General Question

marinelife's avatar

How firm a line in the sand should the government take regarding AIG and the bonuses?

Asked by marinelife (62418points) March 16th, 2009

AIG is insane. Bonuses to the executives in the department that ran the company aground? Here is the NY Times account.

I want the government to go all the way it needs to to stop this including calling the loans, even if the company fails.

What do you think?

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67 Answers

wundayatta's avatar

I know. It seems totally unjust to have tax money go to pay these bonuses. Yet, if they are not paid, AIG has a lawsuit on its hands and they may lose their talent. Then we have to bail them out even more, unless we let them go under. It seems that, in for a penny, in for a pound. We have to hold our noses and pay. I hate it. But we’re following a course that won’t allow us to go back.

dynamicduo's avatar

I think this entire situation just keeps getting worse and worse, and the only logical solution I can see would be the government getting its hands out of this mess and letting the companies fail. Of course, that would have a huge impact on the economy. But I just keep hearing these stories of Bernake not telling anyone where the money went to, the executives being paid bonuses out of the tax money or otherwise spending it frivolously, and I really can’t see any positive benefit this has had to the American people other than putting a plug in the deflating balloon that is the current situation.

gailcalled's avatar

Obama has put on his buckler and spurs today (too late for the NYT).

AP 12:47
Start of article:

WASHINGTON (AP) – President Barack Obama declared Monday that insurance giant American International Group is in financial straits because of “recklessness and greed” and said he intends to stop it from paying out millions in executive bonuses.
“It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession.
“How do they justify this outrage to the taxpayers who are keeping the company afloat,” the president said.
Obama spoke out in the wake of reports that surfaced over the weekend saying that financially strapped American International Group Inc. (AIG) was paying substantial bonuses to executives.:

marinelife's avatar

@daloon What talent? If they had talent, would they be in this shape?

I say let them go bankrupt. I say a court would stop the bonuses, and the good units of AIG could be sold off.

gailcalled's avatar

I have friends here who were severely Madoffed; They have to sell their house at a garage sale price and are planning to move to CA and live with one of their kids.

Maybe every greedy overpaid ex. at AIG should be obligated to welcome a needy family to share one of the McMansions.

wundayatta's avatar

@Marina: I guess I should have put quotes around the word: “talent.” They are clearly oafs with two left feet, but they are employees, and thus, technically, “talent.”

marinelife's avatar

@gailcalled Absolutely love Madoffed as a verb!

gailcalled's avatar

My friends now are indeed overcomers. (mh: I know that you know that Madoff is pronounced Made Off.) There is now a plan to divest Mrs. M of some of her 69 millions, poor thing.

SuperMouse's avatar

I don’t think it should be a line in the sand, I think it should be a line in quick drying concrete that is utterly and completely impassable.

casheroo's avatar

Good for Obama. I don’t understand..if AIG doesn’t pay the bonuses, the employees will quit? Is that what they’re afraid of? My mother’s company takes away whatever it feels like it, they have no obligations to bonuses (my mother’s company gives shares out, and i think it’s called a yearly..every june she gets a big bonus, but it keeps getting smaller and smaller for everyone. She works for The Vanguard Group)
I’m very liberal, but this is just too much. I would hope they would be using that money to save the actual company from ruins, and not pay people extra money. That makes me sick.

SeventhSense's avatar

If they want bailouts from Uncle Sam then they have to abide by Uncle’s terms. You can’t have your cake and eat it too.

EmpressPixie's avatar

This article and the letter it points to make for good AIG-related reading.

I’m flabbergasted, shocked, and outraged. And frankly, I want the government to put these men in jail. At this point, I don’t think treason is out of the question as a charge. Because their actions have put the safety of our nation in danger through our economy (not to mention the safety of the world economy).

willbrawn's avatar

It is horrible, these corporations are so greedy is disgusting. Thats the reason they fell. All about the money.

Judi's avatar

The talent can be replaced but the law suit could end up costing more than the bonuses. I wonder, if we had allowed them to file chapter 13 would they still be legally bound to honor the bonuses?

aprilsimnel's avatar

I want every single one of these arsewipes who’s up for a bonus to come before Congress and the people and tell us why they deserve anything more than a quick trip to a Federal lockup. Why shouldn’t they be up on charges? How do they have the stones to threaten lawsuits if they don’t get their bonuses? Of all the unmitigated GALL.

Vincentt's avatar

I’m really not an expert on this, but I was thinking…

What if AIG (and other companies in a similar position) would just not pay those bonuses. Then some people would sue them, which would get those people media attention and there’d be public outcry – so people would be discouraged from claiming the bonuses. Then those few who do sue can be paid by AIG after they’d been publicly hated ;-)

I still don’t get why I have seen so few stories of managers who have denied their bonuses because they feel responsible.

skfinkel's avatar

@Vincentt: That’s what I would like to see as well. A modicum of humility by these bozo’s— who have done so much damage to the country’s and the world’s economies—by refusing to take their bonuses. Then watch all the praise they would receive!!

If this isn’t a case of fiddling while Rome burns, I don’t know what is.

marinelife's avatar

@Judi A bankruptcy judge would have the power to stop the bonuses even if they are contractually mandated. (AIG says they are, but I am not convinced.)

aprilsimnel's avatar

Further, the company needs a federal bailout! How is that responsible stewardship? Surely such a contingency means that those particular employees are definitely NOT due a bonus. >:P

Oh, I know, “it’s in the contract.” Can’t someone tear up those contracts? I object to these people getting a bonus from my tax dollars.

ubersiren's avatar

Let ‘em burrrrrnnnn! Finally, a good decision by Obama… I know it’s partly an agenda, but this is one more good decision than the last president ever made. 10 crappy decisions to 1 good one is better than nothing!

adreamofautumn's avatar

At this point i’d be willing to take the slap to the economy just to watch them go down. I worked hard, I paid my taxes and I in no way condone this action. The government should do everything they can to halt this, contracts or not, it’s outrageous.

ubersiren's avatar

@adreamofautumn : The extra sweet part is that if they fail, it’s only a short-lived crisis. Whereas, if we were to continue funding their business, it would be an on going strain that would last who knows how long.

