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Directing anger at AIG is misguided. Our government is the wrongdoer here. Failing to let state bankruptcy court and natural liquidation happen - as we did with

Directing anger at AIG is misguided. Our government is the wrongdoer here. Failing to let state bankruptcy court and natural liquidation happen - as we did with Enron - started the problem. The problem with exec bonuses was exasperated in the final version of the American Recovery and Reinvestment Act of 2009. Here, Chris Dodd added the “Dodd amendment” http://www.google.com/search?q=dodd+amendment http://www.google.com/search?q=dodd+amendment It reads: ‘‘(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1 http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1: That amendment guarantees all bonuses that were contracted before the date of the Act. Of course, Dodd and Obama are “outraged”. But why did Dodd add that provision? Why did Obama sign it? Not surprisingly Dodd, Obama, Bush, McCain, and Shumer are the largest benefactors of AIG’s massive lobbying. http://www.opensecrets.org/orgs/recips.php?id=D000000123&type=P&state=&sort=A&cycle=A http://www.opensecrets.org/orgs/recips.php?id=D000000123&#38... AIG isn’t taking our money. Our government is.

jhancock 18y ago
you are correct in what is happening "right now". But that is not what got AIG and many others into this mess. AIG "insured" debts it did not have enough holdings to back up. I quote the word insured because, insurance is barely what it used to be. Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. Additionally, the "insurance" has been broadened to include other type of investment vehicles instead of traditional insurance. AIG got greedy and was able to do so because they and others lobbied hard to allow them to be greedy. This was a multi-decade process.
- davetufts 18y ago
  Right, my comments are about "right now", because they reference the article which deals with the situation right now -- specifically firing AIG's management because they are "sucking down" big bonuses. I contend that the article focuses on one of the symptoms "right now" (bonuses to poor management still running a company); whereas the cause is government intervention. Without that intervention, the "right now" symptoms would not exist, i.e. AIG would not exist. You bring up the long debacle that led to this situation. However, you fail to mention that our government and the Federal Reserve have been tightly tangled with AIG for a long time. Regarding "multi-decade process", there's plenty of government blame to go around. http://www.lewrockwell.com/rozeff/rozeff253.html http://www.lewrockwell.com/rozeff/rozeff253.html If you're contenting that AIG was insolvent and still issuing insurance, they should have been prosecuted under state fraud laws, not bailed out with billions of dollars.
  - jhancock 18y ago
    insolvent is a tough word. I don't know if it applies as their books are so complex. The problem is that their investments should never have gotten this complex. AIG and others should never have been allowed to underwrite with such volatile investments. Running an investment bank as the back end to your underwriting is a fairly new thing. 20 years ago, Insurance companies were not allowed to do this. I know because I built IT systems for some of the largest insurers. One thing they all had on their radar was the ability to add investment banking and change the rules that enabled them to invest in other classes of assets. They kept chipping away at the rules until they got it. The root of this problem is simply that insurance is supposed to be backed by securities that are significantly _less_ volatile than the security they are underwriting. If AIG doesn't have the assets to cover their bets, they clearly did not achieve this goal. The big question is why and which parties deserve blame. My money is on multiple parties.
- anamax 18y ago
  > Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. As I pointed out in another thread, AIG's assets have not had losses and the relevant regulations have not been dismantled over the years. (In fact, AIG had to register as a bank because of new regulations.) What happened to AIG is that the mark-to-market for those assets, which are behaving exactly as predicted, went away. (AIG's portfolios are not taking a foreclosure hit because they cherry-picked.) That took AIG's credit rating down and then the covenants kicked in, requiring AIG to pay money that it didn't have.
  - anamax 18y ago
    FWIW, daily mark-to-market as a way of valuing long term assets was the rule before the great depression, was suspended under FDR, and reintroduced during the Bush admin (I think during the Enron reaction). Mark-to-market is attractive, but does it necessarily make sense? Suppose that I have an apartment building that is throwing off enough cash to meet my obligations. Is it worth nothing on a day when no one offers to buy it? Is it worth nothing on a day when no one offers to buy "comparables"?
    - dpatru 18y ago
      Mark-to-market applies only where the value of an asset is at issue. If, for instance, you want your insurance company to have a minimum value for its assets, to insure that they can pay out in case they need to, then you don't care what that asset is earning. All you care about is the value of that asset when sold, so that the insurance company can use that money to pay off its obligations to you. Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan. When the value of that collateral goes down, it's fair for you to call the loan, even if AIG is still making money and distributing dividends. These is the way that a bank treats its own customers who put up property as collateral, but when banks themselves are putting up collateral, they want to operate under different rules.
      - anamax 18y ago

