Tag: bailout

  • AIG–My Very Own Rick Santelli Moment

    Posted by

    Adam Levitin

    The AIG bonus episode pisses me off.  But not for the reason it ticks off most other people.  Yes, it's outrageous that the shmoes who drove AIG off a cliff are getting a bundle of cash.  But what really bothers me is that this silly episode is what gets Congress (and other people) all worked up.  For goodness sakes–it's just $165 million.  That's chump change for the federal government and especially in the scope of the bailout.  Put another way, it's about 55 cents per citizen, whereas TARP is about $2,333.33 per citizen.  

    I understand the Congress is responding in part to a perceived public anger.  But there's an utter lack of perspective in the reaction to AIG.  Simply put, AIG doesn't matter.  It really doesn't.  The bonuses are disgusting, but irrelevant.  Get over it.  Lynching a bunch of Wall Street shmucks might feel good, but it doesn't help anyone.  It doesn't help people keep their homes and it doesn't restore the value of our 401(k)s and 403(b)s.  

    The real question is why aren't we this outraged over things that really do matter?  Why is Congress about to leap into action (well, we'll see about that) over this piddly $165 million that has no effect on the world, when it hasn't done much of anything to help struggling homeowners?  Where is a sense of priorities?  Why wasn't Congress so energized to take serious action to help homeowners a year and half ago?  Why is legislation permitting homeowners to restructure their mortgage in bankruptcy still trying to get the Constitutionally mandated 60 votes to pass through the Senate?  

    Bailouts are about economics, not moral justice.  We should be focused on what will help fix the economy.  The place to express our anger at Wall Street's excesses is not in clawing back some bonuses, but in creating a regulatory system that will prevent against future excesses. AIG is just beside the point, and if we continue to have national attention focused on things like the AIG bonus story, it only distracts from what matters.  

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  • Auto Bailout

    Posted by

    Adam Levitin

    TARP funds are now going to be used to bail out the auto industry.  Whether or not this is ultimately a good or responsible idea is something that I will reserve comment on for now.  The loans' term sheet isn't out yet, but it's outlines are being reported:  $13.5bn now, callable on March 30 (conveniently on the Obama administration's watch) if the automakers haven't reduced their debt by 2/3s (including via deb/equity swap–shareholders will get diluted) and worked out a competitive labor deal.

    The idea animating these bridge loans is that the exploding deadline will force the automakers and their major creditor constituencies–labor, secured creditors, suppliers, dealers, and bondholders–to work out a restructuring.  That's a nifty move, but it is a gamble, and as I explain below, it is a very risky one for taxpayers. The Times reports that the loan will have priority over other creditors, which should protect taxpayers/  Only problem is that I don't know how that would be possible under existing law.     

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  • Citi and GM

    Posted by

    Adam Levitin

    If I were a line-worker at GM, I’d be pretty pissed right now. My boss flew into DC on a private plane and came away with bupkes. Citi, on the other hand, just got a fourth big bailout. (Bailout 1: Bear Stearns; Bailout 2: AIG; Bailout 3: TARP preferred share investment; Bailout 4: the Citi-specific bailout. The first two bailouts propped up Citi and other financial institutions by protecting their counterparties.)

    What’s most troubling about the GM non-bailout and the Citi bailout is the disparity in the moral hazard angle. It seems to me that from a moral hazard perspective (and I recognize that is not the end all and be all here), we have our bailouts exactly backwards.

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  • Senate Bailout Bill: Just a 451-Page Version of Paulson’s Two-and-a-Half Pages

    Posted by

    Adam Levitin

    For all the ink spilled about the bailout bill over the past week or so, there has been strikingly little media coverage paid to the actual terms of the bailout bill. A tremendous amount of attention has been paid to the politics of the bill, but it just doesn’t make a lot of sense to talk about the politics of the bill without looking at the substance of the bill. Legislation can be technical and it can be hard for reporters to know the significance of legislative provisions, but I’ve just read too many articles that regurgitate the blandishments about the revised (and rerevised) bill imposing oversight, limits on executive pay, help for homeowners, and now the FDIC deposit cap drivel. Any consideration of the substantive provisions shows that there’s a lot of verbiage and very, very little in substance. Once one realizes this, the politics of the bill are even more bizarre and more fascinating.

