Friday, March 13, 2009

Deep Cheating and the CEO Cartel

Time for my once-monthly political screed.

"So long as risk is effectively concealed from borrowers and lenders or actually shifted to others, risk-taking will be excessive. The initial phase of excessive risk-taking will manifest itself as an economic boom, but eventually, when actual losses begin to change the perceptions of borrowers and lenders and begin to impinge upon unsuspecting others, the boom will give way to a bust....[A] market system whose credit markets involve risks that are partially concealed from the lender and partially shifted to others will be biased in the direction of excessive risk-taking. And excessive risks are converted in time into excessive losses."  --Roger Garrison

“Neither the U.S. government nor anybody else is capable of estimating the ultimate cost of bailing out such corporate giants as Citigroup, AIG, General Motors, Fannie Mae, and Freddie Mac (and the list goes on). There are two reasons for this. First, on a stand-alone basis, these companies are opaque and indecipherable entities. Financial innovation left transparency in the dust. Wall Street devoted much of its intellectual and political capital to concealing the risks it was creating. This concealment was deliberate; products needed to be priced inefficiently to produce profits.”  - Michael Lewitt

Ironies abound.  Though I consider myself something of an open market libertarian, I have long warned that we've been slipping into a putsch-coup by a conspiratorial oligarchy.  There is, of course, no contradiction.  The patron deity of capitalism, Adam Smith, declared that the very worst enemies of markets (far worse than socialism), are conniving aristocrats and top lords of finance. 

 Smith made clear (as I'll reiterate) that capitalism and top capitalists are often NOT the same thing.  Indeed, the latter can often be lethal to the former.

 I nevertheless have never favored the notion that the government should set CEO compensation rates.  That populist response to justified public anger, simply answers one anti-market cheat with another, at a time when what we really need to do is restore markets to health.

Alas, I find myself hoping for a bit of a delay in the Big Obama Recovery, if only because America needs a taste of radicalization, at this moment of history.  Not enough to send tumbrels through the streets, or mobs waving red banners, or a tsunami of wretched, hypocritical Timothy McVeigh clones blowing up buildings.  But enough to not let the reforms stay superficial -- simply a matter of the government buying out the godawful horrid mistakes of a clade of business morons who styled themselves as geniuses. We cannot continue to ignore the cheat that brought us to this mess and provoked public wrath. This cheat goes deeper than any problem of excessive-leverage, or negligent mismanagement, or failures of regulation. Much deeper, since it caused all of those.


WHAT WAS THE DEEP CHEAT?

 It was the creation of an international cartel in top-level management, which acted monopolistically, in blatant restraint of trade, in order to corner the market in a single valuable commodity -- managerial positions atop major corporations -- especially international financial institutions.

Sure, these guys maintained a superficial appearance of competing... while appointing each other to each others' boards and desperately fostering the mythology of the indispensable, hyper-elite manager.

Along the way, the era of business leaders like Walter Wriston -- a bygone day when banks were led by bankers -- gave way to one of paper-magicians, engaged in smoke, mirrors, and incantations, siphoning commissions off of every churn as they created "wealth" based upon pure subjectivity and illusion.  These fellows justified their cycle of reciprocal compensation boosting -- a clear case of a "circle jerk" -- by claiming to be mutant-level geniuses... like pro basketball players... who were so far at the end of the gaussian curve that normal market laws of supply and demand simply did not apply to them.

That is a point worth careful pondering. (Yet no one speaks of it.) For if basic economic laws were to apply, then  high CEO salaries should have drawn in talent from other realms, from science, politics, law, the arts, until, by simple economics, the new, copious supply of managerial talent would bring pay levels down again. 

 In other words, the market forces that these fellows claimed to devoutly believe in should have brought CEO compensation rates back to sanity naturally, organically, through Amith's marvelous invisible hand! (See The Syndrome of the Essential Man.)

In fact, many of these guys did come into management and finance earlier, for precisely that reason, drawn by hope of rich compensation, elbowing aside the Wriston-types who still thought (the old-fashioned fools) that banks should tend the mortgages they sold.  Hence, the clade of super-manager golf buddies did once believe in supply and demand... back then.

Only, later, these supposed defenders of market capitalism (in theory) declared that supply and demand had no meaning at their stratospheric level of talent!

