges to protect the original core investment. Those changes are going to be especially frequent in the current economic climate where a company that was solid yesterday is today on the edge of economic collapse.
I’m no expert, certainly not a hands-on trader, but I can’t see any other reason for the Rube-Goldberg device each of those bundles is supposed to represent.
My other guess is that a large number of those bundles are brokered, with an investor on one side, the insured on the other and AIG merely acting as the broker and manager of the set of contracts. The parties involved wanted AIG closely managing their investment, thus the heavy penalties if AIG fails to manage the bundle and it goes into default without the needed hedges as protection.
Mind you, I don’t know this for a fact, but from what I know of derivatives and from the history of CDS we have all been hearing over the last couple of years, this is what I infer. If I am right, it all makes sense, and I haven’t seen any explanation and can’t come up with a better one myself. Yet.
But this would explain why the daily management is required, and why these back-office boys could command such hefty payouts. Back-office types don’t normally see paydays like that. Those payouts are intended to protect the investments until they mature. Without some kind of substantial reward, the back-office boys are sitting in a sinking ship as AIG gets out of the business, so they are naturally going to be looking for someplace to go. They can’t be forced to stay in the job if they don’t want to. An insurance company won’t provide the investment jobs they want and are trained for.
If my inferences are correct, then the problems become clear, and the biggest one right now is PR. The mistaken idea the media has about the purpose for the badly named “Bonuses” is a real problem. They are more appropriately consider deferred payment with a balloon payment for completion of the contract. The media, however, desperately wants a new OJ Simpson scandal and the Republicans are desperate for something to say “No!” to.
Unfortunately, catering to the media may cause these critical bundle managers to move on out of the limelight and let the contracts go into default. That’s the worst possible outcome. The taxpayers lose their investment, AIG goes under, and the banking system itself may not survive. (The Republicans could then claim a scalp and run on THAT next election. Can you hear Rush? I can.)
Thanks for taking the trouble to present this. I haven’t got any better facts to challenge your story with, except that I’d take issue with this statement as to the situation in Jan. 2008:
I think by that time it was the smelly, slippery kind of gold; remember, by this time the first Bear cdos had collapsed and caused a sudden lack of interest in the possibility of a market price for much of anything except Treasury issue, Countrywide had scampered into the shelter of BofA, the credit markets had seized up enough to cause Ben Bernanke to begin his transformation into HeliBen (Aug. 2007), the big inv banks were starting to post billions in quarterly losses and along with Citi, the “monoline” insurers, and others who had to work for a living were beginning to have trouble raising funds, the save-the-sivs initiative had come undone, …
So it could be argued that by Jan. 2008 the best practice was to snatch up any of the few glittery cobblestones that remained loose in the vicinity of Maiden Lane before they became cemented in the muck.
But that’s a detail so far as the gist of your narrative goes, concerning only leverage the AIGFP folks might have had against AIG corporate, beyond that conveyed by their own machinations; I still really think your story is on the whole useful.
You’re right, of course. The hints were already there. But no one believed them, especially no one on Wall Street.
They all still thought they were looking at another short Recession. GDP down for six months, some real buying opportunities, and the turn around by third quarter of the year. People looking for new jobs still thought they grew on trees. If you wrote a contract that lasted over a year, you planned on the economy having rebounded by then. If you switched jobs, you got something that would start paying more as the economy improved. The problems were still seen as being something the free market could handle with just a short-term hiccup. Just don’t let the government come in and try to solve the problems and really screw things up.
The few Cassandras still couldn’t even get invited to coffee. Ask Atrios about Nouriel Roubini.
I was reading Atrios, Roubini and Calculated Risk and getting more and more disturbed by then, but the professionals all pooh-poohed them. Even the housing mess was isolated to mortgages according to the professionals.
Oh, and I don’t really need thanks for writing those items. I do it for myself. For some reason, writing for an intelligent audience forces me to clarify my thought in my own head. When I am finished, I am often amazed at how I put the stuff together, and his has been one of those sets of messages. Rather then thanks when it works, I really hope for good questions and criticisms because they keep me reality based. I just want to get read and if it is full of it, at least be read and told that. An editor. My kingdom for an editor. Preferably tough and honest.
I used to try to write free verse poetry a la Richard Brautigan, and I found the same thing about the creativity in writing. Get the first line down, and the rest writes itself somehow. Since I have always been a techie rather than a creative person, this may be common and well-known, but I am constantly amazed at it.
What strikes me about this whole mess is that Geithner, Summers et al. won’t step up and take the blame, sheltering Obama — at least from stuff other than making the stupid choice to bring them into the Administration.
To me it shows just where their “loyalties” lie: with their pals on Wall Street, in the Hamptons, and at the posh clubs in NYC.
Obama said he has complete trust in Geithner. So I think we can expect him to resign by May.