Let em crumble!! Hahaha! I have been looking forward to this for so long! Too bad, this won’t make much difference because there will be many more companies for Obama and congress to bail out, but 1 point for taxpayers!

cwilbur's avatar

Here’s the thing. If the government had not bailed the company out, they would not have been able to pay any bonuses.

So I’d say that the board of directors has a choice to make. Return the government’s—the taxpayers’—money, and pay bonuses from what they have left. Or accept the money, and pay no bonuses.

EmpressPixie's avatar

AIG: You have until 4pm. Hearts and kisses, NY Attorney General

dalepetrie's avatar

I’m so glad someone posted a question on this because I was going to post my own question to see what the collective thought of my idea.

OK, so as I understand it, they have contracts that lay out what bonuses people will get, the contracts were (presumably) signed before this whole mess hit. You promise an employee something in writing and you don’t deliver, that’s bad news, I get that. But usually a company is not getting $170 BILLION and counting from the Federal government…one would think the government could review those contracts and step in. I understand however it’s difficult, AIG execs are going to do everything they can to raid the henhouse. So you end up with a standoff…Obama has instructed Geitner to do EVERYTHING IN HIS POWER to block those payments. AIG I’m sure has dug in and is going to do everything THEY can to get them paid, and short of nationalizing AIG, the government can regulate the company’s future activities, it can threaten to cut off future funding (but it knows that if AIG doesn’t get money it could collapse and if it collapses we’ll be looking at a downturn that will make the Great Depression look like a picnic), it can do a number of things, but it CAN NOT make decisions for AIG short of actually nationalizing AIG, which I think with $170B invested they’d be well within their rights to do.

But here’s how I see the solution to this problem. First off, even if a company is in dire financial straits, it is still OK to pay bonuses, IF the bonuses are EARNED. The definition of a bonus, as I understand it, is to reward employees for either a) success of the company, b) success of the division, or c) success of the employee. Now clearly conditions a and b have not been met, not only is the company AND the division in question not succeeding, BUT they have cost the US taxpayer $170 billion and counting.

So, I think we have to look at c. I think the only way to know if these bonuses are “fair” is to look at a person by person assessment of these bonuses. Someone in sales who for example has a contract which says, you bring in $x of revenue, and we will give you a $y bonus in addition to your commission, and has that written into his contract, well, if they hit their targets…even if OTHER decisions made in their division caused HUGE losses that far outpaced their contributions, well, they did earn those bonuses per their contracts.

But how can the government know this? Well, I think the bottleneck here is that AIG is not going to just turn over all this information. But I think the first step is for the government to quantify it. They should look at it and say, theoretically, if we WERE allowed to throw back the covers and look at each individual receiving a bonus, how could we quantify whether that person really earned that bonus? I think logically it could be boiled down to a set of questions that would encompass first, what was written into the contract…was the bonus contingent on achieving a particular goal that demonstrably brought in revenue for the company far in excess of the bonus being paid? Then it would look at whether the employee actually met that goal. If the employee had a written agreement that set to pay him contingent on performance that materially enhanced the revenue of the company, and the employee met that contingency, then he should be paid, regardless of bailout or not.

But it would seem that it’s very likely that is not the case here. And that is what we need to get at, so first as I said, we need to quantify a simple set of questions that would, on review of each individual’s set of circumstances provide a clear, black and white, yes or no answer to the question “was the bonus EARNED?” It is the bonuses being paid to those for whom the answer is “no” that we should collectively be working to stop.

But let’s say that the government had a way to quickly get AIG to comply with providing that data on every employee receiving a bonus, then what? They still don’t seem to have the power to block AIG from making those payments. So, they can cut off future funding, but what then? What if AIG does fail, and what if the pundits are right that AIG is too entrenched in too many areas, making it “too big” to fail, and that causes a financial catastrophe. Then I think we’ll look at that $165 to $470 million in bonuses (depending on your source and how they quantify it) as chump change, well worth just disregarding…hindsight being 20/20 and all, but you don’t want to know that when it’s too late and the damage is done.

So, here’s my solution, without further adieu. I would say that first off, we need to expand this universe. And we need to say that EVERY employee of ANY company (not just AIG) where THAT employee received a bonus in ANY year when that company accepted financial support from the Federal Government should have a special IRS audit performed. This audit would determine whether that bonus was earned using whatever quantitative method was established for determining this. For those who did not earn a bonus, but were paid a bonus from a company receiving bailout funds, REGARDLESS of what their contract might say, would be subject to a special 100% Federal tax rate on all bonus money received. Then let these bozos pay out whatever they want or feel they have to, the government will get it back.

Now how do I get this idea in the hands of someone who can implement the damn thing?

EmpressPixie's avatar

@dalepetrie: Sometimes I wish we could have once a month super-lurve to GA an answer more than once.

dalepetrie's avatar

@EmpressPixie – I can feel the lurve, even if it doesn’t count in my total!

cwilbur's avatar

See, I think the best use of the bailout money in the first place would have been not to prop up failing companies, but to provide some sort of relief to the people who were affected financially by the collapse of AIG.

In the company I work for, there are no guaranteed bonuses. Bonuses are based on a combination of the performance of the company and the performance of the employee. If the company tanks, no bonuses.

So a promised bonus—based on meeting departmental goals, for instance—is yet another instance of a poor management decision. Especially if it didn’t include any wording about the performance of the company.

So I don’t support any bonus payments, for any employees. No matter what they expect. No matter whether they would have earned a bonus under the old regime. If the company is not happy with that, they can pay back the bailout money and collapse, and we’ll use the bailout money as it should have been used in the first place.

marinelife's avatar

@aprilsimnel Wonderful link, thanks.

@dalepetrie I am glad you mentioned the IRS. Here is Aaron Zelinky’s take on how that should work and would stop the bonuses. Here is an excerpt:

“Section 162(a) of the Internal Revenue Code declares:

“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including . . . a reasonable allowance for salaries or other compensation for personal services actually rendered.”