Talent that proved -- and let's emphasize PROVED -- to be utterly delusional, at all levels and in all ways.  Almost any sensible person would have done a better job with Citibank.  I would have.  So would you.


THE MIND BOGGLING GALL

What boggles me is that nobody seems at all interested in putting any of this into the context of human history, revealing the pattern for what it is.  Part of a tedious cycle that is - actually - quite typical.  Nearly all human eras saw markets spoilt and ruined by their real foe -- one that (let me repeat) Adam Smith himself decried as far worse than socialism (though socialism also sucks).  That enemy is collusional oligarchic cheating by cronies of the king.

Recall how Louis XIV said “l’etat c’est moi”?  (I am the state.)  In a similar manner, members of the financier cartel proclaim that any attack upon them is an attack on capitalism itself.  But that is the proclamation of all parasites.  And it just ain't true. Capitalism is not the same thing at all as fat, lazy, conniving and uselessly stupid capitalists.  Indeed, the purpose of actual competition is to Darwinnow out the fools and keep the others nervous!  No wonder they prefer a cartel!

In order to save free enterprise from a monopolizing cartel, the answer is simple.  Do not bother trying to set prices or limit CEO salaries.  That is simply acting like a cartel again!

No, the thing is to break up the cartel! There are already laws against interlocking directorates and conspiratorial restraint of trade.  Enforce them. See to it that boards represent a wide variety of stockholder and creditor viewpoints, including dissenters and skeptics.  Ensure that the CEO supervised by one board member does not sit on the board wherever that fellow is CEO!  Insist upon radical levels of transparency.  Seek objective metrics of managerial success that actually correspond to practical decisions.   But above all, break up a conspiratorial cabal of ripoff artistes that threatens our security far worse than OPEC ever did.


BRIN’S “SUGGESTIONS” REDUX

 One proposal that maybe I should not have included in my list of 100 unusual suggestions for the Obama Administration was that we consider a change from 20 years of failure in Somalia and try something else -- possibly supporting the orderly, organized and lawful northern tribes of Somaliland. (In a recent development, it appears that the Obama administration is doing something very similar to what I recommended, only instead quasi-adopting the neighboring Somali region known as Puntland.  Recently, US naval forces delivered several captured pirates ashore at Puntland, for trial, an implicit recognition of sovereignty... even though some pirate ships have always operated out of Puntland but never (apparently) out of Somaliland.) See: Jiu Jitsu in Afghanistan.

 Now I have something similar -- to not so much to suggest as to tickle the imagination.  First, consider the awful situation that the Obama Administration faces, in Afghanistan and Pakistan.  One is a failed state where “empires go, to die.”  Since Alexander, no imperial pax has ever intervened there without screaming in pain and leaving in ignominious defeat.  We’ve actually done very well, by comparison, but the prospects aren’t good.

Nor are they bright for Pakistan, a nuclear power, portions of whose population are smart and educated and modern oriented... but thrown into national instability by a northwestern region that is radical, violent and rife with lawless chaos.  See an article that describes how both Waziristan and Swat Province have been effectively handed over to a Taliban franchise, by a Pakistani government that has given up enforcing its own laws.

Deals that the Pakistani government makes with the Taliban are a comprehensive strategic victory for the Taliban and Al Qaeda. One, they ensure that the over hundred thousand Pakistani troops in the region are no more a threat to them or to their goals. By securing their eastern front through peace deals with Pakistan, the Taliban and Al Qaeda are free to focus their entire firepower on U.S. and NATO forces. Two, the deals give the Taliban and Al Qaeda safe havens where they can train, recruit, and fund raise. These provinces give them a strategic depth against western forces. Now they have safe homes in Pakistan to retreat to and resuscitate in, so they can return to fight another day in Afghanistan. Three, the frenetic burning of girls’ schools, destruction of non-Islamic texts or other books, and demolition of museums and libraries will guarantee this region remains  both backward and a hotbed of anti-western activity.

But the most dangerous consequence is the loss of land. Taliban now control vast territories in the South East of Afghanistan and North and West of Pakistan. They are steadily carving out a Talibanistan — a state perpetually at war — that will nestle between Afghanistan and Pakistan and prey on both of them for territory, fighters and resources.


