I know you thought Jack Welch had faded away. We did. Sure, he’d appear at this or that conference. Make a speech here or there. But we were kind of convinced that he had a body double doing all this work while he played bridge at the secret Welch Hideaway Compound. Well, that was until his appearance last night with Larry Kudlow when the guy who gave us Jeffrey R. Immelt poured out his heart. He had some not-so-kind words for the new “owners” of AIG:
KUDLOW: Geithner and his group should have called Liddy down to Washington. I don’t understand this. And just sat him down and say, okay, here is the way life works. Here’s the way it’s going to work. Is that what you’re saying?
WELCH: It should have been resolved between Liddy and the Treasury, or the Fed, or whoever it is that represents the US government who is the owner of AIG! The idea that these guys who own it, can now all throw rocks at it, makes no sense. It would be like a board of directors throwing rocks from the outside and not being responsible.
Jack makes a good point. The government has always seemed to believe that owning a majority stake of common somehow grants them some sort of mystical micromanaging power over individual salaries and operational details that would make a Chancery Court puke. Are all these lawmakers just this clueless about corporate governance? Or is the current outrage really just populist pandering? Given that the details of AIG bonuses have been public and in front of Congress for quite some time and this bit of outrage is so sudden and violent, we think the latter.
An Interview With Jack Welch [CNBC]
“There are two guys out on a life raft and they drift out to sea. They’re surrounded by sharks, there’s a huge tidal wave, and one guy says he’s scared, and the other guy sells him a policy. That’s a credit default swap. Stop laughing, it’s not funny. We’re crying.”
CNBC is winding itself up into a frenzy preparing for Liddy’s testimony (they aren’t that excited yet, they’ve only got a 4-box up so far) and they seem to have come to the consensus that restricted stock, not cash, is the best bonus structure to apply in situations like this. This baffles me. How do you award restricted stock in a company you are winding down and expect that to be a compelling incentive? Then I remembered, it’s CNBC.
We’ve heard mixed stories about the effect of being “underwater” on home equity. We’ve heard that owners are likely to walk away, leaving the keys and moving on, and we’ve heard that it makes little sense to bail out on even a deeply underwater mortgage. It seems the former view has taken widespread hold as “walkaways” spike.
While others persist in draining savings and running up credit card debt in a last-ditch bid to save their homes, a growing number see no point in making boom-level mortgage payments in a bust market — with no bottom in sight.
“People are hurting,” said Barnard, who includes himself in that group. “They’re scared or they’re angry,”
In California’s Inland Empire east of Los Angeles, where Barnard lives and sells real estate, median home values have plunged more than 40 percent in the last year as formerly sidelined buyers snapped up foreclosed properties.
Those bank-owned homes moved at fire-sale prices that decimated the value of neighboring homes — many of which are owned by people who have limited “skin in the game” because they put little or no money down at purchase.
The cascade effects of a few “abandons” in the neighborhood tend to set up a few more, and, contrary to the more optimistic gesticulations of some observers, this suggests that the housing crash is long from over.
Owners skulking away from “underwater” U.S. homes [Reuters]
9:58AM: We’re moments away from today’s Congressional shouting match. While we wait, here’s Franky-boy this morning, telling CBS, “There are going to be multiple attacks. We’re not going to stop.”
10:00AM: Frank has taken his seat and was just saying something, not deemed important by CSPAN, which had an announcer talking over the Rep.
10:01AM: There are a row of Pink Ladies in the audience, so that oughta be good.
10:06AM: Rep. Kanjorski, apparently a rapscallion, accidentally refers to TARP as “TRAP.”
10:09AM: Kanjorski: “There’s something seriously out of whack” going on at AIG. I told Liddy back in the day that distributing bonus would create a shitstorm, but did he listen to me? Noooo. “My sound advice went unheeded.”
10:12AM: Rep. Scott Garrett wants to know why Geithner didn’t raise this issue with Obama last week, and if T. Geith were standing in front of him, he’d say “What did you expect?” (A: “I didn’t think it was a big deal! Everyone cheats on their taxes.”)
10:15AM: Frank in the hizzous. Suck it Garrett! You didn’t ask any questions either, except about covered bonds (that’s right, Frankle went back and read the transcript from AIG hearing back in July).
10:17AM: Uh, something about “fighting in the [Congressional] gym..”
10:18AM: “The problem is not the dollar amount, it’s the incentive structure. Heads they win, tails they break even.”
10:21AM: “Let’s bring a lawsuit against the people who damaged the company.”
10:24AM: Rep. Bachus: Apparently the blame game is like “trying to play pin the tail on the donkey.” Not exactly, but sure, go with that. “There’s justified anger, so we could certainly pin the donkey on AIG.” (Has Mr. Bachus ever played PTDOTD? Survey says no.)
10:26AM: The Fed and the Treasury have done a shitty job managing AIG. So have the regulators. No one can do it. “Should we take a TV poll to see if anyone can?” No, no one can do it. No one, except AIG. Ed Liddy’s a good man. He can do this. Let’s get off their asses and let them do it.
10:29AM: Rep. Ackerman, ravishing with a white carnation on his lapel, rode into this hearing “on a tidal wave of rage.” The taxpayer is “the ultimate sucker.” How was AIG able to “package smoke and sell it on the market for billions? HOW?”