In Gordy Tire Co. v. United States (155 Ct. Cl. 759, 1961), the United States Court of Claims declared that determinations of the reasonability, and thus the tax deductibility, of compensation should consider the “foresightedness and business acumen” of the individuals receiving such compensation. AIG’s head honchos exhibited about as much foresightedness and business acumen as the captain of the Titanic. Larry Summers himself declared the AIG bonuses to be the “most outrageous” event of the “last 18 months.”

aprilsimnel's avatar

@Marina : …psst… That was @EmpressPixie, I think! But I’m on that wavelength, no fear.

marinelife's avatar

@EmpressPixie Mille pardons! Thank you for the great link to Cuomo’s letter.

@aprilsimnel And thanks for the catch!

cdwccrn's avatar

Wall street uses the term “talent” very loosely. I don’t think a bailed-out company and it’s employees deserve a dime of bonus money.

dalepetrie's avatar

@Marina – Thanks for the link. Though it sounds like Zelinsky’s take is that we disallow the bonuses from being considered deductible for the company for tax purposes. Two big problems with that, one, the company won’t be paying any taxes if it didn’t make any money, and two, the company doesn’t give a shit, if they’re disallowed $100M tax savings they’ll just ask the govt. for an extra $100M. Better to tax the people receiving the bonuses @ 100%, then there will be no incentive for the company to stick up for the bonuses, the government will get their money back, AND no matter what the companies do to try to circumvent this system, if the IRS is making the decision on a person to person basis, AIG can pay their CEO $1 billion right out of the TARP funds, but the CEO won’t be able to keep it, that money will go right back into the TARP fund when the IRS seizes it.

mij's avatar

Just saw that item on the ABC news here in Perth, Western Australia.
That totally sucks, greedy bastards!
That type of thing is just not on… especially when the ordinary folk are doing it tough.
C’mon Mr President crack down on these leeches and take the money back off them and give it to the people who really need it.
I hear tent communities are springing up in California and elsewhere?
Taxpayers funds shouldn’t be given out to the very people who stuffed up your financial institutions in the first place.
Hang in there you folks who are doing it tough, better days are coming… the sooner the better.

cookieman's avatar

Elizabeth Warren was just on Fresh Air discussing this.

She explained that AIG, in an attempt to capitalize on their then AAA credit rating, began a group to offer insurance on those “toxic assets” many investors were playing with. Those highly overvalued mortgage slices.

These insurance policies were written in the millions and AIG put no cash up front, instead banking on their stellar credit rating. A very risky deal as it required these sliced and diced mortgages to continue to go up in value.

Well, we know what happened to the housing market. So as values plummeted and AIG’s credit rating dropped like a rock, they were forced to pay billions of dollars against these insurance policies.

Until recently, the AIG executive who developed this shady deal, was kept on payroll as a consultant to the tune of one million dollars a month even after he was yanked from the group.

Now that burns my bagel.

kevbo's avatar

We should get dinner with our kabuki.

cookieman's avatar

@kevbo: Funny how that works. This may be unrealistic, but I’d be all for a ban on political contributions from any corporations. Non-profits and individuals only.

SeventhSense's avatar

@mij
Thank you for the foreign perspective.
The problem is that there is way too much government involvement in all of these industries and it is becoming downright frightening. If this is how it plays out under a Democratic administration, what will it be like in the future when a Republican white house has these decisions to make. Our government is the largest private mortgage holder in the country through Fannie Mae and Freddy Mac takeovers. It is State run Socialism without the consent of the people. I never intended my tax dollar to prop up the banking, insurance and mortgage industry! It’s absurd. The one thing that is still not addressed is the Middle Class and their dependence on ever extending credit to maintain a basic standard of living. The country is a reflection of the people and there needs to be fiscal responsibility established but meanwhile the middle class is drowning. And, as such, significant aid should go to the middle class not the corporations who continue to show blatant disregard for financial management and disdain for the populace who sustain them. Let’s try some trickle up economics and let the people decide the corporations that stand and fall.

mij's avatar

I just heard in Australia that the Govt are trying to put a cap on corporate bonus payments, the sooner the better.
I think they want it to be a payment of the same amount as annual salary but no more.
The other way is to make shareholders control salaries and bonus payments but the Corporation boys and girls don’t like that idea.
Were just sending our head of Telstra Australia back to USA with a huge million dollar payout, ok so he did a good job but not that bloody good mate…
Hang in there good people of America…
The financial collapse hurt me most when I heard the Bank of Scotland went bust!
I’m away to count my pennies…

SeventhSense's avatar

I don’t think the government should have any involvement in the pay structure of corporations other than loaning money with interest, using accurate risk assessments and eliminating monopolies before they are out of hand. Our revolution was fought over taxes of about 3%-6%. Our founding fathers would be outraged at what government has become and its involvement in the private sector.

cwilbur's avatar

I think that if the government is not funding the corporation, the government does not get to say how its compensation works.

However, if the government needs to bail out the corporation, all bets are off.

SeventhSense's avatar

@cwilbur
Well, yes and that’s where we currently find ourselves, but sooner rather than later we have to stop this government involvement in the private sector because it’s getting out of control. The federal branch of government is becoming far too powerful. We are looking more and more like subjects and less and less like the voice of government.

cwilbur's avatar

SeventhSense: if the private sector managed itself competently and responsibly, it wouldn’t need government involvement to pull its fat out of the fire. I think the situation would end better if Congress had allowed AIG to collapse completely and used the billions to provide relief for the laid-off workers—but corporate executives make big campaign donations, and laid-off workers tend not to.

If a company is too big to fail, it’s too big to exist.

SeventhSense's avatar

@cwilbur
I agree but no one wants to be the one responsible for the fallout or they don’t care what we want anyway.

