15 thoughts on “A Letter of Resignation”

  1. What a guy!
    “I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. “

  2. Great, given that the American people now effectively own AIG our board of directors, congress, has decided to gut the company of the only people who know how to make it work. Good luck hiring anyone else to take these jobs either.

    The fundamental problem with political decision making is that it the system as a whole is driven more by emotion than reason. I haven’t seen any evidence that anyone involved in the credit-default swaps actually received a bonus but now we have the modern of equivalent of mobs of pitch fork waving peasants threatening people who did nothing wrong other than work for a company that had one division that did something stupid.

    This is the same cognitive process that generates racism. Some African-Americans commit a lot of crimes therefore all African-Americans are criminals. Some people in the financial system screwed up therefore all people who work in finance are to blame.

  3. “The fundamental problem with political decision making is that it the system as a whole is driven more by emotion than reason.”

    I know, right? It’s like that comment I made here some time back about how the ‘Technocratic Elite suckz’ (I kind of regret that) – but at least I recognized it as emotional! I wouldn’t stake a decision on that feeling, at least I hope not.

    Hmmm, this letter and that Daniel Hannon speech posted on Instapundit and the tea party protests and, and, and…..I hope some of this stuff is getting through ahead of that horror of a budget Pres. Obama is proposing. Ugh.

  4. Go back to AIG CEO Liddy’s explanation earlier this month about why these AIG-FP bonuses were paid. To paraphrase, it was because early last year–when the retention bonus package was formulated under his predecessor–there were $2.6 trillion of credit default swaps to be unwound. As of 12/31/08, there was still $1.6 trillion remaining on AIG-FP’s CDS book (I may have the numbers a little wrong). The bonuses served to retain the managers and traders with intricate, detailed knowledge of these CDSs and how their hedging had to be continually monitored and adjusted. Lest, rather than being unwound at minimal additional loss, the CDSs values should plunge towards zero.

    Now we find out in DeSantis’ letter that only a tiny minority of AIG-FP’s 400 bonused employees had anything to do with CDSs, as opposed to other stuff like commodity indexing. Profitable other stuff.

    To the extent DeSantis is telling a truthful story, Liddy was being misleading at best.

    This is the hallmark of the financial crisis: confusing, inadequate, incoherent, contradictory information. The Priesthood can talk among themselves, on Wall Street, at Treasury and the Fed, in Congress. Using arcane language to make statements that are un-evaluable by the rest of us.

    We should just shut up and take our lumps, I guess. After all, we are the ones who got the high fliers into this fix. Ordinary citizens and taxpayers made them underestimate risk, participate in regulatory arbitrage, peddle AAA rates Alt-A securities, and all the rest.

  5. I spoke to a friend that ran a group that competed with aig fp. She agreed it was foolhardy to interfere with the current employees comp, but thought it likely that review of previous years docs would reveal legal shenanigans and any punitive action should be focused there. She is outraged by the fraud they pulled and wants punishment Regardless, the damage has been done

  6. This is a sideshow. The corruption and bad incentives in business have already been fixed by the markets (except to the extent govt action is creating new corruption and bad incentives). No one is going to try this stuff again.

    The market problems were ultimately caused by Congress. If we’re going to punish let’s start with Barney Frank and the other hacks and demagogues, who created a legal and regulatory regime that criminalized the honest assessment of credit risk and persecuted banks for not lending. Let’s also punish Franklin Raines and the other Fannie Mae executives, who blatantly (as was obvious many years ago — see the WSJ’s 2003 editorials) cooked the books to understate risk and overstate profit.

  7. AMac…”other stuff like commodity indexing. Profitable other stuff”…but as an AIG “investor,” don’t you *want* AIG to do profitable things?…to help offset the losses? And don’t you want them to do what’s necessary retain the people who enable the profitable things to be done?

    None of which excuses any misrepresentation by Liddy of the purpose of the bonus plan, if any such took place…but Liddy mis-speaking on the plan, intentionally or not, doesn’t justify abrogation of valid contracts, either ethically or pragmatically.

    Speaking of Liddy, I thought this comment was interesting and possibly revealing: “You and I have never met or spoken to each other..” This is the Executive VP of Financial Products writing to the Chairman & CEO of the overall corporation. I can’t find an org chart, but would guess, based on the title, that DeSantis is one of the top 30-40 executives of the company, and makes me wonder about Liddy’s management style if he hasn’t met and substantially interacted with all of the people at this tier.

  8. David Foster —

    > As an AIG “investor,” don’t you *want* AIG to do profitable things?… to help offset the losses?

    Barn. Door. Horse.

    The profitable activity that can offset a $99,300 million loss (AIG, full year 2008) has yet to be invented. Likewise for profitable financial activities large enough to offset a $17,200 million quarterly loss (AIG-FP, 4Q08). Source.

    As a taxpayer/owner of this insolvent wreckage, do I want to see the $2,600,000 million (as of 12/31/08) or $1,600,000 million (as of mid-March) in CDSs wound down with minimal additional catastrophic losses? Why, yes.

    Pragmatically, it may be best for AIG to have paid these bonuses for such reasons–depending on the facts of the case. But they are proving to be elusive creatures in this case. Or as Duke’s president famously whined as he was throwing his lacrosse-playing students to the wolves, “the facts keep changing.”

    Legally, one thing a bankrupt company does is abrogate contracts. As Tim Burke points out at Megan McArdle’s blog, that’s the situation that GM’s UAW workers are faced with. Of course, AIG isn’t technically bankrupt, thanks to the bailout(s). Though neither is GM.

    It seems that our political leadership is far more interested in duck-and-cover than in constitutional quibbles about Bills of Attainder, whatever they are.

    Overall, based on what I know, I would probably grit my teeth and instruct Liddy to pay out the bonuses on schedule. But I’d do so while suspecting that the taxpayers whose interests I was supposed to be protecting might be getting taken to the cleaners. Again.

    My further thoughts are on one of McArdle’s threads.

  9. Jonathan said: “The corruption and bad incentives in business have already been fixed by the markets (except to the extent govt action is creating new corruption and bad incentives). No one is going to try this stuff again.”

    I don’t understand how corruption has been fixed by the markets in this example? I still don’t understand if any part of AIG was corrupt and how you assess the corruption. That the government has been corrupt and the generator of the current problems in our economy I can believe.

    Also, I don’t believe the last sentence. People always try stuff. Maybe I don’t understand what you are trying to say?

  10. AIG was selling insurance contracts that they could not reasonably expect to cover in the event of a series of mortgage defaults. This was reckless because implicitly AIG assumed the taxpayers would back them up. No one will do this again, because of the risk of a govt takeover of any company that does it, and because even if nothing bad happens, if you write a lot of uncovered options or insurance policies now you become a target for Congress and the regulators.

    The markets will run off the rails again, because they always do. This is human nature, mob psychology. No regulation can prevent it. But next time it will happen in a different market sector. When it does happen the govt and regulators will be miles behind, as always. There is no systemic way to prevent such events. The best response is to encourage decentralization of markets, so that when one market blows up other markets are as little affected as possible. Centralized regulation of the type that is now proposed to remedy current market problems, will make such problems more destructive when they happen again, as they inevitably will.

  11. To put it another way, markets correct for the mistakes of market participants, because people change their behavior when they lose money. Long-term problems in markets are usually the outcome of ill-considered govt interference, e.g., by encouraging excessive mortgage lending.

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