ataxingmatter

AIG bonuses: more

[edited 032409 to add link]

Is the populist anger about the AIG bonuses bad?  I don't think so.  It is not unreasonable to be mad about Wall Street's sense of entitlement.  In fact, it is out of bounds, and damaging to society, for a few people who happen to be good at math and so able to work with the various engineered financial instruments to be paid so much that they have come to think of themselves as entitled to multiple millions of dollars a year even when their reckless performance has cost the entire world dearly.  400 employees (current, former and future!) in AIG's financial products division received bonuses ranging from $1000 to $6.5 million, with 73 of them getting $1 million or more, according to Cuomo's investigation.  Cuomo: AIG Execs Agree to Return $50M Bonuses, AP (Fox News: Politics), Mar 23, 2009

Is the Congressional response to populist anger bad?  That's harder to say.  Much of the Congressional outrage is itself derivative--if constituents get mad, then Congress gets mad, or at least appears to get mad.  That's the way politics works, so nothing unusual there.  But that can mean that there is a good deal of posturing intended to calm the public mood and then get on with business as usual.  There needs to be a real response to the financial crisis that results in a new way of doing business and not a return to business as usual.  

Is a tax on certain bailout company bonuses bad?  Again, harder to say.    Clawing back unreasonable compensation paid by a company that is 80% controlled by the federal government seems unremarkable, but there may be various legal issues that would depend on the details of any law ultimately passed.  A law that instituted, even retroactively, a significantly higher rate  of taxation on the ordinary income of individuals in a very high bracket ( $1 million or more AGI, for example) received from companies that received at least some threshold of bailout money would appear to pass muster under due process, bill of attainder and other constitutional tests as within the general taxation power of Congress, and an income tax avoids the breach of contract issue.  Check out this Below the Beltway posting for a discussion of a number of these issues. 

(I find the discussions of contract breach ironic--many of those complaining about breaching contracts also pushed for a requirement that the auto companies gain concessions from labor (modifications to the existing contracts) if they received federal bailout loans.  If the same approach as that taken with the auto companies had been taken when  the federal government first provided aid to AIG--i.e., require modifications to contracts in respect of bonuses to be paid, else no aid and likely bankruptcy and no pay whatsoever--the current bonus problem would not have arisen.   But back in September  the Bush administration was quite fixed on not imposing controlling conditions on bailed out companies. The fiscal crisis, caused in large part by the deregulatory mania begun in earnest under Reagan, thus broke out under a regime that tended to attempt to cure the disease with more of the same deregulatory mania.)

Furthermore, if structured correctly and if coupled with provisions in other laws, a reasonable surcharge tax on bailout company bonuses might be a start on moving to a new paradigm of thinking about managers and owners.  We need to figure out how to change the laws about the ways that managers' compensation levels are set, so that we don't continue expanding the gap between overpaid CEO and underpaid workers.  Limiting the corporate tax deduction hasn't worked,  because courts tend to find unreasonable compensation reasonable and because the performance-related compensation loophole swallows any limitation.  We need some governance changes, that put shareholders in control of the Board and, especially, of compensation.  Someone suggested federal legislation that required a shareholder committee, similar to a creditor committee in bankruptcy, to handle nominations for board members and compensation for executives.  We probably also need to change the tax laws about pensions and stock options, though it is difficult to know what tax incentives or disincentives make the most sense.  This suggests that Congress should set up a joint committee on executive compensation to come up with across-the board reforms in a number of different areas (securities laws, tax laws) that will make a difference.

But I don't think Congress will ultimately enact any bonus tax, for two related reasons:  first, neither Obama nor the Senate have the political will to take an action that might be viewed as chastizing Wall Street, see The US Senate Delays action on the AIG bonus tax, Mar. 24, 2009 (noting Obama's appearance on CBS's 60 Minutes that questioned using taxes to "target[] a handful of individuals" and the Senate's decision to defer consideration of the bonus tax bill); and second, Andrew Cuomo's success in getting a good number of the top executives to give back their bonuses (see AP story, above) will provide a cover for Congress to take no further action. 

Bailout and Bonuses

As the saga about the AIG bonuses, bank bailouts, and general handling of the TARP funds continues, the general anger of ordinary taxpayers seems to grow. People are mad. See, e.g., Reuters, AIG massive payments to banks stoke bailout rage, Mar. 16, 2009.