Our country is a corporation called the UNITED STATES all capitals, not to be confused with the people’s- the United States of America. These are not simple distinctions. The act of 1871 created a corporation to get us out of debt and firmly under the oversight of international bankers. In essence, this Act formed the corporation known as THE UNITED STATES. This in fact defaced the constitution
The original Constitution drafted by the Founding Fathers, was written in this manner:

“The Constitution for the united states of America”.
The altered version reads: “THE CONSTITUTION OF THE UNITED STATES OF AMERICA”( ALL CAPITAL LETTERS). It is the corporate constitution.
In addition it went from for the people, to of the states
Anyone in business or law knows that letters and words are very significant in contracts. Just take a look at any legal document you own and see if there is anything less than all capital letters to “signify you” from your bills to your credit card. Our country has been quietly taken from us for over a century.

“As long as our government is administered for the good of the people, and is regulated by their will; as long as it secures to us the rights of persons and of property, liberty of conscience and of the press, it will be worth defending.”
~Andrew Jackson

Mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges… which are employed altogether for their benefit.
~Andrew Jackson

And they put him on a twenty. Oh the irony.

It’s “funny” because the problem is just geting bigger and like a skyscraper adding floors to a poor foundation it seems inevitable that eventually it will collapse. But they have to know this. No economist looks at any of this as less than voodoo economics. Or until they institute a universal credit/debit standard “currency ” that assures the World bank has complete hegemony. This may in fact be in the works and we just don’t know it.
The problem is that commercial code rules the day not law.

dalepetrie's avatar

It sounds as though this particular problem exists because in 2007, when there WAS a lot of competition, and they felt the need to retain people, they realized that 2008 and 2009 were going to be bad years, and many of the people receiving these bonuses now were on compensation plans that were 100% commission/bonus based, and what AIG did was to specify in their contracts that for a brief period, they would still be eligible to receive payments under this comp plan, as it would be their only form of comp, and in exchange, they had to agree not to quit, and AIG agreed not to fire them. So, it’s kind of a more gray area than I think a lot are seeing. I still would favor an individual review for fairness of each bonus payment, but I can see how perhaps it might not be “fair” to simply take away the pay of all these people in one blanket move. In other words, these “bonuses” might not really technically be “bonuses” after all, at least not the way you and I define the term. For more on this, check out this link

dalepetrie's avatar

A couple notes on the corporation. There is a FANTASTIC documentary called “The Corporation” which really lays out why we’re in such a mess…and this was previous to the economic collapse…this was done mainly in response to shenanigans at the likes of Enron, but there are great parallels. What I think I got from this that I didn’t understand before and what I think most people don’t understand is that a corporation in and of itself is considered to be a fictitious person, but because it is fictitious, it is not subject to our criminal and civil laws. Now, the people who run the corporations are still subject to these laws, but if they act on behalf of the corporation, they can shield themselves from personal responsibility from their actions, such is the PURPOSE of a corporation in the first place…it’s kind of a safe haven. And when you consider the executives who HAVE been prosecuted, it’s not because they made evil decisions which benefited the corporation but harmed the little guy, it’s been when they have made evil decisions which have benefited themselves. Consider Enron…those guys weren’t up on trial because the corporation stole billions from the pension funds of their employees, they were on trial because they used information that only THEY were privy to, in order to tell the employees it was time to invest, pumping up stock value, at a time when they were selling their personal shares, knowing that the floor was about to fall out of the whole thing. Their decisions which ran the company into the ground and caused thousands of people to lose their jobs, their pensions, etc., well those were business decisions which didn’t work out.

Essentially, the way the entire code which created corporations is written does two things, one is it shield the individual owners/decisionmakers from personal responsibility for their business decisions if two, the decisions are made in what seems to be the best interest of the corporation. The duty of decisionmakers in a corporation is to maximize profit for the owners…that is their sole purpose. The purpose of a corporation itself is to maximize profit to the owners. It is in fact illegal under US code for a corporate decisionmaker to make a decision which would knowingly not return the maximum value to the shareholders.

In other words, a decisionmaker at a corporation is faced with this scenario. Let’s say that they come to a decision point, and can go down path a or path b. Under path a, the corporation would earn $10 million, but it would break several environmental laws and could be subject to fines up to $2 million. However the environmental damage caused would be somewhere in the neighborhood of $40 million, but the corporation would only be liable for up to $2 million of that. Under path b, the corporation would actually improve the environment to the tune of $20 million in economic impact, and would pay no fines, but would make no more than $1 million. Logic would dictate that path a was shortsighted, destructive and potentially more impactful in the long run. But a decisionmaker in business could not look at the $40 million in harm vs the $20 million in good, he could ONLY by law look at the fact that under path a, I return $8 million to the shareholders, under path b I return $1 million. It doesn’t matter that the corporation has to break laws to go down path a, it is not governed by criminal or civil law, it is governed by regulations, and if those regulations cap their economic liability to $2 million, then the decision maker is bound BY LAW to go down path a, even though it means the breaking of other laws. But the decisionmaker could be sued by the shareholders if he took the company down path b, and the decisionmaker is shielded from prosecution for going down path a by acting on behalf of a corporation.

So this heralds back to the idea that government needs to get out of the business of corporations. Actually, what government needs to do is to lay rock solid foundations of regulation with clear penalties which far outstrip the profit motive as it relates to the public trust. In an example such as above, there SHOULD be a regulation which would subject the corporation to the full $40 billion in liability plus maybe 10% for good measure, and that way, breaking the laws for profit would actually be the least desirable option, not the best. And that is what we have here…we have corporations which do things which if you and I did them would be considered stealing. But because it is the most profitable way to run the business, the businesses themselves can’t be punished, the people running them are shielded from personal responsibility, and there is no protecting regular people from businesses they way we can protect people from other people using civil and criminal law.

It is my belief that it is this mindset that we must let the businesses be free of regulations that is what caused the problem, and which is going to just hurt more and more people, we need more regulations, but they DO need to be sensible. We shouldn’t be trying get in the way of corporations making money, but the whole concept of the corporation was based on the fact that it would have to live under a set of laws designed to protect the people, the same way people have to live under a set of laws designed for that same purpose. What this whole deregulation mindset forgets is that if we create a fictitious person whose only purpose is to make money and we don’t give that person any rules to live by, that person is going to fuck over everyone. And let’s face it, if we had certain rules, we might not HAVE corporations that are “too big to fail”.

