Why are $165 million in bonuses being paid to staff at American International Group Financial Products (AIGFP)?
As much as I denigrate the “mainstream media,” sometimes they do stellar work. In late December, Washington Post writers Robert O’Harrow, Brady Dennis and Bob Woodward did a wonderful three-part series on AIGFP, starting with “The Beautiful Machine.”
And in March, Reuters writer Lilla Zuill has been spilling important numbers that point out the dangerous depth of Congress’ clumsy ineptitude.
I suggest all of you read the Post series for context, and Zuill’s articles, if only for the numbers. If not, here’s Dave’s Crib Notes:
Our AIGony started with three math whizzes at junk-bond firm Drexel Burham Lambert. Their problem: As a junk house, DBL had a crummy credit rating. So, to pull off their schemes of “multi-sector asset-backed securities,” “credit default swaps,” and “BISTRO’s” or Broad Index Secured Trust Offerings, our geniuses had to find a stodgy insurance firm with a high rating and low borrowing costs, like, oh, I know, AIG!
So, in 1987 AIG agreed to allow the three junketeers to set up a “Financial Products” shop that offered “vast, interlocking deals that bound together financial institutions in ways that no one fully understood […]” Later on, when the edifice began to crack, AIG’s “computer models continued to show only a minute chance that the firm would ever pay out a dime […].” Right … computer models based on formulas nobody fully understood?
What impacts resulted? Zuill’s articles present some illustrative numbers. First, AIGFP had no more than 400 employees. Her March 3 story reports that AIGFP was able to recruit talent because under Joseph Cassano, FP “offered to share a third of all its profits with staff.”
How much profit did AIGFP “earn?” According to Zull, from 1987 to 2004, AIGFP “contributed $5 billion” to AIG’s profits during that time – meaning about $7.5 billion in total profit in 17 years.
Well, ya know how much liability AIGFP’s paper now carries? $1.67 TRILLION, or 223 times what AIGFP ever “earned.” How long would it take AIGFP’s “talent” to pay that back, if their stupid formulas actually worked right? Um, 3,791 years.
And thanks to Congress’ “investment” in the TARP bailout, we’ve dumped $170 billion so we can “own” 80 percent of AIGFP’s toilet paper?
How about this gem from our very own Senator Max Baucus to CNN: “Frankly it was such a rush [to pass the stimulus], I didn’t have time and other conferees didn’t have time to address many of the provisions that were modified significantly.”
Now, are you surprised that those “bonuses” to AIGFP’s “talent” somehow survived?
Does it matter if Senator Dodd, or Senator Snowe, or some faceless staffer got in “such a rush?” Does it matter that the Post’s series ran December 29, 30, and 31, way before the stimulus bill hit the floor?
The lesson of AIG boils down to two words: Due diligence.
Skip due diligence? Sign contracts you don’t understand? You lose. AIGFP (and its copycats) sold products “no one fully understood” to thousands, even millions of clients who skipped due diligence. They lost – ergo, our national AIGony.
What would Congress, which has a fiduciary and public trust duty to be duly diligent while it acts on our behalf, be expected to do in response to a massive, systemic failure of due diligence by other parties? Use extra caution, right? Make sure the rest of the country, and the global economy, isn’t irretrievably dragged down into Wall Street’s crater?
Wrong. Congress insists instead on passing TARP, the “stimulus,” and now this idiotic and unconstitutional ex-post-facto tax on the AIGFP bonuses?
Senator Baucus’ “Frankly, it was such a rush” excuse sounds like a teenager trying to explain chugging down all of Dad’s Crown Royal and wrecking the Buick. To constituents wondering if Congress hasn’t fecklessly drained our treasury, wrecked our economy, and compounded our AIGony, we need wonder no more.