Perhaps that's a good thing.  If people are mad, and if they figure out what went wrong well enough, they can apply the kind of pressure that is needed to get Congress to change the way it operates.  Not corporate cronyism as usual, but legislation that considers the ordinary people.  Not advantaging the rich with super-low tax rates (e.g., 15% on capital gains), but considering the hardworking ordinary Americans and eliminating the capital gains preference, maybe.  Maybe, just maybe, the widespread anger at the "greed is good" "I'm worth millions even if I lose the company money" attitudes of Wall Street will end up changing the way the corporate-financial system works.  Right now, it works for the rich and doesn't give a damn for the ordinary person.  Unions find it hard to organize, but wealthy CEOs have their boards made up of their peers, and get the results that are favorable to them.  In that climate, the ordinary taxpayer's anger is reasonable and perhaps even cathartic.

The reasons for the anger are many.  First, Congress and the executive stayed asleep at the switch through the speculative expansion of the investment banking industry, letting corporations like AIG get "too big to fail" and letting speculative derivatives take over the market.  These same big banks and insurance companies were also acting as accommodation parties in tax shelter transactions, so that our ire is even greater--we let them speculate us into a market disruption credit crunch that has reverberated through the economy, hurting especially the little guys who have little resources to support them through this kind of disruption, and we let them dupe the government in tax shelter deals where they got lucrative fees, and again the little guy was hurt, paying payroll taxes while the big guy got reduced capital gains rates or no taxes at all because of aggressive tax shelters.

Then when the government decided that it had to act to help the financial system--way back in September under the Bush Administration--it didn't bother to attach the kinds of strings that should have gone with all that bailout money, at least not when it came to banks.  So AIG contracted to pay ridiculous bonuses to every member of the financial products unit that caused the company the stupendous losses that require taxpayer assistance.  AIG paid out $165 million to 73 recipients on March 15, with many of those getting multiple millions in "retention" bonuses so they can handle the winding down of the losing transactions they created, even though some have already left the company.  We even find that the current Treasury secretary intervened to be sure the bailout bill didn't make it impossible to pay big bonuses to AIG, based on some concern about honoring contracts.  Funny, when it comes to ordinary workers'--especially ones that are unionized--Congress doesn't seem very concerned about honoring contracts.  Remember that the bailout provisions for the auto companies required them to gain concessions from labor!  So now Congress is considering a special tax provision that will tax bonuses paid to employees at bailout companies at a very high rate (90% in the bill passed by the House on March 19, drawing 85 Republicans in the 328-93 vote; 70% in the proposed bill under consideration in the Senate).  Baucus indicated that he wanted "the highest excise tax rate that could be imposed on the bonuses that would be sustainable in court."  BNA Daily Tax RealTime, Mar. 17, 2009.  The Senate's proposed 70% rate (35% company, 35% recipient) would apply to "excessive executive compensation" for all companies that accepted government funds.  See Grassley, Baucus would tax all bonuses, Mar. 17, 2009.   And New York Attorney General Cuomo proclaimed:  "If the taxpayer didn't bail out AIG, those contracts wouldn't be worth the paper they’re printed on.  ... Just because there's a contract doesn't mean there's no way around the contract."  Salon, Take this bonus and shove it, Mar. 17, 2009. 

We may dislike this approach, but it may succeed in causing employees to cough up the bonuses paid.  Being retroactive does not make a tax unconstitutional.  Of course, it will need to be treated as a tax, and not as an unconstitutional taking without compensation.  The Senate and House bills differ in a number of details.  See Rangel release, Mar. 18, 2009; text of H.R. 1586; Reuters, U.S. to Claw Back AIG Bonuses, Lawmakers Eye Tax, Mar. 18, 2009; 70% tax on AIG bonuses?, Straits Times, Mar. 18, 2009.  This issue should have been handled when the Bush Administration first arranged to bailout AIG--by clear provisions attached to the bailout funds that resulted in the change of funding meaning a change to business as usual.  That didn't happen, so we are left with after-the-fact solutions.  An excise tax on retention payments that are in excess of a reasonable amount may be the best solution possible.  Does AIG need to pay each of these employees multiple millions to get them to stay on and wind down their disastrous deals?  One suspects that there are competent financial analysts available in this recession market who could figure things out pretty quickly.  I just don't buy the "only those employees can do the job" attitude.