But let’s look at that, I too am no big fan of bailing out businesses, it’s either a “free market”, i.e. you live and die by your own economics, or it is not. It’s not all good times when your plans work out, and welfare when they don’t. But you get a situation where a company is too “big”, or really one should say too “intertwined” to fail, and you have a very hard decision to make. Now it was suggested that maybe we should have let AIG fail in the first place and use those billions to help the displaced workers. But the problem is, it’s not just the AIG employees who are hurt. With all these derivatives, all the lines they insure, all their vendors and suppliers, there would be catastrophic damage to probably hundreds of large employers who are so deeply interrelated with AIG that they could not survive if AIG went out of business. We’d be talking first wave probably millions of layoffs. And every supplier/vendor of those companies would struggle, if many went out of business at the same time, a second tier of smaller businesses which serve the larger businesses would fail, millions more out of work. State governments, already stressed would not be able to keep up with unemployment payments. Millions more people would lose their homes. Banks would collapse under the weight of all the new foreclosures. No one would be able to borrow money (even worse than it is now). More and more businesses would go out of business because no one could afford their products. We would likely hit over 50% unemployment, and that situation would cost WAY more to fix that all the stimulus packages, the TARP program, the payments to AIG, the automaker bailouts…everything combined.

So I think, in theory, companies should live and die by the sword, and should be allowed to fail, and that we should use sound regulations perhaps to make sure that no company can be so important that the entire economy would crumble without it. But we’ve gotten ourselves into this mess, and we have to fix it. And the problem just like any problem in life is that an ounce of prevention is worth a pound of cure. So, what the government is trying to do, even though I find it highly distasteful, is to plug up the holes at the top, so that the entire foundation doesn’t get taken down. It’s kind of like saying that you should build your town on higher ground so that if the river floods, the town won’t be destroyed, but you go ahead and build it on low ground anyway, well, when the floods come, it does no good to say, “ideally, this town should be on higher ground,” instead, you sandbag to try to keep the water out…it’s not a perfect solution and may not work, but you do it because the reality is, trying now is a better and less costly solution than it would be to just let the town flood and then buy everyone a new house on higher ground. AIG could have prevented these problems by putting its business on better footing by not creating these derivatives, but they did. Now if AIG goes down, it takes the whole economy with it, so even though it sucks that we have to spend tens of billions trying to save AIG when it was their own damn fault they’re about to go under, if we don’t, then we spend trillions trying to rebuild the whole damn economy, yes AIG gets what’s coming to it, and that may be the most morally sound thing that could happen, but it would be devastating to too many people who weren’t even involved in the problem. What is the greater good? It’s like the superhero that needs to kill the villain, even though murder is wrong, because the villain will kill 100 people if he doesn’t die. It’s a concept known as moral hazard.

So, the solution is to do what we have to do in order to save as much of the economy as possible, but the government MUST exact a price by forcing through regulations that will make sure that nothing like this is EVER allowed to happen again. And it doesn’t mean that we drop our free market economy, free trade is still integral to our capitalist society, businesses should by and large be able to conduct their business, decisionmakers should not be hampered by excessive rules, there is a danger of over-reacting, but the whole point of regulation should be to keep people safe by recognizing that the pursuit of profit is not always in the best interest of society as a whole. This is what I’ve ALWAYS believed, and this is just validation to me that I have been correct all along.

Vincentt's avatar

This might be interesting, a good reminder that we also should take care not to judge too fast.

cwilbur's avatar

@dalepetrie: I think one possible and reasonable solution is to make the board of directors and senior management of a company legally responsible, jointly and severally, for any laws that are broken by the corporation. Someone dies in an industrial accident? The entire board of directors and the CEO and CFO can be tried for involuntary manslaughter, if the situation warrants. That will bring about more emphasis on safety.

One problem with eliminating corporations altogether is that the whole corporate shield that protects big corporations also protects small businesses by separating business assets from personal assets. If I’m running a two-man shop without incorporating, then one wingnut with a reasonable-enough sounding case to drag me into court can bankrupt me personally—and it doesn’t even have to be my fault. But it’s definitely a two-edged sword.

The real problem is that corporations can become “too big to fail.” If it’s too big to fail, it’s too big to exist, and it ought to be broken up.

dalepetrie's avatar

@cwilbur – I would be fien with a solution such as you propose, I do believe there needs to be some corproate shield (my last job was for a real estate development company, a group of LLCs basically that really now that the company is failing through no malfeasance on the part of the owner, going to keep him out of jail most likely, and he’s a good guy…he just wanted to keep the company afloat and keep people employed, he didn’t know the real estate market was going to tank). But yes, it’s not a matter of that there is a wall, it’s that the wall is just too thick, AND the whole purpose of the corp is to make as much money as is possible, so far too often, breaking a law is more lucrative than not breaking it, that’s just wrong.

SeventhSense's avatar

The Financial Times’ William Buiter summarizes well:

The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger. The organized lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime.

The answer is not to increase the behemoth of government, add restrictions to business or create more tax code but to completely remove ourselves from the shackles of The Federal Reserve and World Bank commercial interests and be a representative of the people once again.

dalepetrie's avatar

@SeventhSense – in my opinion, and I’m sure we’ll have to agree to disagree, it seems that your solution is like removing the melanoma and not treating the cancer. I think we have a fundamental disagreement as to what government should be. I won’t speak for you, but in my view, the government should be as large as it needs to be in order to ensure that no one is vicitmized by economic forces larger than themselves. I see government as the entity that provides for the people the ability to attain the important things in life that individuals can not provide for themselves due to the inherent limitations of being simply one small fish in one huge pond. I’m all for the free market, but an unregulated free market is a guarantee that those with money and power will enrich themselves at the expense of those without. And it’s that lie that the right wing has been force feeding the US for 28 years that has gotten us into the mess we are in. America has FINALLY elected a true progressive who puts the needs of the regular joe before the needs of those with power and money, and I say it’s about fucking time. Removing ourselves from the shackles of the Fed and the World Bank would be fine and dandy, but it’s not going to stamp out unmitigated greed which is enshrined in our legal system via the structural purpose of the corporations.

