horns of dilema

@parados,

Probably, and the law would have been applied by the courts. Sorry you don't see any difference.

0 Replies

You can't put AIG and other financial companies into bankruptcy right now. The bankruptcy court wouldn't have the first ******* clue how to untangle the Credit Default Swap mess. Who is going to buy the assets at more than pennies on the dollar? The whole thing would just implode and it would drag down the banks who are heavily depending on getting paid those CDS just to survive.

Cycloptichorn

0 Replies

@georgeob1,

George,

Quote:

My company sets aside 22% of pre tax profits for bonus payments to employees, and they are distributed rather widely in the company. This is not particularly unusual.

If your company had made extremely poor decisions and was deeply in debt, and you had to go to the government for billions of dollars just to stay afloat, would you still be paying these bonuses? My guess is no. Yet you now defend other companies paying bonuses when they have zero capital with which to do so.

Quote:

I'm not suggesting that there haven't been serious excesses in Wall Street. My preference in these cases is to allow the companies to fail, the stockholders to lose everything; the employees to lose their jobs with severance payments intact and the bondholders to get what's left (if anything).

My preference would be for these companies to be wound down, the stockholders to lose everything, the bondholders to lose everything, and the management to be investigated for fraud and tried for the crime of crashing our economy through their idiotic actions.

Then, get rid of publicly traded banks permanently so these gargantuan creatures cannot rise again to threaten our economy. Go back to the private model, where performance actually mattered when it came to compensation. You asked me a while back if I thought 3-5 years was really 'short term.' I was ******* dumbfounded to read that. Of course that's short-term. These perverse incentives to maximize short-term stock price have to end.

The minute these companies came begging to you and I for a bailout, they forfeited any moral right to complain when we propose harsh penalties upon them. And all you big business supporters are unwilling to admit this fact, and now act as if we are somehow attacking people who were doing a good job and a business model which was working. The truth is they were doing a poor job and the model was not working.

Forget about bonus clawbacks; these people are lucky they still have jobs and even luckier their asses aren't getting raped in jail right now.

Cycloptichorn

3 Replies

@Cycloptichorn,

If you are under contract to pay earned bonuses - you pay them or face
an expensive lawsuit that will end up costing 3Xs the original amount.

0 Replies

@Cycloptichorn,

Happily my company has no debt and a fairly good pile of cash. However business always has risks in terms of competitors; market trends; and project performance (we do a fair amount of fixed price remediation and given the punative nature of environmental law, errors, misestimates and even surprises can quickly cost millions).

I'm not really defending AIG or the decision of its recently appointed CEO (who just took the job and works for no salary) to approve the previously scheduled bonus payments.

Instead I'm pointing to the self-serving hypocrisy of legislators who; (1) Took large sums in political contributions from AIG; (2) Almost certainly knew about the lingering issues of bonus payments in an industry that used them heavily;(3) Very likely particpated in (or should have known of) specific actions to remove restrictions on paying them from the draft legislation they passed ; (4) Rose up in self-righteous indignation to denounce these payments after the public became aroused; and (5) finally called for (Senate) or actually voted for (House) obviously unconstitutional legislation that would illegally seize these bonuses through under the fraudulent guise of "taxation". This cynical comedy is government at its worst.

I'm quite willing to accept that there is excessive greed in wall Street, and that AIG in particular grew to huge proportions by "insuring" elements of risk that involved few precedents and even less in the way of sound actuarial analysis. I don't for a moment believe that AIG should be saved by even a dollar of public money unless it is clearly in the public benefit to do so. Democrats & Republicans appear united in the belief that this is so. I am unsure and skeptical of this, but frankly don't know enough to be confident of my judgement, given the stakes involved.

However, for good or ill we have made the political decision to save this company, and invested huge sums in doing so. It seems rather foolish to me for us to attack and perhaps destroy the thing in which we have invested so heavily. If punishment of the greedy is our goal then let AIG collapse and allow its shareholders to lose everything; its employees to lose their jobs & stock holdings; and their creditors to get what may remain. If instead we want to keep it going at tolerable cost, then I suggest we put the required money into it, watch closely, and keep the hands of self-serving, hypocritical idiots like Barney Frank and Chris Dodd off it. Unfortunately that is not really possible - and that alone may be the decisive reason why the bail-out itself was a huge mistake.