Of course, our anger is made worse by the fact that the government--especially Phil Gramm and his midnight putsch putting through the Commodities Futures Modernization Act- let a company like AIG serve as a counterparty in credit default swap contracts that can be purely speculative, with no regulation to monitor capital reserves, size of the swap portfolio, or counterparties at risk.  Now we are finding that the big investment banks that are mostly responsible for getting the global economy into the mess it is in are also receiving much of the taxpayer bailout money that has been "loaned" to AIG.  More than half of the bailout money to AIG has gone to pay Deutsche Bank, Societe Generale, Barclay's, Goldman and other banks who are counterparties on these bets, making ordinary taxpayers even angrier.  See, e.g., Reuters, AIG massive payments to banks stoke bailout rage, Mar. 16, 2009.  Many of them are foreign banks, so that the US taxpayer is essentially bailing out the foreign banks (instead of the foreign governments doing so).  Weren't the banks that entered into contracts with AIG at least as responsible as AIG for the mess--they should have seen that it was unreasonable for any one company to take the guarantor position that AIG took on so many of these swaps, shouldn't they?   Cambell Harvey, a finance professor at Duke, agrees with me. "A hedge is not a hedge if you did not factor in the counterparty risk.  And the U.S. taxpayer should not be obligated to make people whole for hedges that were not properly executed."  Id.  And shouldn't those banks have taken a "haircut" on their swap payments?  They'd have been paid substantially less (maybe nothing) if AIG had claimed bankruptcy.  See Goldman Sachs defends $13 billion payment from AIG, Los Angeles Times, Mar. 21, 2009.

Then, to top it all off, we learned March 19 (in the Ways and Means Subcommittee on Oversight hearing) that 23 large recipients of the bailout monies owe millions in unpaid taxes. 13 companies that got TARP funding owe unpaid taxes, according to Rep. John Lewis, even though they signed statements to the contrary ahead of the distribution of the cash.  $214 million of the $220 million total is owed by 2 of the companies.  Various items are available at the Hearing on the Troubled Asset Relief Program.

Maybe Congress needs to sit down and work out some reasonable corporate governance rules that will be federally mandated for all corporations, existing or new.  A few items to consider--providing a seat on the Board representing workers, providing shareholders a real say on the board membership and on executive compensation, eliminating the power of the board to clone itself through board nominations.  Then Congress should put some real restraints on executive compensation, such as requiring any stock options to be held for at least 8 years before being exercisable, limiting deductibility of bonuses to no more than 2X regular salary, limiting deductibility of regular salary to no more than 40X average worker salary, etc.  Other ideas?

Obama's First Budget

There is one thing that should strike you as you sit down to read, for the first time, President Obama's first budget.  It is the title.  This is not a budget for the faint-hearted, given our lamentable four-decade history of thinking we can have tax cuts for nothing, keep borrowing from the Chinese, the Brits, the Japanese and all those wealthy people from the world over who have socked their millions away in the Cayman Islands in hedge and equity funds.  This ia  budget for a "New Era of Responsibility: Renewing America's Promise".  That means we have to face the music and realize that we have to pay for the type of society we want. 

Do we want a country with a high-speed transportation system that can get everyone from one side of the country to the other with reasonable usees of resources?  Then we need to build a national high-speed rail system, with intercity and intracity links that eliminate the need for private cars for most people living within a reasonable distance of the city center, and thus eliminate one of the main causes of air and water pollution and global warming. 

Do we want a country that has a sustainable economy that provides a decent life to all, with medical care in those times of health crises, adequate food, that is safe to eat, adequate water, that is safe to drink?  Then we have to fund our national parks, retain our national forests, beef up our food inspection, and find a way to move, over the eternally present objections and intensive efforts of the insurance lobbyists and wealthy medical doctors, to a single payer single provider health care system like most other advanced civilizations.

Do we want our inner cities to bloom again, to provide work, play, education, and culture within reach of all, without the need for long auto commutes?  Then we need, perhaps most of all, to fund education, from K-12 to college.  Get rid of the guaranteed loan programs that provide just another government welfare check to big banks, and put the money into direct loan programs for students.  Get rid of twentieth century drug laws that make hardened criminals out of petty thrill seekers, and allow pot to be sold the same way liquor is.  Quit putting so many young men in prison, where the state spends tens of thousands a year to maintain them, and start putting them in schools, and spend the tens of thousands to make the schools good schools.