It is a disturbing and worrisome diagnosis.  If imagination is to be applied - with the aim of offering solutions - then first we must start with a simple question.

Who is causing all the trouble in both Afghanistan and Pakistan? If you answer “radical Islamists,” then you have drunk the same koolaid that has been poisoning clear thinking since long before 9/11.  The same thing happens when you shrug and call the region “Talibanistan.”  By blaming all of Islam, you simply drive more good Muslims into thinking that we hate them all.

 In fact, the Taliban and its allies in Pakistan are driven, at least to a large extent, by the quirks of a particularly passionate and intensely determined tribe called the Pashtuns.  Long before it was called Talibanistan, the region on both sides of the border was known as Pashtunistan.

The Pashtuns are an unusual people by many measures. Realization of this fact goes back to when scholars cited remarkable linguistic and cultural features, suggesting that Pashtuns are direct descendants of the “Ten Lost Tribes of Israel.” If true, it would be profoundly ironic.  Today, their passion seems directed toward destabilizing both Afghanistan and Pakistan, with radical Islam as the superficial meme.  But if you look at how they treat their fellow Muslims, it is clear that fierce tribalism is a stronger undercurrent.

Of course, the obvious (if cynical) solution is also blatantly impossible -- though it still merits a passing thought -- or some due diligent appraisal at the highest levels, before it’s dismissed.  That solution is separation -- allowing both Pakistan and Afghanistan to cleave off, legally, territories that they have already lost, de facto.  Fashion Pashtunistan into its own entity and encourage those radical Pashtuns who reject modernity to choose life there.  This might allow the remainders of both Afghanistan and Pakistan to go about their business in peace... a result that could be precious beyond pearls.

Might this then leave us with a hostile and radical Pashtunistan that is wholly and directly controlled by the Taliban? A national entity, eager to promote terrorism, the way Afghanistan was, till 9/11??

Well, here is one of the beauties of statehood.  It forces some degree of realism - not always, but often. For one thing, once you have a formal government, a capital, a treasury, currency etc, you now have something tangible to lose.  If such a state began acting in hostile ways, the Pakistanis -- and the Tajiks and Uzbeks and Haziri etc of Afghanistan -- would be far better placed to retaliate against a state than against a murky guerilla force.  So would the US and NATO. International retribution would be far more feared by a Pashtun state than it is by tribes that have nothing to lose and can just scatter into the hills!

All right, back in 2001, the Taliban who ruled Afghanistan were in a similar situation, and they proved undeterred in their support of Al Qaeda, even knowing that America would have to come, after the 9/11 attacks.  Still, most observers say that Taliban were rudely shocked by the ease with which their nation was brought down.  It is doubtful that another radical (and non-petroleum producing) Islamist state will be quite so cavalier or careless.

 Well, it’s a thought.  Even though it certainly won’t happen.


AND THE WORLD’S ECONOMY TURNS

Microsoft’s Steve Balmer recently: “For the past 25 years, the world has certainly enjoyed incredible, incredible global growth. Average incomes around the world grew at unprecedented rates, millions of people moved from out of poverty into the middle class for the very first time.

“I think that expansion was built on three things: innovation, globalization, and debt, increasing debt. American technology was certainly at the heart of the innovation that played the central role in the process. The PC, the Internet, fiber optics: Those things were things that continue to keep America at the forefront of technology, and really at the lead of a growing global economy. But over time, over the last period of time, the balance has really shifted. Instead of innovation and productivity driving growth, it’s really been unsustainable levels, particularly of private debt, that have been a key driver of economic growth.

“In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent. Last year, private sector debt as a percentage of the GDP: 300 percent; far more leverage. And you can see it’s been a steady increase basically since almost the end of World War II. In my view, what we now have will be a fundamental economic reset. The economy is going to have to reestablish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.

“In our opinion, in order to reach the reset point, three things need to happen. First, the economy must be deleveraged. Private debt as a percentage of GDP has to be reduced. Restoring health to the nation’s financial system is a fundamental part of this. Second, confidence must be restored. The stimulus package, in my opinion, is vital. It will provide a cushion as we reach the reset point and it will help restart our economic engine.  Third, America really has to return to growth that’s built on innovation and productivity, rather than leverage and private debt.