One good thing may have come out of this -- future bailouts are likely dead. The auto industry and the UAW will simply have to face the music.

0 Replies

@Cycloptichorn,

Cycloptichorn wrote:

My preference would be for these companies to be wound down, the stockholders to lose everything, the bondholders to lose everything, and the management to be investigated for fraud and tried for the crime of crashing our economy through their idiotic actions.

Unfortunately this is a country of laws and "crashing our economy" isn't a crime. Indeed if you were to make it one this would be a net that would also take in numerous Republican and Denocrat legislators as well as prominent members of the current and last two presidential Administrations.

BTW capitalism is well-known to be subject to the growth of bubbles in the valuation of various things, and their inevitable collapse known to bring all the catastrophes we are now facing. History demonstrates that such bubbles are reather easy to analyse and understand in retrospect, but almost never accurately forseen in prospect. There is as yet no formulaic way of managing economic growth in a free economy and eliminating the possibility of such events. Despite these serious flaws, capitalism delivers better average results for more people than do its alternatives. I don't oppose sound regulation, but simply note that there are many more examples of foolish regulation stifiling economic growth than there are of the wise prevention of such catastrophies.

Cycloptichorn wrote:

Then, get rid of publicly traded banks permanently so these gargantuan creatures cannot rise again to threaten our economy. Go back to the private model, where performance actually mattered when it came to compensation. You asked me a while back if I thought 3-5 years was really 'short term.' I was ******* dumbfounded to read that. Of course that's short-term. These perverse incentives to maximize short-term stock price have to end.

I think you are seeking to legislate the reform of human nature. In the first place I think you are trying to make a distinction between "private" and "public" banks that never existed. Banks have always had multiple investors whether medieval syndacates in Genoa or privately held consortiums in London or modern publically traded banks worldwide. Do our legislators think in the long-term as you have defined it ??? There is damn little evidence for the proposition that they do in either the current or any of the administrations during my lifetime at least. I agree that long-term thinking and planning as you infer it is a desirable thing, but how can it systematically be achieved in any area of human endeavor without the imposition of a real tyranny - and how do we find Plato's philosopher kings with which to lead it? It is noteworthy that the leaders of even the politically enlightened and non tyrannical socialist systems didn't do very well in the long term - eventually the economies they led wound down to dull decaying systems with little innovation, less investment and more or less uniform tawdry poverty for everyone.

Cycloptichorn wrote:

The minute these companies came begging to you and I for a bailout, they forfeited any moral right to complain when we propose harsh penalties upon them. And all you big business supporters are unwilling to admit this fact, and now act as if we are somehow attacking people who were doing a good job and a business model which was working. The truth is they were doing a poor job and the model was not working.

Did they really come begging? The government appeared to be the one taking the initiative here, and increasingly other banks are refusing the offered government aid. Moreover the government did a great deal itself to create and facilitate the very business model that brought everything down.

Cycloptichorn wrote:

Forget about bonus clawbacks; these people are lucky they still have jobs and even luckier their asses aren't getting raped in jail right now.
Cycloptichorn

I'll take that merely as an expression of your anger and frustration. It is however an interesting and perhaps illuminating example of how the Bolshevicks rationalized what they called the "harvesting of the Bourgeois" - taking the property and freedom of those they opposed and members of the classes other than the one they pretended to represent. Unfortunately once the floodgates were opened it became impossible to restrain the seizures and murders. It turned out to be a reather ineffectual "reform" of Russian society and wasted the lives of two generations of its people.

1 Reply

@georgeob1,

Quote:

Did they really come begging? The government appeared to be the one taking the initiative here

Wow, it's hard to believe you would say such a thing seriously. Yes, they came begging. Without our public funds the major banks would all have failed, with the possible exception of Wells Fargo.

Then, nobody would be getting paychecks or stock or bond payouts or bonuses or anything. Without the assistance of the US government and people, the entire financial sector would be looking for a job right now. So to claim that we have no moral right to impose penalties on that sector is ridiculous.