    The bill has been bloated up to 451 pages in the Senate version. The additional 341 pages in the Senate version have nothing to do with the bailout per se, but instead are an energy bill and a tax bill. In short, the Senate version is the same as the failed House version, but with the addition of (1) the irrelevant FDIC provision, and (2) other unrelated legislation. And the House version was just a 110-page expansion of the Paulson’s original two-and-a-half page proposal that had lots of extra window-dressing, but little in the way of new substantive provisions that are actually mandatory, enforceable, and monitorable. This means that the Senate version of the bailout bill has the same flaws as the original Paulson bill. (Gotta hand it to Hank–he’s concise.)

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  • Bailout Bill Executive Compensation Provision: Lipstick on a Pig

    Posted by

    Adam Levitin

    The bailout bill as defeated in the House today was some 110 pages. But there was little that made it substantively different from the two and a half page bailout plan originally proposed by Secretary Paulson. So what was all that other stuff? Lots of window dressing. Lots and lots of it to pretend that there were serious conflicts of interest provisions or help for consumers or limits on executive compensation.

    Let me just illustrate what a fraud the executive compensation limits proposed are. Currently, businesses may deduct all salaries under $1 million from their corporate income. The proposed bailout bill would lower that deduction to $500,000 for certain executives at certain companies. Already, not a real big penalty for excessive executive compensation–the tax deduction gets limited by $500K/executive. But here’s the catch: the deduction cap only applies to the top 3 executives at companies that have over $300MM in dealings with the Treasury under the bailout program, excluding direct sales.

    In other words, the bailout bill’s cap on executive compensation only applies to 3 people at really big financial institutions that enter into guarantee arrangements with Treasury. At worst, this means that an addition $1.5MM is not deductible from some very large financial institutions corporate income. $1.5MM is a rounding error for big institutions. The lost deduction on the salaries between $500,000 and $1MM will just come out of shareholders’ dividends which won’t be changed by so much as a penny. And for smaller institutions, e.g., hedge funds…probably won’t apply to them. Given that these institutions are reporting losses for the current year, this is pretty much a throw away anyhow. But for Congress to pretend that it did anything about executive compensation is laughable. I guess they were hoping that no one would look at the tax provisions (rather than the executive compensation provisions) that were buried on page 101 of a 110 page bill.

    And the golden parachute limitations? First, it only applies to the top 5 executives, not others. Second, there are already strict limits on executive compensation for troubled banks. The universe of people affected by the executive compensation provisions in the failed bailout proposal would have been very small indeed. (I would be surprised if there are other twists that make this ineffective: tax folks, what am I missing?)

    And guess what the executive comp provisions don’t cover? The big gedile…stock options. If you’re an exec whose options are out of the money now, guess what, the board can issue you more (at no cost to the company really), and there’s nothing in the bailout bill that will stop that.

    So what did Congressional leadership do with this bailout bill? Put lipstick on a pig. I wonder how many Congressmen who voted for the bill know just how impotent the executive compensation, oversight, and homeowner protection provisions are. There’s a reasonable bailout bill that could be passed. But this wasn’t it.

  • Is the Crisis Real?

    Posted by

    Elizabeth Warren

    At a Harvard panel discussion yesterday, [correction**] Gregory Mankiw–Harvard economist and Chair of the President’s Council of Economic Advisers 2003-2005, made an interesting point: The liquidity crisis isn’t real.  Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Greg said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines."  Why?  Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity).  As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash? 

    Economics professor Ken Rogoff also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can’t support it.   

    Greg’s work with the current administration and Ken’s background with the IMF and on the Board of the Federal Reserve add a certain credibility to their assessments of conditions on Wall Street.  If they are right, the $700 bailout is saving some investment bankers’ jobs in the short term, but overall it is just making the financial system worse. 

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