“This is a once-in-a-lifetime economic crisis. There is a lot of history around that, and frankly if you stop and think about it, 1837, ‘73, ‘29, 2008, it’s almost exactly a whole lifetime between each of the major economic difficulties that we face. But I think it’s also a once-in-a-lifetime opportunity to think about our priorities again and make the investments that put us on the right foot.”


In fact, Balmer should have included 1819, the nation’s first major depression.  In which case one notices that the gaps between each collapse and the next one are getting longer at a steady rate.  19, then 36, then 57, then 79 years.  Of course this selectively excludes smaller recessions and “panics” so one can be dubious.


OPEN CALL

Anybody who has contacts with companies either in DC or Phoenix (e.g. Motorola), I’ll be in those two cities and open to suggested folks who might want an inspirational and stimulating speech or consultation about “the future.”


AND FINALLY.....

This is perhaps the last installment of the Bush era in comedy. In fact, about half of them were unfair gotchas.  But I'm in no mood to cut him any slack.

See “Developmental and ethical considerations for biologically uplifting nonhuman animals,” by George Dvorsky... opining that we humans will soon attempt what I described 30 years ago, when I coined “uplift” in several novels that explored the concept from many angles.  George's fascinating paper, might have benefitted from more on the sfnal history of the idea.  Before me, HG Wells, Cordwainer Smith, and Pierre Boulle depicted humans endowing animals with powers of intelligence and speech - though always in a context of abuse and involuntary servitude.  Indeed, those cautionary tales may have helped ensure that it will be done openly and accountably, hence qualifying the tales as "self-preventing prophecies."  Allowing me to be the first to ponder "what if we tried to do uplift ethically and well?"

44 comments:

TwinBeam said...

Perhaps uplift was an idea whose time had come?

"The Probability Broach", (C) 1980, L. Neil Smith - various uplifted animals...

TwinBeam said...

Oh yes - the dog in "A Boy and His Dog" appears to have been uplifted. 1969, Harlan Ellison.

There's no indication that the uplift was done unethically - it appears the dog got uplifted before the nuclear war, given extended lifespan and high intelligence.

Stefan Jones said...

Don't forget Olaf Stapledon!

'litree': Um, I'm out of ideas.

Tom Craver said...

The Dems and Repubs are a cartel as well - can we break them up yet?

Corporate boards should be composed of representatives holding at least 3% of all shareholder's proxies, all votes should be voted by shares, and the proxy assignment process should be explicitly out of the control of the corporation, so the board can't skew matters to favor cronies.

Those wanting to be on the board would have to be shareholders and remain shareholders while on the board. They'd need to advertize for shareholders to get their proxies if they did not hold 3% of shares themselves. It should be illegal for corporations to in any way fund any representative.

A potential board member could advertize "cheap rates!" or "years of experience - worth a little extra" or even "pals with the current chairman of the board wink wink nudge nudge".

If the board still selects a twit for CEO, the shareholders are getting the CEO they deserve.

NoOne said...

CITOKATE:

I have an Indian background and our history lessons covered the Kushan empire and the Gandhara kingdom (both of which included large parts of Afghanistan). One could argue that "western" imperial powers have had trouble in Afghanistan, but given the multicultural nature of the Kushans, that term probably does not fit.

idiotgrrl said...

Economic collapses are indeed cyclical, at least the huge disastrous ones are. The short, sharp ones that are nasty but don't last too long (historically called "Panics") such as the ones in (IIRC) 1987 and 2000 aren't cyclical. The slower, more shallow ones historically called "Recessions" (such as 1973, again, IIRC) generally aren't.

But the economy-wrecking ones are, and they always follow a truly manic boom, and here's the mechanism: after a long-lasting economy-wrecking crash, the survivors restructure the economy so it can't happen again, and keep things that way.

Then the survivors grow old and die or retire or are kicked out, or (thank, you, Mr. Greenspan) decide that "everybody;s out of step but Alan G." and cave in.

Meanwhile, kids who have never known a major crash and have seen that we have always been able to pull ourselves out of the little ones, are really chafing at the starting gate because these "obsolete Depression-Era" structures and regulations are "Standing in the way of PROGRESS! And ECONOMIC GROWTH!" Meaning the ability to race the car without brakes. And they can prove it works because prices of everything keep getting higher and higher and everybody gets richer and richer.