I think one of the major problems is the pretense that these companies cannot be ran/wound down by other people than the ones currently working for them. There is nothing so special about these people that we have to reward them just to keep them around.

You evaded the question earlier, but I think we both know that if your company was in financial trouble, you wouldn't be paying bonuses out.

Cycloptichorn

2 Replies

@Cycloptichorn,

Cycloptichorn wrote:

You evaded the question earlier, but I think we both know that if your company was in financial trouble, you wouldn't be paying bonuses out.

Cycloptichorn

I'm fairly sure you are right, but as you noted earlier, they set aside 22% of pre tax profits. That would surely dampen bonus prospects in a money losing year, which sounds typical of companies in financial trouble.

0 Replies

@Cycloptichorn,

You are wrong about ALL the major Banks. Check your facts. Indeed increasing numbers of banks are currently refusing the "simulus" funds, precisely to avoid government intrusion. CITIBANK certainly did come begging, but I believe we would be far better off letting it go into receivership.

As I said, my company pays bonuses equal to 22% of pre tax profits. If there are no profits, there are no bonuses. I didn't evade the question at all.

How AIG could rationalize bonuses in a year in which it made no profits or in which its policies on CDO's experienced an enormous number of claims is another matter. It may well be that a number of people critical to unwinding their various financial positions feel they would be better off leaving if they are not paid promised or implied bonuses. This puts the new CEO (who serves without a salary) and the government which has already committed its money in a fix. If so this is certainly greedy and somewhat disloyal behavior. However, human beings are frequently greedy and disloyal, and there may be no other way to prevent their departure. While this is certainly bad behavior; it is not a crime. As we have already seen there is a dark underside to politics, whether the issue is getting elected in the cesspool of Illinois politics, or creating a massive appropriation bill acceptable to all the various equally selfish constituent groups of the Democrat party. Why should you expect business to be any better?

I didn't say that the government had no moral right to impose sanctions on AIG bonus recipients: I said it has no legal or constitutional right to do so.

I also said that the Democrat leaders in Congress calling for such legislation are being knowingly deceptive and hypocritical.

1 Reply

@georgeob1,

Quote:

It may well be that a number of people critical to unwinding their various financial positions feel they would be better off leaving if they are not paid promised or implied bonuses.

Is it truly a fact that this problem cannot be unwound without these people? I have not seen detailed reasoning for why this is so. Surely records exist which can be used with or without their cooperation; are the records of these credit-default swaps not on the books?

As for the bonus issue, I recall that the word 'bonus' means different things. It seems that it essentially means 'lump-sum guaranteed payment,' not tied to the performance of the company, in the financial industry; whereas in your company I doubt that is true. Why is this done to such a degree in the financial industry?

Cycloptichorn

2 Replies

@Cycloptichorn,

Cycloptichorn wrote:

Is it truly a fact that this problem cannot be unwound without these people? I have not seen detailed reasoning for why this is so. Surely records exist which can be used with or without their cooperation; are the records of these credit-default swaps not on the books?

Good question, and I don't know the answer. It is evident that the new AIG CEO (who again is serving the public in this matter without a salary) thinks he needs to keep these folks.

It was painful to watch him being insulted by pipsqueak congressmen out to capture a moment's exposure on the camera in a deceptive display of self-righteous indignation, when both they and he knew that what they were complaining about occurred before he took office.

Cycloptichorn wrote:

As for the bonus issue, I recall that the word 'bonus' means different things. It seems that it essentially means 'lump-sum guaranteed payment,' not tied to the performance of the company, in the financial industry; whereas in your company I doubt that is true. Why is this done to such a degree in the financial industry? Cycloptichorn

Industries vary in their compensation practices - getting good employees is but one of the many ways in which enterprises compete with each other. Employees can be quick to run off with insider knowledge that can benefit a competitor or facilitate their own creation of a new competing company. Not always pretty, but certainly a part of human nature. In general it is very hard to keep good folks when they can do better elsewhere, particularly in good times which these are not.

