Congress, Politics, Society

When Everyone is at Fault, No One is Accountable: Barack Obama Takes Blame for AIG Bonuses

200px-aig_wordmarksvg225px-official_portrait_of_barack_obamaPresident Barack Obama has proclaimed that the bonuses to AIG executives is “outrageous” but the “The buck stops with me.” The White House press corp again failed to ask the obvious question: what does that mean? When everyone is at fault, no one is generally accountable in the bizarre world that is Washington.

Previously, Obama has insisted in answering questions about investigating war crimes by the prior administration that “no one is above the law” and has thus far blocked any investigation into the matter. In the meantime, the Edward Liddy, chairman and CEO of the American International Group Inc. is expressing his own outrage. Everyone is outraged. Congress, AIG, and the White House. With everyone outraged, no one is really responsible in the perfect Beltway sidestep. Obviously, Obama does not believe he is at fault since he has insisted that he didn’t know of the bonuses and says that he is opposed to them. What the “buck” statement tends to mean by politicians is not “I accept responsibility” but “I expect blame for everyone else so no need to keep demanding answers.”


I discussed this issue on Countdown in this segment. Senator Chris Dodd has been criticized for allowing an amendment that exempted such bonuses but others have pointed out that Dodd opposed the idea that was pushed by the Obama White House. That takes a bit away from the outrage expressed by President Obama and his staff this week.

While Congress might be able to recoup the funds with restrictions on future payments to AIG, it believe an effort to tax the individual AIG executives would raise serious constitutional problems. This remains a case of the completely corrupt meeting the overtly incompetent. It will be the taxpayers who pay for that perfect storm.

In the meantime, Libby is asking AIG executives to voluntarily return half of their bonuses — leaving many with half a million dollars or more for ruining the company as opposed to a million.

As for the executives, they appear to have act within the law written by Congress. As rational actors, why wouldn’t they grab a million dollars or more? It is not likely that these people will have gainful employment in the future. Being a former AIG executive is much like being a former Madoff accountant — not exactly a hot item in the job market. It is not like this will make these executive more unpopular. They are currently rivaling Ebola and rickets on popularity scales.

For the latest on the story, click here.

35 thoughts on “When Everyone is at Fault, No One is Accountable: Barack Obama Takes Blame for AIG Bonuses”

  3. Mike A:

    Excellent summation of the problem, but what about this:

    “They were friends “regulating” their friends, colleagues overseeing their colleagues.

    It should be remembered that the actors in each step of this process were not amateurs. They were all trained in their fields. They understood financial analysis and risk assessment. They were familiar with securities laws.”

    Smells like conspiracy with a scent of RICO in the air; securities fraud and fraud being the predicates.

    Do you think anyone will be held accountable; or is the lesson of the day/decade truly “When everyone is at fault, no one is accountable?”

    SIYOM,

    Bob

  5. MIke Appleton:

    “3. Due to the riskier nature of many of the loans, they are put together in pieces parts to make them more attractive to investors.
    4. Since no one knows how to accurately guage the risk of these mortgage securities, investors demand that they be insured.
    5. Companies like AIG sense the huge revenue potential in insuring the debt and create products for that purpose.
    6. Underwriting guidelines are created out of whole cloth because of the inherent inability to measure the risk.”

    *********

    Cogent analysis as always. I can only ad that by calling it collateral debt swaps instead of insurance, the big boys can avoid state insurance regulation and hence the underwriting and reserve requirements. End run around the insurance law, indeed.

  6. Great Post Mike Appleton. I expect fairly soon that this blawg will become the only website I will need to access in my attempts to understand the downsides of human nature and where the resultant current debacles might lead us. Thank you, Professor, for covering a wide-range of current events and for positing your legal opinions alongside those of other attorneys who frequent this site.

    To my consternation, I thought that people in power would consult independent legal scholars to ensure justice and that American lawyers had more legal clout than they appear to possess to elicit investigations and then prosecutions, if warranted, of obvious public crimes that affect all of society.

  7. Thanks to all for your kind words. I agree that there must have been a great deal of fraud in various links in the chain. I fully expect some of the bailout funds will eventually be used to cover litigation expenses for key AIG executives.

  9. Mike S.

    Insurance companies are not in the business of paying claims,
    they are in the business of collecting premiums…

  10. Mike,when peolpe think of how madoff,made off you answered their question with this”They were friends “regulating” their friends, colleagues overseeing their colleagues. Great post as everyone has said.