End our lamentable involvement in unilateral war in Iraq, and cut military spending back to some more reasonable threshold.  We have squandered billions on wasteful war and useless weaponry through the military budget.  We have created a fiefdom of military contractors that have brought to life the worst nightmare of Dwight D. Eisenhower's military-industrial complex.  it is time to cut the funding off, close down much of the military machine and put that money to work in peacetime projects that will protect our environment, build our economy, educate our population, and sustain our lifestyles.

Obama doesn't do all of those things, but his first budget offers a glimpse of a possible future of lower military spending; higher spending on the things that make our lives better like education, environment, health care, food safety; and an attempt at collection of adequate taxes to pay for it rather than constantly hoping to borrow beyond our means from overseas neighbors. 

It's the last point that Citizens for Tax Justice (CTJ) questions.  Collecting somewhat more in taxes from the wealthiest Americans simply won't be enough to pay for all the major emergency surgery on the economy that Bush wrecked, because the budget still operates "to cut taxes drastically."  See CTJ, Tax Proposals in President Obama's First Budget: Budget Proposal Includes Significant Progressive Initiatives & Tax Reforms. But Revenues Fall Far Short of Needs, Mar. 12, 2009.  Obama's budget makes permanent 80% of the Bush tax cuts that would otherwise expire after 2010--that, giving up on amending rather than consistently sparing taxpayers the AMT, letting most of the Bush cut to the estate tax be made permanent, and other new tax cuts will amount to  $3.5 trillion of new tax cuts, offset by only $1.3 trillion of tax increases. "[O]ne might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy."

CTJ points out that the economy is in a mess, and we had a full eight years of the Bush "tax cut, borrow and spend" policies that got us here.  When Clinton was in office, taxes were higher than they are now, and the economy was performing better.

My take on this--I agree with CTJ.  Sure, raising the capital gains rate from 15% to 20% on the wealthiest Americans is a start, but why not go on and put it back to where it ought to be--at the same rate as the rate on ordinary income.  That is the only way that the superrich will ever pay their fair share.  Sure, raising the top brackets to 39.6% will help--that puts them back where they were under Clinton.  But with patches on the AMT planned indefinitely, those who are making lots of money (those just below the top 1% who are subject only to the regular tax, i.e., those next top 10% of taxpayers in the $200,000 to $500,000 range) still will be paying too little tax, because of all the various loopholes that allow them to reduce the income on which they are taxed.  We should either restore the AMT, and quit planning regular patches, or we should acknowledge the need for much more progressive rates as taxpayers earn upwards of $200,000.  Remember that the top rate was much higher through our most prosperous periods.

It's really time for Americans to quit hiding their heads in the sand like ostriches and face up to the facts of how government works.  We didn't ask for the Bush tax cuts--most people did not think that tax cuts were the most important thing to be done when they were first passed, but we have an awful lot of trouble giving a tax cut up once we've gotten it.  Obama needs to bite the bullet and use his charisma and leadership to engage the American population in a real discussion of taxes.  We need to raise more money to fund the things that we need to fund, even if we cut the military back gradually and even if we quite paying Blackwater many times what we pay US soldiers.  Taxes need to go up, and we will suffer considerably if we wait until too late to do it.  When China quits buying U.S. Treasuries, we will have to learn, very quickly, what it means to live on what you have.

Links Worth Noting

David Shaviro points out the next shoe falling in the Great Recession--Chinese Prime Minister Wen Jiabao's concerns about the safety of China's investment in U.S. debt.  See This is how it starts (alternative title: "Well, duh.")

Angry Bear has some extended discussion of the Congressional testimony on the global economic crisis before the House Committee on foreign Affairs Subcommittee on Terrorism, Non-proliferation and Trade, at this link and this one.

Meanwhile, Dani Rodrik reports, in Willem Buiter is on a roll, Mar. 9, 2009, on Willem Buiter's views on financial regulation--better to err on the side of over-regulation, and quickly.  And Mark Thomas responds to Rodrik's view of the appropriate regulation of banks in the global economy.  If you want even more on the problems of our financial institution and lack of regulation, read Roger Ehrenberg in Entrenched Managements: Yet One More reason Why TARP = CRAP, Mar. 12, 2009.