Bonuses are usually called "incentive compensation" a euphamism sometimes misused by both employers and employees. Business sometimes make basic salary very small and make up for it with large potential bonuses for specific individual outcomes, in effect creating something like a piece work situation in which an employees work product earns him pay only if it sells (common in the financial industry): employees bid up bonuses and expect them even when they don't produce. My preference has always been to tie bonuses to company and division profits: we have very transparent monthly financial statements and most people can estimate their bonuses fairly accurately - I get motivation based on our bottom line performance: everybody wins.

We pay bonuses annually at the end of our fiscal year. Some companies, like Oracle pay bonuses both quarterly and, for senior execs annually. Partnerships and law firms typically pay very low guaranteed salaries, but distribute often fat profits to the partners usually on a quarterly basis. These organizations have little financial staying power and the shortest time horizon of all. Partner loyalty is usually low and law firms fail quickly in bad times, such as those at hand. (Hard to shed a tear for these guys.)

Some companies, particularly those in fast-growing industries, keep salaries low and pay bonuses in the form of stock options. In effect they are paying their employees a share of future earnings. If the company succeeds everyone wins. Microsoft did this for years, paying fairly low salaries but generous option grants. Many mid level employees who were there during the high growth years the 1980s and early 1990s retired early with millions. That all ended with the dot com bust of 1999.

Overall a very dynamic situation: in good times companies hustle and compete to keep good employees: in bad times employees hustle and compete to keep their jobs.

It's not easy to keep a business creative, adaptable, lean and profitable. Human nature seeks comfort, predictability and security: the brutal facts of competition limit their attainment. Only a very small fraction of the companies created in any year last more than twenty years.

1 Reply

@georgeob1,

georgeob1 wrote:

.........Good question, and I don't know the answer. ......

It's not clear that the mathematicians were to blame in that particular debacle, because AIG's subsidiary selling these swaps was one of very, very few who agreed to terms of "pay as you go"; most other insurers only pay out in case of actual default. The difference is crucial: AIG has to pay out whenever the underlying securities fall in value ("mark to market" rules apply), whether they default (ie "a credit event occurs" in legalese) or not.

Worse yet, as long as the group had a AAA credit rating it had no obligation to keep reserves against potential losses on these swaps - which wouldn't have been the case with regular insurance - and those geniuses in the London subsidiary went out and wrote $400 billion worth of swaps. That's twice the market cap of all of AIG in 2007, and the maximum potential taxpayer bailout amount.

Blaming contracts on lawyers strikes me as more reasonable than blaming them on mathematicians, most of whom knew perfectly well that the so-called Gaussian copula is complete garbage.

2 Replies

@High Seas,

More on legal wording in case your eyes don't glaze over looking at the stuff:

Quote:

......credit default swap transactions where the Reference Obligation is the syndicated secured loan of the issuer and the Deliverable Obligations are Syndicated Secured Loans. This form is primarily intended for use in the North American market. In terms of settlement once a Credit Event has occurred....

http://www.isda.org/publications/isdacredit-deri-def-sup-comm.html

0 Replies

@High Seas,

PS to previous post the Gaussian copula is complete garbage when nobody knows what the correlation coefficient really is, because in synthetic securities it was calculated over the "price series" in the securities' existence, which was sometimes measured in months!

If the true covariances were known, of course, as they are for physical processes like electromagnetic interference, the formula would be perfectly valid - sorry if that wasn't made clear in original post.

0 Replies

@Cycloptichorn,

Just in from my NYT news alerts:

Quote:

Cuomo Says Most Huge A.I.G. Bonuses Were Returned

Attorney General Andrew M. Cuomo of New York announced late
Monday afternoon that 9 of the top 10 bonus recipients at the
American International Group had given back their bonuses.

He also said 15 of the top 20 bonus recipients in A.I.G.'s
financial products division had given the money back, for a
total that he estimated at about $30 million. "Those bonuses
will be returned in full," Mr. Cuomo said during a conference
call with reporters.

Kinda irrelevant, I guess....but sensible

0 Replies

horns of dilema

Related Topics

Quick Links

My Account

able2know