jhancock 18y ago

you are correct in what is happening "right now". But that is not what got AIG and many others into this mess. AIG "insured" debts it did not have enough holdings to back up. I quote the word insured because, insurance is barely what it used to be. Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. Additionally, the "insurance" has been broadened to include other type of investment vehicles instead of traditional insurance. AIG got greedy and was able to do so because they and others lobbied hard to allow them to be greedy. This was a multi-decade process.

davetufts 18y ago
Right, my comments are about "right now", because they reference the article which deals with the situation right now -- specifically firing AIG's management because they are "sucking down" big bonuses. I contend that the article focuses on one of the symptoms "right now" (bonuses to poor management still running a company); whereas the cause is government intervention. Without that intervention, the "right now" symptoms would not exist, i.e. AIG would not exist. You bring up the long debacle that led to this situation. However, you fail to mention that our government and the Federal Reserve have been tightly tangled with AIG for a long time. Regarding "multi-decade process", there's plenty of government blame to go around. http://www.lewrockwell.com/rozeff/rozeff253.html http://www.lewrockwell.com/rozeff/rozeff253.html If you're contenting that AIG was insolvent and still issuing insurance, they should have been prosecuted under state fraud laws, not bailed out with billions of dollars.
- jhancock 18y ago
  insolvent is a tough word. I don't know if it applies as their books are so complex. The problem is that their investments should never have gotten this complex. AIG and others should never have been allowed to underwrite with such volatile investments. Running an investment bank as the back end to your underwriting is a fairly new thing. 20 years ago, Insurance companies were not allowed to do this. I know because I built IT systems for some of the largest insurers. One thing they all had on their radar was the ability to add investment banking and change the rules that enabled them to invest in other classes of assets. They kept chipping away at the rules until they got it. The root of this problem is simply that insurance is supposed to be backed by securities that are significantly _less_ volatile than the security they are underwriting. If AIG doesn't have the assets to cover their bets, they clearly did not achieve this goal. The big question is why and which parties deserve blame. My money is on multiple parties.
anamax 18y ago
> Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. As I pointed out in another thread, AIG's assets have not had losses and the relevant regulations have not been dismantled over the years. (In fact, AIG had to register as a bank because of new regulations.) What happened to AIG is that the mark-to-market for those assets, which are behaving exactly as predicted, went away. (AIG's portfolios are not taking a foreclosure hit because they cherry-picked.) That took AIG's credit rating down and then the covenants kicked in, requiring AIG to pay money that it didn't have.
- anamax 18y ago
  FWIW, daily mark-to-market as a way of valuing long term assets was the rule before the great depression, was suspended under FDR, and reintroduced during the Bush admin (I think during the Enron reaction). Mark-to-market is attractive, but does it necessarily make sense? Suppose that I have an apartment building that is throwing off enough cash to meet my obligations. Is it worth nothing on a day when no one offers to buy it? Is it worth nothing on a day when no one offers to buy "comparables"?
  - dpatru 18y ago
    Mark-to-market applies only where the value of an asset is at issue. If, for instance, you want your insurance company to have a minimum value for its assets, to insure that they can pay out in case they need to, then you don't care what that asset is earning. All you care about is the value of that asset when sold, so that the insurance company can use that money to pay off its obligations to you. Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan. When the value of that collateral goes down, it's fair for you to call the loan, even if AIG is still making money and distributing dividends. These is the way that a bank treats its own customers who put up property as collateral, but when banks themselves are putting up collateral, they want to operate under different rules.
    - anamax 18y ago