  11. That spells Fraud with a capital ‘F’, my friend.

    What you just described is the very antithesis of ‘Insurance’.

    Those Reserve Accounts are for the purpose of covering Losses.
    That’s the only inssurance against risk there is- those monies
    IN reserve.

    They are supposed to be timely and accurately updated for the purpose of monitoring a company’s monetary position. How else would they know what they needed to charge as premiums
    for services?

    They excluded at least one auditor and lied to stockholders, according to articles I’ve already provided.

    To my knowledge, the Federal Reserve system requires banks to settle Money Market Positions-Fed Funds/Foreign Exchange to the penny – EVERY day!

    Multi-multimillionsvery single day-to the penny. It can be done.

  12. Mike A,

    Excellent summation. And what Mike S. said. Honestly, that was the first time I’ve gotten angry watching TV since Bush left office. I feel sorry for Liddy. He’s in an untenable position not of his making, other than the bad decision to take on the task it would seem. As to those who work in FP? Pure fury. I’m pretty sure everyone here knows Howard Beale. Multiply that times 10^150. Like you said Mike, none of these guys were amateurs. They knew exactly what they were doing. Now they should suffer the consequences.

  13. Mike A.,
    Cogent analysis from you as per usual. My only quibble with the completeness of the schematic you present is I’ve become convinced that there is criminal activity of a fraudulent nature entailed. However, I defy anyone to summarize the situation as you do, with fewer words. Your comment is elegant in the truest sense.

  14. A little reflection on human nature probably provides the most reliable insight into what occurred at AIG. Here’s my attempt:

    1. The housing boom, fueled by both easy mortgage qualification and speculation, creates a huge demand for capital.
    2. Loans are packaged and sold as quickly as they are closed to generate more capital to fuel the beast.
    3. Due to the riskier nature of many of the loans, they are put together in pieces parts to make them more attractive to investors.
    4. Since no one knows how to accurately guage the risk of these mortgage securities, investors demand that they be insured.
    5. Companies like AIG sense the huge revenue potential in insuring the debt and create products for that purpose.
    6. Underwriting guidelines are created out of whole cloth because of the inherent inability to measure the risk.
    7. Bond rating agencies, desirous of getting in on the action, agree to give favorable ratings to the mortgage securities.
    8. The money machine runs at full tilt, generating billions of dollars in fees and commissions for everyone in the food chain and encouraging increasingly sloppy underwriting and risk assessment practices.
    9. The inevitable occurs and defaults begin mounting, quickly eating up wholly inadequate loss reserves.
    10. AIG and similarly situated companies ignore the initial signs of approaching disaster, hoping that the market will right itself.
    11. As losses mount, AIG realizes the possibility of collapse, although it remains unable to estimate the extent of potential losses in the absence of any models to draw upon.
    12. Utilizing the “tentacle” theory of financial catastrophe (you know, the one that says if I go down, I’m taking all of you with me), AIG convinces the feds to begin the bailout process.
    13. With the market in freefall, it becomes increasingly obvious that neither AIG nor any of the other significant players in the financial markets have the slightest clue as to the extent of their exposure.
    14. Panic feeds upon itself and a succession of cash infusions are made to avert the threatened devastation.
    15. The principal architects of the disaster, having recognized before the general public the inevitability of the meltdown, position themselves in advance to receive compensation packages that will permit them to sustain the impact of company failure.
    16. The principal architects of the disaster take the money and run.

    In order for this charade to have sustained itself as long as it did, of course, required the implicit cooperation of regulatory authorities. But the agencies were operating within a political climate disdainful of regulation and committed to unfettered capitalism. And, after all, the regulators and the regulated moved within the same social and economic circles and shared the same philosophy. They were friends “regulating” their friends, colleagues overseeing their colleagues.

    It should be remembered that the actors in each step of this process were not amateurs. They were all trained in their fields. They understood financial analysis and risk assessment. They were familiar with securities laws. They knew the rules regarding fiduciary obligations to shareholders. They are all hoping that the veritable avalanche will make it impossible for rescuers to find the bodies and assess responsibility. But there are plenty of weapons available to shareholders and investors alike. It will be interesting to see what unfolds.