Alas, it's not production riches. It's the sort outlined in the tale of the planeload of Wall Street executives whose plane crashed in the Pacific and marooned them on a desert island. When they were finally rescued, they were insanely cheerful, and one announced that they were all ten times richer than they were before the plane wreck. When a reporter asked how, one of them explained "Well, we traded our holdings back and forth with each other...."

As for the average investor, we saw that with increasing prices, we could buy what we can't afford and flip it at a good profit to the next guy. Until a supersaturated market did what all supersaturated solutions do. And Joe and Moe got rich and Schmoe was left with worthless assets and too much debt.

Yeah. We've done it before and we will do it again.

Pat Mathews

David Brin said...

Oy!

Have a look at:

http://www.peoplevsgeorge.com/trailer/

Tony Fisk said...

Clarke briefly described uplifted 'simps' as part of the Endeavour crew in 'Rendezvous with Rama' (1973)

Stretching a point a little, but a miniature publishing industry has arisen around the ethical consequences of Asimov's laws of robotics.

Sure, these guys maintained a superficial appearance of competing... while appointing each other to each others' boards and desperately fostering the mythology of the indispensable, hyper-elite manager.


A while ago, I described a set of behavioural anti-patterns I collectively dubbed 'the Glass Wall'. It arose out of frustration with an employment market that simply would not accept that you could adapt your skills to the job at hand, unless you had demonstrated the precise skills required for at least three years. Never mind where you might have been able to acquire those skills. (hence the term I coined for the perfect candidate: 'AnAthena')

I likened the effect this continued behavior would have on the job market to a dry waterhole: a pool of talent that would dry up as the bearers moved on or retired. The way David describes the insular clique at the top of Wall Street sounds similar, although the motives may differ.

I have thought of referring to these high flying CEOs as 'execos' (said with the same inflection as 'aristos')

unicsten: formal mode of address for people in the open source community.

Tony Fisk said...

Oh, yes! This interesting snippet:

Swiss cave in on tax evasion secrecy

(Maybe that junket to Leichtenstein had an effect, eh ;-)

Sage said...

On uplift precursors... in a different vein, there's Leo Szilard's Voice of the Dolphins.

Tony Fisk said...

So long as risk is effectively concealed from borrowers and lenders or actually shifted to others, risk-taking will be excessive.

Here's an original take on that sentiment (and maybe on the Emperor's New Clothes?):
Designer armour arrives in India

"It's all about being discreet," he [Caballero] says.

I wonder if these suits actually work, though?

conabble: emperors in the market for stylish bullet-proof suits.

Travc said...

Hum... "free markets" again.

I'm generally biased towards "open market libertarin" too, but there is an often overlooked assumption needed for "free market = efficient": Perfect Information
(There are other unrealistic assumptions too... and I have yet to meet a free-market-uberalis proponent who can name half of them.)

This hits the core of not just the insanity of recent "financial innovations", but also the healthcare debate, food safety, environmental regulations, and a lot of other places where ideological (idiotlogical) conservatives have serious screwed us over. We don't have perfect information... and in many cases individuals are so far from actually having the ability to act rational a "market based" approach will simply not work.

Just a $0.02 rant...

PS: Another potential upside to the current economic problems I haven't heard mentioned. The bubble bursting will actually lead to a more efficient allocation of resource (especially capital).

The insane (and unsustainable) rates of return from financial shenanigans drew in a lot of capital and put pressure on everything else to compete with their rates of return. That has caused a lot of damage too... which maybe we will slowly start to undo as people once again get more sane expectations for what an acceptably good rate of return actually is.

James H. said...

I'm on the socialist side of things. You have some good points on what to do in the short term, but another avenue would be to give the workers more of a deciding voice.
The key is education. Greenspan et al. got away with turning our economy into a kleptocracy because his overseers were too stupid to question him. And while some may be less willing to cave in now, the ideology that Greenspan represents is still dominant among economists (till retirement).
As far as the current political parties are concerned, I agree that we need drastic reform here. We need to move to a proportional model that will allow other parties to enter the political process.

Ilithi Dragon said...

lol at the Armani Armo(u)r clip's frequent mention of corporate CEOs wanting them.