SeventhSense's avatar

@dalepetrie
I think we want the same thing. Protection for the little guy and a free economy.
But this problem is beyond our borders and the fact of the matter is that a small group of interested parties with an enormous stake, control the economy and they are better at it than the government and will always run roughshod over us in this way.
We are not bailing out AIG (or whatever one wants to call it) as a matter of choice alone but because these private interests in the Federal Bank are demanding we do so or they won’t play ball. The AIG debt will be backed by the government as essentially .93 cents on the dollar, investors will jump, the price will shoot up and they will dump it. The wealth(our wealth) will be back in the hands of many of those who created the devastation, the recovery and then the windfall! And the second act will be worse than the first. And then what? Another 800 billion?
And greed.. is not necessarily bad. It’s just that the government ought to exercise a little of the same shrewdness as these international bankers. And it’s not their size as much as their power. Our government is already exponentially larger than any one player. It is the largest mortgage holder in the country! What’s next, the United Socialist States?

P.S.- I consider myself a Liberal but fiscally conservative and don’t own a home
P.S.S- And not that I don’t have the long threads at times but I think it’s just more considerate to have some relevant points to allow some space for dialogue without thinking that you have to touch on everything. Dare I say…editing? :)

Michale's avatar

Boo hoo. One tenth of one percent of the bailout money went to bonuses. Obama’s own stimulus bill had a provision that specifically guaranteed these bonuses would be paid. A bill which the Banking Queen Barney Frank signed.

Can you say hypocrite? I knew you could.

dalepetrie's avatar

@SeventhSense – First, the PPS, well, I won’t even mention that your paragraph is longer than mine…I’ll suffice it to say I’m a writer, not an editor and leave it at this…once I start getting paid for my written widsom, I’ll worry more about making it pall nice and pretty.

Now I don’t disagree with you that the banks are largely to blame for this mess and they have us by the short hairs, and the biggest problem is I think exactly a symptom of what I’m talking about…those with money and power run roughshod over the rest of us, which is because of the structure of our laws and our system, soemthing that far predates the current administration.

In as much as I can defend this bailout, which I don’t like one bit, I can only say that it may be a necessary evil, simply because we can’t cut off our nose to spite our face. To me, the financial world is a bunch of economic terrorists, and right now they have the equivalent of an economic nuke pointed at the US. Tens of millions will be screwed if that nuke goes off. Now, we could do things the OLD way, take the moral high ground and say, “we don’t negotiate with terrorists,” call their bluff, let them destroy tens of millions of lives, and then retaliate…yay…we took the moral high ground and won. Or we can slowly and methodically disarm them, while ceding some ground up front that really is not fair and not right that we should have to. Maybe we have to give them Kansas to save the US, but if we tighten regulations and change our laws enough, we get Kansas back eventually, and make damn sure we never have to give it up again.

That seems to me to be the gist of the plan….yes, we’re putting ourselves on the hook, and yes we are assuming all the risk and only reaping some of the reward. But the alternative is to assume none of the risk and pay the ultimate price…at least this wasy it’s not a lose/lose sceanrio, it’s a lose/win, we could come out ahead or at least even, and at very least we’ll save a lot of suffering, even if some pricks who don’t deserve it…who even CAUSED much of the suffering, end up benefiting from it because THEY still have the keys to the Kingdom.

I get the where does it end, I get that we’re being raped and I don’t like it. But I’m not sure we have any choice but to negotiate with the terrorists at this time, because the consequences of doing the “right” thing might be far worse. It seems to me that at least they are looking for solutions to a moral hazard which has no good answers.

@Michale – I’d respond to your assault on Frank, but when you refer to a homosexual Senator as “the Banking Queen”, you lose all credibility, and I’m not a fan of wasting my breath on someone without the ability to engage in an intelligent discussion.

SeventhSense's avatar

@dalepetrie
It’s a sticky situation, I agree and what do you do when your hands are tied and now your feet as well. I would say far from the exception this has become the rule. We’ve always negotiated with terrorists. First it was the railroads and then the airlines.
I don’t know how old you are but do you remember Chrysler-Lee Iacocca late 1970’s? And those were loans which proved to be a good investment. He was a brilliant businessman.
As per wikipedia:
Realizing that the company would go out of business if it did not receive a significant amount of money to turn the company around, Iacocca approached the United States Congress in 1979 and asked for a loan guarantee. While it is sometimes said that Congress lent Chrysler the money, it, in fact, only guaranteed the loans. Most thought this was an unprecedented move, but Iacocca pointed to the government bailouts of the airline and railroad industries, arguing that more jobs were at stake in Chrysler’s possible demise. In the end, though the decision was controversial, Iacocca received the loan guarantee from the government.

It was just Chrysler before. Now it’s the Big Three.
We have to pay the piper sooner or later and I think we may have gone past the point of no return.

Michale's avatar

@SeventhSense I had no idea that he was homosexual. I just hear his rhetoric about how he knows so much about finance and I called him that for no other reason than that.

SeventhSense's avatar

@Michale
I did not address you.

Michale's avatar

@SeventhSense apologies. I’m a new jelly and misread who said what.

@dalepetrie See my comment above.

dalepetrie's avatar

@Michale – I’ll take your word for it. It simply seemed an interesting choice of words given that he’s been out of the closet so long it doesn’t even remember where it was. So given that I take your word for it, now please point me to that specific provision in Obama’s bailout plan that guarantees the bonuses.

@SeventhSense – I am old enough to remember Iococa, and I do think the whole practice needs to end. I heard somewhere that since its inception, air travel has YET to become profitable, it has in net lost money. We subsidize that. Same with railroads, of course when planes became all the rage we kind of left the railroads behind in favore of airlines, and auto companies…seems anything that moves people from place to place, we seem to feel that (and this may be a function of the vast size of our country), that it’s important to make sure that people can travel cheaply from place to place (hell, we go to war over oil). Unfortunately it creates a codependency…yes the government should play some role in creating and supporting infrastructure for the common good, but we haven’t drawn enough of a demarkation from my point of view. It seems that we’re missing the mark…it’s all the fault of politics if you ask me.