  15. This is a systemic problem. (from Jeremy Scahill)

    “For those already outraged at the AIG bonus scandal, here is a fact that should add more fuel to the fire: The Obama administration has paid the mercenary firm formerly known as Blackwater nearly $70 million to operate in Iraq and, according to the Washington Times, may keep the company on the payroll months past the official expiration of its Iraq contract in May. I reviewed Blackwater’s recent transactions with the Obama State Department and discovered a $45 million payment to Blackwater on February 4, 2009 for “protective services-Iraq.” It is described as a “funding action only.” Here is the interesting part: The estimated “Ultimate Completion Date” is 5/07/2011.

    The Washington Times (as described below) reported on a $22 million payment to Blackwater on February 2. Combined with the $45 million payment I discovered, that’s nearly $67 million in 72 hours. Not bad for a company supposedly going down in flames.

    With the US economy in shambles and millions of Americans struggling to make ends meet and keep their homes, Obama and Secretary of State Hillary Clinton need to explain to US taxpayers how they justify these mega-payments to a scandal-plagued mercenary company.”

    http://www.commondreams.org/view/2009/03/18-15

  16. I liked his response,Liddy that is.When he was asked if his company would supply consul to any employee who may need it.

  18. I’ve been watching the testimony and Liddy’s argument for keeping these people in place at AGI-FP is simply ridiculous. None of those clowns is irreplaceable and the assertion that they are required to close the down the book on FP is quite simply the equivalent of letting a murderer conduct the investigation into his crime. Check out the testimony when he was asked, just before recess was called, about whether or not AIG was pursuing the avenue of civil litigation against corporate officers for breach of fiduciary duty. The word that came to my mind was “bullshit”. He’s trying to cover up fraud. No doubt in my mind now. True, not his fraud, he inherited the mess, but I think he’s clearly covering for the criminals who were and remain at AIG-FP and he seems to be doing it out of fear of THEM. Screw them. He should be worried about We the People. And his protestations about “concerned for the safety of AIG employees”? Awwwww. Poor babies. Well what the Hell did they expect? He was warned that paying these bonuses was going to blow up in his face and he decided to pay them anyway. You kick a bear, in this case the American taxpayers, you run the risk of getting bit. You shouldn’t steal from people and expect them not to want revenge. That’s human nature. And as far as “security” goes? Let the bonus babies pay for it out of their own damn pocket if they’re so worried about the threats. They brought it upon themselves by their overwhelming greed, they should shoulder the cost of protection too. Then again, they have demonstrated time and again they do not understand either human nature or the nature of risk. Especially the “you get hurt when you loose” part.

    It’s time for people to go to prison now. Or hey! There won’t be a lot of sympathy when something bad does happen to his “precious” (think Gollum) employees. I still stick by my earlier prediction that will come to pass absent people going to getting arrested and but soon.

    AIG shouldn’t get another dime until the criminals in the organization are surrendered to the FBI and held, without bond, pending trial and their personal assets frozen.

  19. mespo,

    This isn’t just an innocent mistake. Check out some of the other deals AIG was given along with their money:

    “Six months ago, we taxpayers began bailing out AIG with more than $140 billion, and then it went and lost $61.7 billion in the fourth quarter, more than any other company in history had ever lost in one quarter. So Timothy Geithner and Ben Bernanke huddled late into the night last weekend and decided to reward AIG for its startling failure with thirty billion more of our dollars. Plus, they sweetened the deal by letting AIG off the hook for interest it had been obligated to pay on the money we previously gave the company.

    AIG doesn’t have to pay the 10 percent interest due on the preferred stock the US government got for the earlier bailout funds because that interest will now be paid out only at AIG’s discretion, which means never. The preferred stock, which got watered down, carried a cumulative interest, meaning we taxpayers would have recaptured some money if the company ever got going again, but that interest obligation was waived in the new deal.”
    (from The Nation)

    There are too many perks given to one company to just be a mistake. AIG is connected, it’s a big contributor, and it’s getting its reward. The treatment of AIG goes right to the top.

    .

  20. JT:

    That amendment exempting the bonuses was obviously both a political and financial mistake. It was sold as retention bonuses to keep supposedly competent people working to fix the derivative mess. It came as a “shock,” that bonuses were misused to reward the same folks who got AIG into this mess. I am sure the word “stupid” applies to those decision makers here, but I am reluctant to say these actions were malicious. I agree with your analysis that a shell game is going on that “everyone” is outraged thus “no one” is responsible. However, like most ploys it may help save face before Congress, but the Court of public opinion is not so easily fooled. Just ask Roger Clemens.

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