Aggressive Tax Reporting: Study Suggests Private Equity-Owned Firms Are Worse

Brad Badertscher, Sharon Katz and Sonja Rego did a study last fall to investigate how a firm's ownership structure might affect the firm's tax reporting aggressiveness.  See Does Private Equity Ownership Affect Tax Reporting Aggressiveness?, Nov. 2008. They found that privately held firms tend to be substantially less aggressive than publicly held firms, except that privately held firms that are majority owned by private equity firms are more aggressive in their tax reporting.

The authors studied a sample of firms, both private and public, that have public debt and thus are required to file financial statements with the SEC.  The private firms are further segregated to track aggressiveness of tax reporting of those that are owned by private equity (PE) firms such as The Carlyle Group, The Blackstone Group, and Kohlberg Kravis Roberts & Co., since PE firms are of "growing importance" in the US and typically acquire businesses through leveraged buyouts, taking them private.  As the authors note, "critics of PE firms claim these firms aggressively manage their tax liabilities and those of their portfolio companies, i.e., the companies they own....These claims are inconsistent with recent research that suggests PE firms have considerable reputational concerns and are effective monitors of their portfolio companies." 

The study uses several proxies for aggressiveness:  book-tax differences and cash effective tax rates are treated as proxies for less aggressive reporting while discretionary permanent book-tax differences are treated as a proxy for aggressive tax planning; an adjusted cash effective tax rate measure is used to reflect the benefit of interest expense tax deductions.  They conclude that companies that are majority owned by PE firms are the most aggressive.

Tests that compare the tax aggressiveness of majority PE-backed firms to the tax aggressiveness of minority PE-backed firms and management-owned private firms indicate that majority PE-backed firms are significantly more tax aggressive than both of the comparison samples. These results hold across all measures of tax aggressiveness, including the adjusted cash effective tax rate measure. Thus, relative to other privately-held companies, majority PE-backed firms have more aggressive tax reporting across different types of tax planning strategies (i.e., strategies that do and do not generate book-tax differences). To our knowledge this is the first study to provide empirical results that indicate PE-backed firms are more tax aggressive than other privately-held firms.

The authors therefore conclude that "there may be some truth to claims that PE firms aggressively manage the tax liabilities of their portfolio companies."

Martha McCluskey--Building a Story of Economic Class

Martha McCluskey, at Buffalo Law School, has published a new article on economic inequality, Constitutionalizing Class Inequality: Due Process in State Farm, 56 Buffalo Law Review 1035 (2008), analysing the 2003 State Farm case, which "corporate lawyers billed as 'a big win for corporate America'."  McCluskey had earlier mined State Farm, a case in which the Utah Supreme Court found that the company had "systematically, deliberately, and even maliciously violated consumers' contractural rights in order to increase its profits" but yet the Supreme Court overturned a jury's punitive damage award against the corporate defendant.  That earlier article discussed how corporations distort the civil justice system in which artificial persons (large corporations) and their owners are systematically privileged over natural persons (individuals).  She revisits State Farm here "to analyze its implications for understanding the treatment of class in constitutional doctrine."  [emphasis in original].  She finds a striking contrast in the Court's view of the inappropriateness of discretion in the award of punitive damages against corporate defendants, compared to its view of the appropriateness of discretion in matters of life and death such as domestic violence or criminality.

The Court treats criminal defendants or victims of domestic violence as normally and naturally (and beneficially) subject to the regulatory authority of criminal juries or police, even though it recognizes that these authorities can be irrational or unwise. But, in the Court’s view, the authority of state courts to regulate the organized interests of capital owners appears less normal and natural (and less obviously beneficial).

Here's an excerpt from the abstract for the article, which is definitely worth reading by those who want to understand how class --and corporatism--work in America.

I argue that some of the most important doctrinal action on questions of economic class in the Constitution takes place under the rubric of procedure. First, class inequality is constitutionalized by casting substantive protections for wealthy capital owners in a procedural guise, as narrow technicalities or as neutral formal principles. Second, class inequality is constitutionalized by recasting basic procedural protections for the non-wealthy into illegitimate and anti-democratic claims to substantive rights.