No one looks for the common sense solution in the middle…when politics gets involved it’s either “no regulations, unfetterred free trade,” or “not enough regulations, must prop up the industry for the greater good.” But we don’t do a good job of regulating industry…we allow lobbyists to write the regulations, because they have “industry experience”, but they are looking out only for the good of the company and not the good of the public. But then if we restrict business too far suddenly we feel as though we need to almost nationalize the losses of the industry because competition won’t grow in an over regulated environment.

All I’m getting at is we need sensible regulations that make it clear what is right and what is wrong, which favor the common good and the good of the little guy over the good of the business, but which DON’T restrict a company’s right to free commerce. And then, we need to say, hey, either this is an industry that is TOO important to allow the profit motive in (kind of like medicine, I think medical science should be nationalized so we don’t have drug companies pushing expensive drugs with huge side effects at enormous markups for the first 11 years when they hold the patent, while ignoring cures in favor of treatments, which cause insurance rates to skyrocket, making it impossible for families and business to afford policies). If we want to say transportation is something that every American should be guaranteed (and I don’t think this is a right, but a privelege), then we should nationalize the industry and accept all risks and rewards. If however we want free enterprise to rule and to allow those with an entrepreneurial spirit to make money, then we should expect them to come up with a profitable business model within the confines of sensible regulations.

So getting back to banking, though I do think this is an industry where the profit motive should be allowed, I do think that we’ve gotten away from imposing regulations that are set up to protect the unsuspecting. We’re allowing companies to reap great rewards while passing the greatest risks on to the people. And as such, we really can’t afford to prop up all these companies. But now the risks have already been passed, we’ve allowed lax regulation to get us to a point where if they fail, the whole damn country’s economy goes under…they’ve already passed the risks onto the taxpayer/citizen/government. Our government is now in a situation where it has no choice but to do its best to minimize the fallout. And if that means giving money to people who should actually be in jail, well, you can’t make an omellette without breaking a few eggs. I’d rather drop a dozen eggs then set the whole damn chicken coup on fire.

SeventhSense's avatar

Companies are business and business is the life-blood of this country in every town, city and hamlet. Companies like Johnson & Johnson, Apple Computer, eBay and countless other small businesses are what bring value to us all. We can’t villify business nor can the abrogation of contracts be allowed. That’s just counterproductive in a free market economy. It’s a knee jerk reaction by us who don’t have billions in our portfolios. Corporations employ millions of people and supply the population with a means to enjoy the benefits of this country. I own a small corporation(business) and I am actively involved in creating value for people and adding to the national GDP. The sacrifices are tremendous and the benefit of being able to write off tax expenses etc. is the trade off that the government makes for what I add to society. It’s also easy to write off “big businesses” as the bad guys but they did not cause this mess. They are the victims like the little guy and in fact the one whom the little guy depends on to feed his family. In addition they pay billions in taxes to run the country.
What caused this mess is people who just push money around and manipulate numbers and the loss of government regulation over them. The banks perform a service and for that of course they should be compensated. Their chief service is to provide credit to people and businesses who need a mortgage, and as important, to extend credit so persons can run their businesses. If they are unable to perform that function then they are simply a drain on the economy. If the exclusive banking concerns which represent about 5% of the banks can wreak such havoc then they need to be leashed-maybe through tax code revisions. The responsible 95% of banks should not be punished but protected from this elite minority. But restricting businesses which are jobs, money and value is no solution because it was never a problem. And I’ll close with this. I have just watched back to back episodes of expert panel upon expert panel and the only thing that’s crystal clear is that neither the left nor right has any clue what’s going to work. So I guess we’ll wait and see about the success or failure of the current policy. Meanwhile they are auctioning off foreclosed homes at the New Jersey Meadowlands.
Peace out.
‹(•¿•)›

dalepetrie's avatar

@SeventhSense – not sure how clearly it came across, but I mostly agree with you. I agre companies are indeed what makes our economy work, and I don’t villify companies for making a profit. In fact, if you’ll read back to before you jumped into the conversation, what I was villifying was the way in which we have structured corporate law. Basically, as I’m sure you know if you own a corporation, the corporation is a fictitious person. But unlike a flesh and blood person, it can NOT be prosecuted under criminal law. The language of business is money, and the corporation’s sole purpose for existing is to return as large a profit as possible to the owners. As the owner of such an entity, you would be derlict in your duties if you did not make it your primary (not to say your only) goal to make the business as profitable as possible.

But whereas you are not a big enough fish to worry about this, a corporation MUCH larger than yours may very well be faced with a decision. Say an opportunity to earn money comes along, and it comes with grand risks, such as leveraging all your assets at a 30 to 1 ratio and breaking them all down into derivatives to spread the risk across the entire financial sector…you KNOW if that whole house of cards comes crashing down, the whole economy is fucked. But it’s not “technically” illegal, because hey there is no law against it. THAT is where regulation belongs…if someone wants to do something new, like say break banking assets down to derivatives in order to support a 30 to 1 leverage ratio, then it is the JOB OF OUR FUCKING GOVERNMENT to say, hold up there a minute, bucko. If you do this, then what if a, b, c, d and e, and to realize that uh uh….this is just too risky…this means that if it ever backfires, it’s going to be a HUGE mess, a mess that wouldn’t have existed if you weren’t allowed to pull these Ponzi scheme, and yet, because you’ve spread your risk throughout the entire economy, YOU will be in a position to say, “if I fail, I take the whole damn economy with me.”

So it’s not the J&Js and the Apples and the eBays that caused the problem in this case, and to a degree it’s not even the fault of the banking executives who thought up this Ponzi scheme or those who were complicit in going along with it. I see it as a fault of lax regulation, which is a symptom of businesses which have bought influence, and a culture created by politics that allowed the mindset to prevail that says all regulations are bad.