As for capitalism/free markets... A pure capitalist free market system only works on paper, because it requires numerous ideal conditions, and assumptions of honesty and integrity, to function properly, and those ideal circumstances, and especially the honesty and integrity, simply don't work out in the real world like they do on paper. There are several other issues I have with a pure capitalist system, including the inherent cost of higher education (I'm a firm believer that knowledge should be free for all people, not cost tens of thousands of dollars or tens of thousands of dollars in student loan debts), and the fact that, in all but the purest ideological image, it institutionalizes greed and self-interest and an 'every man for himself' mentality. Pure socialism is a pipe dream as well, since, among other things, it depends on people having the responsibility to NOT vote themselves pay raises, give themselves bonuses, etc. or just not work at all and collect their dole check.

A mix of the two, however, with the inclusion of some other ideas and methodologies, would be the best solution, I think. Probably leaning more towards loose socialism with free market enterprise than a capitalist free market with socialist tendencies.

Gilmoure said...

A.I.G. Planning Huge Bonuses After $170 Billion Bailout

A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

Tony Fisk said...

Well, if it can't be stopped, then it will be interesting to 'follow the money' as it flows into and out of (open) Swiss bank accounts.

connur: see 'execo'

Duncan Cairncross said...

I can't help it - every time I see talk about the use of huge bonuses to retain people,

If you pay peanuts -
you get monkeys!
If you pay millions -
you get loonies!

If you pay sums that are large enough to retire on sensible people take the money and run
you are left with "insatiable" people - other wise known as insane loonies

Why are you surprised when the non sensible people make bad decisions?

Twinbeam said...

Oh wow. Pure capitalism? Perfect competition? You DO understand that those refer to simplifications created by economists in their attempt to get some understanding of how a far more complex capitalist system works?

Oh - and by the way - if you can set aside your demonization for a moment, imagine this: Suppose that every businessman in the financial industry was NOT a crook. I know, it's hard to accept something so clearly false, but try it for a moment.

If that were true - Oh! such a stretch! - why do you think they never said "wait a minute - this is going to ruin the company and the country and everyone is going to hate me"?

Maybe they assumed that it was someone else's job to make sure they weren't going to far? Someone was supposedly understanding the big picture and keep the system sane? Not their job, even if it were possible for one person?

But who would that have been? Who would have told everyone that they had the finance industry under control, that nothing could go wrong as long as they were on watch? Hmmm... who, who, who...

Sociotard said...

a tsunami of wretched, hypocritical Timothy McVeigh clones blowing up buildings.

So, Dr. Brin, how about making this prediction falsifiable? What would the rise of the 10,000 McVeighs look like?

Numbers and date ranges work well for this. How about for date range either
*Before 2012 or
*During Obama's presidency.

For Numbers?
*More than 169 people die in a single terrorist attack purpetrated by a US Citizen. (169 people died in the Oklahoma City Bombing)
*The president or any of his cabinet members are assasinated by a US citizen.
*Any state passes a resolution to secede.

Others? What falsifiable criteria do you like? It is your prediction after all.

David Brin said...

I am happy to see movement toward falsifiable rpedictions registries/ but why should I do it first?

Gilmoure said...

It's odd that you don't hear about folks complaining about high management salaries in the tech sector.

Gilmoure said...

AIG publishes counterparty list
By Julie MacIntosh in New York and Alan Beattie in Washington
Published: March 15 2009 23:25 | Last updated: March 15 2009 23:25

AIG caved in to political pressure Sunday and released a list of some of the financial counterparties that benefited from its $160bn US government rescue, including some of Europe’s largest banks.

The list’s publication came after weeks of mounting anger on Capitol Hill that lifelines of public money had been extended to AIG without a clear indication of where the money had gone.

Lawmakers have said that without full disclosure of AIG’s counterparties, Congress would not vote for more money for stabilising the financial system.

AIG has sold hundreds of billions of dollars of credit insurance through AIG Financial Products – the unit that contributed most heavily to the company’s near-collapse in September.

The insurer, which is now attempting to unwind that financial exposure, issued details Sunday on some of the payments it had made to counterparties using emergency government loans.

AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.

Gilmoure said...