On the surface, the State Farm case seems to present a fairly narrow doctrinal issue concerning punitive damages that generally seems marginal to general discussions of Constitutional economic equality rights. But beneath the narrow doctrinal issue lie assumptions about economic class that have broader implications. State Farm covertly revives the Lochner era ideology that fundamental procedural fairness requires insulating organized capital interests from government accountability or constraint. Even though U.S. doctrine has emphatically rejected the idea of heightened scrutiny for economic policies treating workers or the poor unequally, the State Farm decision surreptitiously adopts a "strict scrutiny" approach to examining economic harm to large businesses. Finally, the State Farm decision constitutionalizes class inequality by interpreting conscious class opposition to wealthy capital owners as fundamentally arbitrary and irrational.

Obama Budget Tax Increases for Wealthy Americans--just getting us back to recent levels

To hear some of the anti-tax organizations whining about the Obama budget, which follows the Obama campaign promises on tax cuts for most working Americans and small tax increases for the wealthiest Americans, you'd think that the proposal was unprecedented in the level of taxes.

MoveOn (a liberal political action group) has decided to take on those whiners by reminding us that pushing back the Bush tax cuts for the wealthiest Americans still means that those top income recipients would pay a much lower rate on their income than under prior presidents  There's a nifty chart (from The Washington Monthly) that shows the way rates have changed since the institution of the income tax back in the second decade of the twentieth century. 

Tax Havens/Bank Secrecy

The US and several Eurpoean countries have been looking hard at bank secrecy laws that make it hard to fight tax evasion.  The global recession makes such actions even more important, as tax revenues help fund the economic stimulus that governments provide.  The US has just entered into a deferred prosecution agreement with Switzerland's big investment bank, UBS, and has recently sued the bank for an additional 52,000 account names.  See this post on ataxingmatter for background on the deferred prosecution agreement.  Now, the upcoming meeting of the Group of 20 in early April has spurred the push for transparency, with apparent success.  See Saltmarsh, Tax havens Likely to be Target of G-20 Nations, NY Times, Mar. 12, 2009.  This week, the OECD addition of Austria, Hong Kong, Luxembourg, Singapore and Switzerland to the draft list of tax havens made the news, and may have been the straw that tipped the scale towards greater cooperation.  Id.

The Swiss Federal Council announced on Friday that it would accept the OECD's international standards on transparency and exchange of information on tax matters to avoid being treated as an uncooperative tax haven. See, e.g., Switzerland eases banking secrecy, BBC News, Mar. 13, 2009;  Switzerland to relax banking secrecy laws, ChinaView.cn, Mar. 14, 2009, The Swiss finance minister, however, said that "Swiss voters might have the final say" and he made clear the rules wouldn't happen overnight.  Id. Switzerland will follow the OECD standards in developing new tax treaties (bilateral tax conventions) with other countries, so that the new standards "will only have practical effects when the renegotiated agreements come into force."  BNA Daily Tax RealTime, Mar. 13, 2009.   The government said, however, that "it would only respond to 'concrete and justified' requests" and would "resolutely refuse[] all automatic transmission of information," Switzerland eases banking secrecy, which may mean that it will not respond to John Doe summons unless the US includes such requirements in its renegotiated treaty.

Other countries to join the move to change bank secrecy laws include Andorra, Luxembourg, Austria and Liechtenstein.  Representatives of OECD met with their government officials and they have agreed to cooperate by exchanging information on demand.  Liechtenstein's prime minister acknowledged that "bank client confidentiality in future cannot be misused to facilitate tax crime."  Liechtenstein eases bank secrecy BBC News, Mar. 12, 2009.

Are you mad yet? AIG plans $100 million in bonuses to loser unit

Big banks don't seem to have any shame.  Or any sense of what the rest of the country is suffering because of their reckless, speculative spree of easy credit, easy inflation of assets.  Bonuses, they seem to think, are their due.  Merrill Lynch paid out bonuses as it was going under.  Claim was that it was necessary to keep the employees on board--retention bonuses.  This, in a Great Recession that leaves bankers and lawyers at a loss for a job.  Now, it's AIG.