Bottom line, I respect you for employing people, but I don’t give a rats ass if you employ 10 million people if you are doing something that is adverse to the common good of all 300 milliion people in this country. A corporation can not be prosecuted under criminal law, and the larger the corporation, the more meaningless the civil code because large fines pale in comparisson to mamoth profits one can reap by bending a few rules (or in this case exploiting the fact that there were too few to begin with).

I don’t want to regulate you so you can’t run your business, and I do want to free up the banking mess…I think we’ve sold the ideal that we’re moving closer and closer to a free market out of one side of our mouths, while making sure that businesses had the natural obstacles to their success magically cleared away from them by the same big bad government that the free marketers villify.

I’ll agree greed is good, but unfettered greed is not good. Greed motivates people to reach for that brass ring, but it also motivates them to do whatever it takes without regard to anything else. Regulation is where that regard comes from, because it doesn’t exist on its own, not among those who have that inherent greed within them that will allow them to take those risks in order to hopefully reap those rewards.

I totally agree that neither side has all the answers, and I think both sides can go too far, but I think common sense needs to rule here. And common sense says to me, OK, were these contracts entered into fairly in the first place, or were they put into place to fleece the taxpayer one last time after their houses of cards fell down. In the first scenario, hell no I would not agree the abrogation of said contract, but in the second, you know as well as I know that contract could be legally voided as it would be a clear attempt to circumvent the law. So bottom line is, when I see that most of these contracts relate to 2007 comp, and much of the reason they were made has to do with the fact that these execs had no other source of compensation and this was meant to bridge the gap during a time anticipated to be unprofitable, for reasons having nothing to do with the current fallout, then hey, if that is indeed the case, and 15 of the top 20 bonus earners are giving the money back…that is small beans. It’s what it says about our government’s failure to know what to regulate and how much to regulate it.

The big problem is what I think you hit on. Even though we’re helping these banks with troubled assets, they’re not loaning money. Hell, I lost my job, but before I did, I couldn’t even get a HELOC with a credit score between 710 and 720 and a mortage at only 65% of my house value. That’s not right. They have us by the shorthairs until we come up with a solution that gets them out from under their debt obligations, which as you said, 95% of them were just doing their jobs.

My whole point is this. We need to do WHATEVER IT TAKES. I like Obama’s solutions to a point, in that he is at least trying to pass some of the risks to the private sector, though he is leaving the government with an uncomfortable level of exposure. What I don’t think naysayers realize though is that the level of exposure OVERALL, goes down if we do something like this, because we already have full exposure…if we allow things to continue on the path they are on, most of us will be living on the street and waiting the breadline eventually. At that point, you might as well blow your nose on the constitution as it won’t be worth the paper its written on. What we MUST do, and I see Obama doing it, is to shoot for the greatest possible upside and the smallest possible downside in a realistic manner, accept the present moral hazards, but then change the entire culture of business so that being a responsible corporate citizen is an expectation and not just something you do because you’re one of the good guys (or are too small to make the wholesale fucking of everything else profitable).

Michale's avatar

@dalepetrie From page H1412 of the Final Stimulus Bill, “SEC. 111. EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE:
“(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a writte [sic] 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.”

This amendment provides an exception for contractually obligated bonuses agreed on before Feb. 11, 2009, which exempts the very AIG bonuses Obama is condemning every single chance he gets. The amendment is in the final version and is law.

cwilbur's avatar

The problem here is that AIG has a lot of divisions. When AIG started to have trouble, upper management realized that having good employees leaving in droves would amplify the trouble, and started offering people retention bonuses—if they stick it out to December 31, 2008, then they’ll get 50% of their annual salary as a bonus, for instance. This is standard practice on Wall Street.

The question here is, you had one division of the company that lost it so much money that it went bankrupt. Is it reasonable to penalize the other workers in the company for this? I don’t know. I think Wall Street compensation is ludicrous to begin with, so I don’t think applying reality helps. At the same time, if AIG had collapsed, the people who had been promised bonuses would not have gotten them.

In retrospect, I think the wiser choice might have been to let AIG fail and use the money that was spent on the bailout to provide relief to people who were hurt by the collapse. I expect it would have been more pain, but it would have been over sooner, and we wouldn’t have to wrangle over bonuses.

dalepetrie's avatar

@Michale – This legaleze seems to me to say that if you entered into an employment contract which lays out bonus payments for specific reasons, the fact that we’re signing this stimulus bill from which this company will receive some federal funds should not be construed to say that all bonus payments will now be null and void even if they are entered into under contract. It seems to me that this language would HAVE to be in there, because like I’ve pointed out many times, some times these contracts were not signed with the intention of circumventing consequences of this fallout, but rather they were fair contracts entered into by both parties in good faith. I no more want Obama to say, “all contracts are null and void” than I want him to say “all contracts are to be honored.” And the later is NOT what this says, it is simply saying that this bill in and of itself does not nullify these contracts, that would be an overreach. It seems far more logical to me that one would look at this as a case arises where there is the appearance of impropriety, to have his Treasury Secretary investigate the options for blocking specific payments as they are deemed to be inappropriate.

@cwilbur – I agree with you on everything you just said, except for the idea that it might have been wiser to let AIG fail, as I suspect that the cost of a failed AIG, given how far and wide (and deep) their derivatives (and the associated risks) were spread about the economy as a whole, I don’t think 170 billion would be more than a band aid on the economic fallout of letting AIG fail. AIG shouldn’t have been allowed to do what they did, but it’s done, and now the only way out of it is to put in place guildines for the future (much like page H1412 of the Final Stimuls Bill as listed by Michale). It seems to me that we’re in a position where if AIG fails, our entire economy is pushed over the brink…we should have allowed it to get to this, but we have, so now we do what we have to and make sure it never happens again. THAT is how I will judge Obama’s success…if a couple decades from now I find that he left a loophole in regulation that allowed this same shit to happen under a different name, I’ll regard him with the same disdain I have for Reagan and the first Bush.

SeventhSense's avatar

@dalepetrie
We are saying the same thing.
You must be brilliant. :)

dalepetrie's avatar

@SeventhSense – no, I just pay attention.

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