A comment on Naked Capitalism: Wiliam Black Savages Treasury's Conduct on AIG

I like this comment on that story: But really, fraud does seem to be the elephant in the room that no one seems to want to talk about, whether it's in mortgages or management. In fact, it has always seemed like whitewashing the fraud has been an implicit goal of many of the programs put forth by this administration and the last. Really, one has to ask, who are they really protecting? It has to be more specific than just the appearance of the "integrity of the system."

So much money and so little law is being thrown around, just what the fuck is going on?

Cliff said...

Alas, I find myself hoping for a bit of a delay in the Big Obama Recover, if only because America needs a taste of radicalization, at this moment of history.

Be careful what you wish for - from my (extremely limited and probably deluded) understanding of what's going on, Obama and Geithner and the Congress are going nowhere fast on fixing things.
Add this to the far right's socialism hysteria (see Beck, Glenn) and I start to get worried that no one knows how bad this could get.

vericaln - prescription drug designed to reduce anxiety about the immediate future.

Larry C. Lyons said...

Regarding your characterization of Afghanistan as "... a failed state where “empires go, to die.” Since Alexander, no imperial pax has ever intervened there without screaming in pain and leaving in ignominious defeat."

I would have to disagree. After the Elphinstone expedition (that's the one everyone cites about the British army getting its collective butt kicks), Britain threw out Afghani governments regularly and installed new ones from the 1880's through the Rawlpindi Agreement in the 1920's.

If that's a graveyard for imperial ambitions, I'd hate to see the nursery.

Anonymous said...

The article "Mr. Taleb goes to Washington" features an interview with Nassim Nicholas Taleb that's worth taking a look at.

This looks like the highlight to me:

First, [Taleb] says, we have to unmask the charlatans of risk like Myron Scholes. To Taleb, Scholes is the Great Oz in this Emerald City because his work on options and derivatives allowed the whole of the financial system to adopt poorly understood products-like the ones that brought AIG down-that hide risk. To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like "giving children dynamite."

"This guy should be in a retirement home doing Sudoku," Taleb says. "His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk."

http://www.thebigmoney.com/articles/judgments/2009/03/26/mr-taleb-goes-washington?page=0,0

David's suggestion that the interlocking boards of directors and other cheats need to be disbanded certainly sounds right. All of that would surely help.

I'm dubious that these reforms would have prevented the current financial meltdown, though, and here's why: every time a CEO took on more risk over the last fifteen years or so, they made more money for their shareholders, and got promoted. Nothing bad seemed to happen. So everyone kept taking more and more risk.

I feel sure that some people in the big financial firms argued against taking risks, but when the argument went against them and everyone made tons of money, I'll bet those people got eased out. It looked as though they had given bad advice. Well, until everything blew up, that is.

This leads me to suspect that the problem was more systemic than a matter of simple cheats. To be sure, a lot of cheating went on. It just doesn't sound to me as though we can reduce it to a simple case of dishonesty. Most of these people seem to have deceived themselves, is what I mean. An awful lot of them honestly seem to have thought that those mortgages wouldn't default.

There's a really good interview with the interview of the book "Liar's Poker" where he talks about this:

I think part of this story is how the normal levels of pay changed so that when I got to Wall Street, if you made a million bucks in a year, you were really happy. You were big time. Million, two million, that was pretty great.

That became chump change. The levels of compensation became just extraordinary where people were making $10, $20, $30, $40, $50, $60, $70, $80 million inside these firms. If you back away from it and ask, "How do you make that kind of money as a financial person?" Well, it is very unlikely you are making it by adding that kind of value, by you actually being that valuable. You make it by taking huge risks and the risks paying off. I think people thinking that it was normal to get paid that much helps them get their minds around taking that much risk.

This doesn't sound like cheating so much as a culture that gets deeper and deeper into taking huge risks, like a compulsive gambler. It's really disturbing to me that the current secretary of the Treasury applauded the dismantling of the regulations that discouraged people on Wall Street from taking those crazy financial risks.

There's more about that in a good article at the Huffington Post called "Brilliant Mind, Toxic Ideas":
http://www.huffingtonpost.com/arianna-huffington/larry-summers-brilliant-m_b_178956.html

FinanceGalSF said...

I would like to use that quote from Roger Garrison about concealing risk, where did you get it?

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