thoughts on the bonuses

[DrTodd13]

It seems to me that if you care about the survival of this company (too big to fail or so they say) that the last thing you would want to do is try to undo bonuses, especially contractually obligated ones. You can't (and definitely shouldn't try to) force people to work for a certain company and if these people don't get bonuses at this company then a great many of them are likely to leave for greener pastures. How will a company in such a predicament survive when its best and brightest and those who understand the most about the business leave?

[Phil]

It seems to me that if you care about the survival of this company (too big to fail or so they say) that the last thing you would want to do is try to undo bonuses, especially contractually obligated ones. You can't (and definitely shouldn't try to) force people to work for a certain company and if these people don't get bonuses at this company then a great many of them are likely to leave for greener pastures. How will a company in such a predicament survive when its best and brightest and those who understand the most about the business leave?

Todd, I would think you'd be the last person around here to defend a bailout.

[jdonn]

Who says the people in charge at the company were its best and brightest anyway?

[Lobowolf]

They're not going to be replaced by the best and the brightest, either. If the idea of the bailout was to make it a continuing, viable, competitive company, this isn't the way to do it. Whoever the best and the brightest are, they're not going to work for TARP recipients if their compensation is up for grabs retroactively. 90% retroactive tax is a poor call based on political posturing and grandstanding.

[jdonn]

They're not going to be replaced by the best and the brightest, either. If the idea of the bailout was to make it a continuing, viable, competitive company, this isn't the way to do it. Whoever the best and the brightest are, they're not going to work for TARP recipients if their compensation is up for grabs retroactively. 90% retroactive tax is a poor call based on political posturing and grandstanding.

I couldn't agree more. That's the true argument against what the government is doing, not a worry that the best and brightest at the company will leave.

[Echognome]

I agree that a 90 percent tax enacted retroactively is wrong. It is clearly a punitive levy. It is not, however, unprecedented to have such high rates.

 

From wiki on U.S. Income Taxes:

 

"During World War I, the top rate rose to 77%; after the war, the top rate was scaled down to a low of 25%.

 

During the Great Depression and World War II, the top income tax rate rose again. In the Internal Revenue Code of 1939, the top rate was 75%. The top rate reached 94% during the war and remained at 91% until 1964."

 

My understanding is that these top rates were enacted to counter war profiteers from making money from the blood of fellow citizens, although my understanding is, admittedly, simplistic.

[mike777]

As I mentioned before I think to use the taxing power to punish a few selected people, retroactively, sets a dangerous precedent. The House clearly said this tax is to punish people.

 

I do a agree with many other posters that this is a bit too much ado about nothing but as for the CEO, he should have just bit the bullet and not paid the bonuses to this division. If that means people suing the company and being fired, so be it.

 

In any event we all know for the next two years there are going to be scandals and outrage coming out of all stuff.

 

 

BTW I read where the President wants new expanded powers. He wants to set up a "resolution trust division" that will have powers similiar to the FDIC. FDIC applies to commercial banks, this new regulatory power will have the power to takeover/sell at auction insurance companies/investment banks/finance companies without a court order or shareholder vote. The FDIC already has this power for banks.

[Winstonm]

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

 

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

 

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

[mike777]

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

 

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

 

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

I am not sure what you mean by trigger. But per Hank Greenberg these things did not default and they are called credit default swaps. He made clear that AIG only paid out collateral.

 

To put this another way, people can default on a mortgage in this package but it does not put the contract into default.

 

See Charlie Rose show.

See WSJ article.

 

 

 

"From comments made by AIG executives it appears that the company fundamentally misunderstood the nature of risks that it was underwriting. Those risks were

 

a) much more highly correlated than they assumed (due to the nature of bonds in CDO structures as well as the likely performance of super-senior tranches in event of impairment)

 

:) actually mark-to-market risk, not default risk which actually made AIG’s business much riskier than it thought. This is because long before super-senior tranches became impaired (the only risk AIG was worried about), AIG will have had to post more collateral than the cash it had on hand effectively guaranteeing its bankruptcy long before it had to “make the policy holders whole”"

 

 

http://creditriskchronicles.blogspot.com/2...anage-your.html

[DrTodd13]

I'm not defending a bailout. The bailouts are immoral. Notice that I said "if" you want to keep the company from dying then you need to keep or recruit top people. These people no doubt put blinders on and got hyper-greedy but they aren't stupid. If anybody can salvage the company in its current form it is going to be smart people who understand the business. You can believe that merit was disregarded in favor of some other factor and therefore the best and the brightest somehow didn't rise within the ranks of AIG but in general, from my experience, that isn't how business works. The competent rise to the top and the incompetent don't. Lobo is just making my point. If you want AIG to fail then this is how you do it...you say we'll just confiscate your contractual income whenever we desire and no one good enough to actually save the company will choose to work there.