Having received $170 billion from the US Treasury, AIG will pay $100 million of that "to executives in the same business unit that brought the company to the brink of collapse last year."  Andrews & Baker, A.I.G. Planning $100 Million in Bonuses After Huge Bailout, NY Times, Mar. 14, 2009.   The company claims that it is contractually obligated to pay them to the big guys in the financial products division that wrote all those worthless credit-default swaps.  CEO Liddy wrote Geithner that "[w]e cannot attract and retain the best and the brightest talent to lead and staff the AIG businesses...if employees believe their compensation is subject to continued and arbitrary adjustment by the US Treasury."  These deals were locked in early 2008, when AIG was trying to make sure its employees stayed around, when it was already realizing it was going to lose a bundle. Seven of these loser executives will get more than $3 million!  But those are just payments on their total pay.  The 50 top executives are supposed to get $9.6 million between march and September.   Next year, the current CEO indicated he "hoped to reduce its retention bonuses for 2009 by 30 percent." 

Who is kidding whom here?  Of course these bankers' compensation should be subject to continued adjustment by the Treasury--we're paying it, after all.  And it isn't arbitrary to refuse to pay a bonus to losers who caused a catastrophic market meltdown.  This is a perfect example of the problem of allowing these maverick financial institutions to continue to run their own show when they are gorging on taxpayer handouts.  The CEO and those executives receiving bonuses should be fired, not praised.  The government owns 80% of this company, and still we are letting them pay millions to losers? 

The Shadow Banking System--Obama should bury it, not recreate it.

As the economic crisis grinds on, more people are exploring the relationship between the "new" programs being used by the Federal Reserve and Treasury to "restore" the economy and the "old" programs that caused the economy to explode in the first place. 

I've claimed that one of the underlying problems was the lack of regulation of speculative derivatives such as credit default swaps and synthetic collateralized debt obligations, with the result that brokers and banks and hedge funds and private equity funds became big-time gamblers with our entire financial system, with little if anything holding their feet to the fire to prevent system risk and market disruption.  A key piece of the lack of regulation was the late December 1999 passage of the Commodities Futures Modernization Act that ensured no regulation of credit default swaps (and many other derivative financial instruments of uncertain denomination), a thousand-page  long bill pushed through by Phil Gramm in the Senate without most Senators --or their staffers--having a chance to peruse its terms and consider its consequences.  Other deregulatory efforts--such as allowing companies to use their proprietary mark-to-market models for risk, valuation, and determinations of needed capital, encouraging off-balance-sheet vehicles (securitizations treated as "true sales" for financial statement purposes that were in substance financings), and disregarding the systemic risk created by the resulting system of longterm, illiquid assets supporting short-term liabilities--were mighty contributors. The unregulated "shadow banking system" that dominated the markets under the Bush administration consisted of securitization deals (backing corporate commercial paper or acting, in the form of trust preferred securities, as "junior equity" for debtors) and private equity funds and hedge fund managers (and some of their investors).  See, e.g., Bill Gross, Pyramids Crumbling, Jan 2008.   From 2000 to 2007, the bubble, fed by the extraordinarily hot air of speculatiove banking and buying and selling of companies, expanded and then burst.  Now we are all suffering the consequences. 

My cure?  Break up the "too big to fail" financial institutions into "too small to do great harm" pieces.  In the process, leave the shareholders and current managers holding the bag for the big losses they created.  Move the depositors out into friendly commercial banks that cannot be involved in investment banking.  And get the United States government out of the process of guaranteeing the speculative swaps entered into with AIG by Goldman Sachs and others.  We are essentially paying them off on their risky bets shorting the economy.

So will Bernanke's Term Asset Backed Securities Loan Facility make sense?  That's the newest brainchild for dealing with the toxic waste created by the speculators, that has the US and private investors buying toxic waste to clean banks' balance sheets.  Even if it were to work, it would be a wrong-minded policy, since it amounts to the US saving the shareholders rather than the financial system.  But it shouldn't work, for the simple reason that we shouldn't be trying to recreate the unregulated shadow banking system that securitization mothered.  See Bruce Krasting, Bernanke's TALF-DOA, Mar. 12, 2009.  Here's a key point:  "The banks want TALF because it gets the assets off of their balance sheet and into the unregulated Shadow Banking System."  As Krasting points out, the "shadow banking system" overshadowed the real banking system so much that "some bells should have gone off with [Geithner's 2007] revelation that there was "$10.5 trillion of medium to longer term assets ...being funded by short term IOU's."