Follow the Money

Certainly the fact that AIG paid bonuses with bailout money make us angry and not without good reason. Focusing our attention on this has the benefit of being easy to understand and puts a human target on our anger. However, it fails to take into account the fact that the $165,000,000 spent on bonuses pales in comparison to the $125,000,000,000 in "loans" AIG has taken from us. As Robert Scheer writes:

"But the $165 million in taxpayer funds used to reward them is but a sideshow in a far larger drama of moral decay swirling around the banking bailout. It should not distract from the many billions, not paltry millions, of our dollars being diverted to reward the very folks who brought us such misery. Consider the $12.8 billion of the $170 billion that taxpayers gave AIG in bailout funds that AIG then secretly diverted to Goldman Sachs, a company that evidently has a lock on both the Treasury Department and the Federal Reserve no matter which political party is in power. It was the biggest payoff among those that AIG made to a score of foreign and domestic financial giants."

That doesn't mean we should ignore the bonuses, but it does mean that we should be spending far more time on making sure AIG spends the rest of the money it received in a way that maximizes the benefits to the taxpayers, not the executives or the counterparties who are getting "paid back in full".

And there's something else missing here. Joe Conason writes that we should also be looking into the "quaint islands and mountainous principalities" where:

"the same banks, hedge funds and private equity firms responsible for the world financial meltdown keep their profits in those "secrecy spaces" -- alongside the ill-gotten gains of numerous drug dealers, dictators and delinquents of every description."

"According to the Government Accountability Office, nearly all of America's top 100 corporations maintain subsidiaries in countries identified as tax havens. As the GAO notes, there could be reasons other than avoiding the IRS to set up branches in places such as Singapore, Luxembourg and Switzerland, where taxes are light or nonexistent and keeping clients' illicit secrets is considered a matter of national pride."

[...]

"When the cost of these shenanigans was last estimated two years ago, the U.S. government's annual loss in revenue due to tax avoidance by major corporations and super-rich individuals was pegged at about $100 billion -- considerably more than a rounding error, even today. But of course that is only a rough assessment, as is the estimate of $12 trillion in untaxed assets hidden around the world. Nobody will know for certain until the books are opened and transparency is established."

Populist rage can be used to get something done. Let's hope it's the right thing.

More on Geithner

It seems that Nouriel Roubini is for the Geithner plan:

"[T]he Geithner plan is not an alternative to nationalization: insolvent banks should be nationalized and the Geithner plan should not apply to them. But solvent banks still need to have their toxic assets disposed of; and for [these] banks the Geithner plan provides a solution that - all in all - is better than the alternative. Those who don't like the Geithner plan on the basis that they prefer nationalization are right - as I agree - that the insolvent banks should be nationalized. But they usually don't give an explanation of how they would dispose of the toxic assets of solvent banks. They seem not to like the Geithner plan because it would provide a subsidy to the investors. But ensuring participation of private investors in the risk and in the price revelation is worth that subsidy."

My take on this is that there is no perfect solution. No matter what, the taxpayers are getting hosed on this, some banks are going to make a lot of money on it and the key to the whole thing will be how well (and how fast) the plan is executed and what is done to make sure this can't happen again.

A man can dream, can't he?

The Plan

Seems that Paul Krugman and Joseph Stiglitz don't like Geithner's plan. Krugman continues with:

"So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money."

Stiglitz said:

"U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said."

And Atrios says:

"The issue isn't that they're worthless, the issue is that they aren't worth nearly as much as the financial institutions are pretending they're worth. Sellers have a huge incentive to not sell at lower prices because lower prices will potentially reveal that they're insolvent/essentially bankrupt. ...[T]he reason that the big players can make money while the gov't loses money is because of the no recourse loans, and the asymmetric upside/downside of the Geithner plan. They're buying shitpile mostly with gov't loans, and if there's money to be made they and the gov't benefit. But if the asset is shit, they don't have to pay back the loan, just hand over the asset. All this encourages institutions to overpay, so we get to pretend shitpile isn't so shitty until the gov't eats the losses."

If these guys hate the plan, then I hate the plan.

I think the situation we find ourselves in is this. We bought a new car. We drove it, maintained it and were happy with it. Then the dealer came over and destroyed it with a baseball bat. And now you have to pay him to repair it with no guarantee the work will actually get done in the foreseeable future. And you have to pay him before he starts the work and you have to pay him a bonus if he does a competent job.

And the politicians wonder why we're pissed.

More on the Cause

This American Life has had several episodes that did an excellent job of explaining the housing crisis, the mortgage crisis, what it has to do with the turmoil on Wall Street, why banks did stupid things like make half-million dollar loans to people without jobs or income and what credit default swaps are and what they have to do with anything. You can listen to these in streaming audio online for free or download each episode for $0.95. Transcripts are also free.

1. The Giant Pool of Money (transcript).

2. Another Frightening Show About the Economy (transcript).

3. Bad Bank (transcript).

Leverage

A pretty good description of how leverage made what may have just been a problem into a crisis.

And this doesn't even touch the subject of derivatives which Warren Buffet referred to as "financial weapons of mass destruction" way back in 2003. In that article he said: "The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later."

In this case, many = 4.

The Crisis of Credit Visualized

A nice simple explanation, with visuals.

Part 1:



Part 2:

Too Big To Fail

"If we bail out this one, bad as it is, if we take Continental Illinois and the rest of them off the hook and they don't have to pay a thing, then the markets will know that, no matter what risks they take, the government will bail them out. Eventually, it's going to lead down the road to the nationalization of the banking system."
- William M. Isaac, Chairman of FDIC, 1982

Read this for an excellent summary of the "Original Sin" of the current banking crisis.