[hrothgar]

I'm not defending a bailout. The bailouts are immoral. Notice that I said "if" you want to keep the company from dying then you need to keep or recruit top people. These people no doubt put blinders on and got hyper-greedy but they aren't stupid. If anybody can salvage the company in its current form it is going to be smart people who understand the business. You can believe that merit was disregarded in favor of some other factor and therefore the best and the brightest somehow didn't rise within the ranks of AIG but in general, from my experience, that isn't how business works. The competent rise to the top and the incompetent don't. Lobo is just making my point. If you want AIG to fail then this is how you do it...you say we'll just confiscate your contractual income whenever we desire and no one good enough to actually save the company will choose to work there.

You seem to be assuming that the skill set necessary to bail out this business bears some semblance to the skills necessary to sell credit default swaps...

 

I doubt that they are remotely related to one another

[jdonn]

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

 

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

 

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

I think my bash is that you feel the need to mention this in every thread about every topic. You didn't even make any segue onto the topic at all there...

 

"This is what I know about financial products, and oh yeah Obama is like Bush."

[Winstonm]

My understanding is that these products did not have to default to set off the trigger but many simply had performance provisions that were triggered without default.

 

There is no doubt Obama wants more power - every president does - and he has not repudiated where it counts a single power grap made by the Cheney-Bush cabal.

 

Before anyone bashes, understand I am not comparing Obama the person with Bush or Cheney - certainly we have a more benevolent dictator in power - but it is still the same presidential monarchy that Cheney envisioned.

I think my bash is that you feel the need to mention this in every thread about every topic. You didn't even make any segue onto the topic at all there...

 

"This is what I know about financial products, and oh yeah Obama is like Bush."

I was only further commenting on what Mike777 had said:

 

BTW I read where the President wants new expanded powers  He wants to set up a "resolution trust division" that will have powers similiar to the FDIC. FDIC applies to commercial banks, this new regulatory power will have the power to takeover/sell at auction insurance companies/investment banks/finance companies without a court order or shareholder vote. The FDIC already has this power for banks

[y66]

I don't agree with the point made in an earlier post that equates taking responsibility for developing orderly procedures and clear rules for protecting the financial system with a political power grab.

 

I think Jerry Seib gets the right point across in his piece in today's WSJ.

 

At last there is bipartisan consensus on something in Washington. Everybody agrees they are furious at American International Group.

 

Beyond that, though, the outrage over AIG's payment of $165 million in bonuses to employees within the unit that almost melted down the economy has descended into typical political finger-pointing about who should have done what to prevent the embarrassment. And while that makes for good indoor sport, it is obscuring the two big lessons this mess is teaching the nation:

 

First, the government by and large has no business owning and running businesses -- and it is the majority owner of AIG. The cultures of the public and private sectors are simply too different.

 

And second, there needs to be a system established for times such as these, when the government does have to step in and perform triage in the financial sector, so it's clear who is in charge and what the procedures are. As it is now, all sides are making up the rules as they go along. When the House passes, as it did Thursday, a tax bill designed specifically to extract money from 73 individuals who took large bonuses from AIG's financial-services unit, it's pretty clear that things have gotten out of hand.

 

Translation: We need an agency and some clear rules to handle winding down big financial companies.

 

The ideal solution, of course, would be to avoid this kind of situation entirely. Governments aren't equipped to operate businesses, and businesses aren't prepared to operate amid the complicated sensitivities of the political sector. Governments run best by consensus, companies best by crisp decision-making at the top. Incentives are different in the two worlds; penalties and rewards are viewed differently, as the AIG flap illustrates.

 

In fact, some of the wisest words President Barack Obama has spoken since being elected came during the transition period, when the question of whether the government should simply take over General Motors and Chrysler was in the air. "We don't want government to run companies," Mr. Obama said on NBC-TV's "Meet the Press" in December. "Generally, government historically hasn't done that very well."

 

That sentiment explains why, despite rampant speculation to the contrary, the administration has been straining to avoid nationalizing any banks or directly taking over auto makers. Nationalization would distort markets, create unfair advantages and introduce either political considerations or suspicions of political considerations into business decisions.

