Understanding the Meltdown and Bailout

Matt Taibbi of Rolling Stone is my newest hero. The Big Takeover is essential reading to understand what is going on between Wall Street and Washington.

People are pissed off about this financial crisis, and about this bailout, but
they're not pissed off enough. The reality is that the worldwide economic
meltdown and the bailout that followed were together a kind of revolution, a
coup d'état. They cemented and formalized a political trend that has been
snowballing for decades: the gradual takeover of the government by a small class
of connected insiders, who used money to control elections, buy influence and
systematically weaken financial regulations.

I also recommend Taibbi's take at The Smirking Chimp on the whining AIG exec who feels ill used because he's not going to get his retention bonus:

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.

Former House Majority Leader Dick Armey: CNBC Guest Jackass

Dick Armey's analysis consisted of nothing more than a bunch of laissez-faire talking points about how wonderful markets work when freed from government regulation, e.g., “let the market settle this stuff and let the people who created the problem take the consequences.”




The problem Dick is that the people who created the problem aren't taking the consequences. The guys who wrote all the credit default swaps at AIG collected their millions in salaries and bonuses. The guys who created the mortgage backed securities at Lehman and Bear Stearns have already cashed their checks.

They may be out of work for the moment, but Geithner's plan is going to create demand for people who understand how these instruments work. I have no doubt that many of these guys are going to wind up collecting huge paychecks to help clean up the mess that they got paid to make in the first place.

Michelle Cabruso-Cabrera: CNBC's Jerk of the Day 3/19/09

My nominee for jerk of the day at CNBC for Thursday is Michelle Cabruso-Cabrera for scoffing at the idea that notions of right and wrong might have some role in the discussion of what went on at AIG. Everyone on Power Lunch had agreed that scapegoating the AIG executives who got the big bonuses was a bad idea, however, Steve Liesman suggested (at the 3:50 mark) that there might be legitimate reasons to examine the situation more closely.

Liesman: There is one purpose that I think President Obama talked about—a new era of business executives having certain values that are, how do you say this, take into consideration those of society in general.
Cabruso-Cabrera: (snorts)

Liesman: You know what Michelle, you can laugh at that, but when you have a situation where these guys are happy to take as much as they want, as much as they’re given, and maybe it’s not the right thing to do, I think there is something to be said for it.

Cabruso-Cabrera: All this right and wrong, morality play, you’re going down a very dangerous path.

What about the path that we have already gone down Michelle?

The AIG Financial Products unit wrote insurance in the form of credit default swaps on $2.7 trillion dollars in bonds without establishing any reserves in case it had to make good on those contracts. Isn't this something that we can talk about in terms of right and wrong? Does the fact that they were able to get away with it absolve the executives of any responsibility?

How Wall Street Works: Bonuses Aren't Bonuses

[C]ompanies play these games because they think it would be unseemly for investors to know how much they are paying managers for just doing their job. Companies think executive talent is far more important than financing, so they want to pay executives a lot of the profits that might otherwise go to investors. But they try to have their cake and eat it by portraying the pay as performance-based. Now the extraordinary attention over AIG is showing the phoniness of of most incentive plans.

The editor of the Harvard Business Review, John T. Landry, explains that the payments to the AIG executives really were salary rather than bonuses. They only call them bonuses in order to convince investors that they are somehow based upon performance. AIG did not want anyone to know the ungodly sums of money it was guaranteeing to its executives regardless of how well the company did.

How Wall Street Works

"I thought Bear Stearns was honest." Jim Cramer.

I don’t believe this.

I think that Jim Cramer believed that the guys who ran Bear Stearns would pull the same kind of deceptive shenanigans in order to line their own pockets that Cramer pulled when he ran his own hedge fund. Cramer might have thought that there was some limit to what those guys would pull and that wherever that limit lay, there would still be a piece of the pie left over for the shareholders. That is not at all the same thing as thinking they were honest.

This is where I think Jon Stewart nailed it. I don’t think Jim Cramer knew that Bear Stearns was going to collapse. I do think he knew the kind of things that people on Wall Street do to make money and I think he understood the ways in which the interests of the guys running the firms diverge from the interests of the shareholders. The problem is not that the executives at Bear Stearns were not exposed to declines in the stock. The problem is that the benefits of short-term high-risk strategies were enjoyed to a much greater extent by the executives than by the shareholders while the risks were shared equally. This is what I think Cramer understood without ever trying to make his audience understand.

The bonuses at AIG illustrate the problem perfectly. The compensation of the executives who wrote the credit default swaps was structured in such a way that they are entitled to millions of dollars in bonuses even though there actions brought down the company and cost the taxpayers of the United States billions upon billions of dollars. The scale may be enough to shock Cramer, but the basic methodology shouldn't be.

Stewart Nails It

For a guy who is not in the business, this is an incredibly shrewd analysis.

I got to tell you, you know, I understand you want to make finance entertaining. But it’s not a fucking game. And—when I watch that [video of Cramer describing hedge fund tricks], I get—I can’t tell you how angry that makes me. Because what it says to me is: You all know. You all know what is going on. You know, you can draw a straight line from those shenanigans to the stuff that was being pulled at Bear and at AIG and all this derivatives market stuff… These guys at these companies were on a Sherman’s march through their companies, financed by our 401k’s. And all of the incentives of their companies were for short-term profit. And they burned the fucking house down with our money. And they walked away rich as hell, and you guys knew that that was going on.