 

There is, in fact, a huge difference between the government injecting capital or taking a minority position in a business -- with a prospect of getting taxpayer money back but no confusion about who continues to run the company -- and nationalizing a firm or becoming a majority owner.

 

This is the line the administration has tried not to cross. AIG is the exception to the rule. Because of AIG's dire straits, the government has invested so much bailout money that it now holds a stake of almost 80% of the company. Taxpayers are the majority owners...

[hrothgar]

This morning I was listening to an hour long interview with the author of "House of Cards" who noted that there was a significant change in the ownership model of Wall Street firms 25 odd years ago.

 

Twenty five years back, most Wall Street firms were privately held. Now-a-days, most of them are publically traded. This has introduced some significant changes in the risk profile and the trading strategies adopted by these firms.

 

Back in the day, most Wall Street firms were gambling with their own money.

 

Today, they are investing money's belonging to third parties and skimming off performance based fees.

 

The author seemed to be hinting that if we returned to the days where trading firms were privately held (rading their own assets) we might have avoided the recent unpleasantness.

 

Not sure whether or not I buy into this, but it is an interesting idea.

 

As I noted earlier, I try not to get too bent out of shape regarding the bonuses structures. I'd much rather have the Treasury Department focusing on solving the real problem and have congress focus on structural reforms.

 

In my mind, some of the key issues that need to get sorted out are:

 

Should we allow pension fund managers to invest in any type of assets?Alternatively, should there be some kind of limitation? Maybe the Fed should create a dozen or so Exchange Traded Funds and require that pension funds stick their money into one of these...

 

Should we learn something from "too big to fail"? Should we cap the maximim size of firms that firms can get? Historically, these types of arguments have been based on anti trust considerations. However, there might also be arguments based on building a fault tolerant system.

 

BTW, when was the last time you saw anyone pushing the idea that we need to privatize Social Security?

[Lobowolf]

BTW, when was the last time you saw anyone pushing the idea that we need to privatize Social Security?

You're right; it's been far too long.

 

There should be a provision for voluntary partial privatiziation of Social Security.

[y66]

Twenty five years back, most Wall Street firms were privately held. Now-a-days, most of them are publically traded. This has introduced some significant changes in the risk profile and the trading strategies adopted by these firms.

 

I totally buy this.

 

Michael Lewis also makes this point in Liar's Poker and again in his December 08 story "The End" which is one of the most amazing pieces of journalism I've seen in this saga.

[y66]

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

 

[bangs head on table]

[Lobowolf]

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

 

[bangs head on table]

Hey, whom you calling a gentleman?!

 

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

[luke warm]

What's up with lobowolf and mikeh lately?  It's a sign of something when gentlemen stoop to sarcasm.

 

[bangs head on table]

Hey, whom you calling a gentleman?!

 

Occasionally, I elevate to sarcasm; however, in case you mean the Social Security comment, I assure you it was entirely genuine! Let's say you were unlucky enough to retire a month or two ago when the market was below 7,000. Let's further call you 65 years old as of that date, and assume you'd been working since you were 20. Take the payments you made into Social Security, starting in early '64, and put them into an index fun on a regular, periodic basis with dividends reinvested, and compare the value of that account to what you're going to get from our non-private Social Security system.

what are you, some kind of subversive?

[jdonn]

What's up with lobowolf and mikeh lately? It's a sign of something when gentlemen stoop to sarcasm.

 

[bangs head on table]

I hope I haven't caused too many concussions to the forums readership over the years. If so I apologize.

[Winstonm]

Here is a nov 2008 quote from Felix Solmon and it appears to substantiate what Mike777 wrote:

 

At heart, here, is an age-old debate over the value of any fixed-income instrument. Let's say you buy a bond at par which makes all its interest and principal payments in full and on time. Then you're happy, and making money. But let's say that a couple of years after issue, that bond is trading at just 10 cents on the dollar. Have you lost money?

 

As far as AIG was concerned, it was one of the biggest companies in the world, more than capable of weathering any mark-to-market storm -- and therefore all it cared about was default risk, not market risk. But as a result, it took on much more market risk than it was really aware of -- and that market risk ended up forcing the entire company into the arms of the US government.

 

The lesson, of course, is simple, but hard to learn: it's not the risks you measure which bring you down, it's the risks you don't measure. But protecting against those risks is very, very hard.

[y66]

No concussions here. Not even from han's posts. Head is made of oak. :blink:

[matmat]

No concussions here. Not even from han's posts. Head is made of oak. :blink:

it shows.

[y66]

Thank you. I guess oak is not sufficiently self-deprecating. Should have tried ironwood.