10:30AM: Rep. Tom Price: “What we desperately need is an exit strategy,” like in that other battle we’re fighting. Also, this is all Geithner and Obama’s fault.
Kanjorski compliments Price on his sound bite being exactly 2 minutes.
10:36AM: Rep. Michael Capuno is clearly saving his energy for the big show. “Do you believe that what we’ve done so far is better or worse than letting AIG go bankrupt? I want to know. I want to know if AIG will ever be profitable. I want to know when.”
10:37AM: Rep. Carolyn Maloney wants to tax bonuses at 100% for any company that receives taxpayer money. Also, AIG executives “haven’t read the memo from the American taxpayer.”
10:46AM: Rep. Jeb Hensarling: The [air quotes] bonus scandal is simply the scandal of the week “and the week is not over.” Let’s talk counterparties, motherfuckers.
10:55AM: Kanjorski’s in agreement! The bonuses are shocking and all that jazz, but not really the main issue, k?
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They were hoping for Pandit and Prince, but due to scheduling conflicts, were forced to settle for their third choice. The Journal reports that the Treasury has retained the services of Citi chief economist Lewis Alexander, “to work on domestic financial issues,” as a counselor to T. Geith.
The BAC CEO sat down with the Charlotte Observer to talk about throwing employees out on their asses, paying back TARP, memo writing, makin’ money, John Thain, and regrets over not having sold a hedge fund to Bank of Amerillwide like a certain other bank chief, in which case he’d be rich.
Q. You’re cutting 35,000 jobs over three years related to your purchase of Merrill Lynch and the weakening economy. Where are you in that process?
We’re early into it. We hope to get about 45 percent of the cost saves this year, so we’re close to having a fourth of it done.
Q. Does that mean you’re about a fourth of the way through the job cuts?
That’s right.
Q. We hear from people who say they were laid off or their colleagues were laid off without any warning, that they had to pack up their things immediately. Is there a better way to do the layoffs, or is there anything you would tell those employees?
Well, you’d have to know the individual situation, but there are issues of access to customer information and other privileged information. Once you tell somebody they’ve lost their job, you have to relieve that access. But again, there’s no intent to do anything other than to make it the least impactful to the associate. We know it’s devastating, and nobody finds it anything but that.
Q. Do you have a timetable for [retiring]?
Well, I’m going back to (my goal of the bank earning annually) $30 billion after tax.
Q. How soon can you meet that?
I would think that 2011 could be the year that you have a shot at doing that.
Q. Are there any changes you would make to TARP now to make it more useful?
No. I want to make it more useful by not having it.
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Ahead of his appearance before Congress today for tea and crumpets, AIG CEO Ed Liddy is waxing philosophic this morning in a Washington Post essay. Let’s see what he has to say!
You’re pissed. That’s obvious. Know who else is pissed? Ed Liddy.
The anger is understandable, and I share it. I have been fortunate in more than three decades in business to see firsthand the wealth creation that well-managed American companies bring to their employees and their communities. I have seen the good side of capitalism. But over the past six months, since agreeing to take the reins of AIG and reviewing how it was run in prior years, I have also seen instances of the bad side of capitalism.
There were a few missteps at AIG.
Mistakes were made at AIG, and on a scale that few could have imagined possible.
Do we get any credit for any of this?
What also became clear is that once AIG’s relationship with the government and taxpayers changed, our behavior as a company needed to change. So, of our own initiative, we suspended our federal lobbying activities and halted corporate political contributions. We also restricted executive compensation. In all, total 2008 compensation for the top 47 executives is 56 percent lower than their total 2007 compensation. My annual salary is $1. My only stake is my reputation.
Give yourselves a hand.
Taxpayers should know that the government’s assistance to AIG has had a beneficial effect. The assistance has provided stability to the company and to the entire financial system.
This is America.
In America, when you owe people money, you pay them. We are pressing forward with our plan to return money to taxpayers, protect policyholders, and give employees a vision of success and a path for achieving it. With the understanding and patience of the American people and the continued support of the Federal Reserve and the Treasury, we can resolve AIG’s challenges and help its businesses contribute to a global economic recovery.
Government Declares War On AIG, TARP Recipients (Bloomberg)
The Government has literally gone batshit over this; members from both sides are now planning to introduce legislation that would tax bonuses at 70% for any company that has received federal funds. Geithner went ahead and took it a step further with AIG promising to accelerate the ‘wind down’ and recoup the money paid out by deducting the money from the next stimulus payout.
Long story short, AIG never pays back all of the TARP money, so it doesn’t matter anyway.
Hedge Funds May Get AIG Cash (WSJ)
In essence, while the U.S. government is busy trying to prop up the housing market — by trying to limit foreclosures, among other things — it is simultaneously putting up cash that could be used to pay off investors who bet housing prices would tumble and many mortgage holders would default.
[...]
The investment strategies involved are perfectly legal maneuvers. Still, the losses show how AIG strayed from its core business: selling standard insurance policies to businesses and individuals to protect against everything from fires to lawsuits. “AIG’s financial-products division went heavily into the business of speculation, and its gambling debts are what taxpayers are paying off right now,” said Martin Weiss of Weiss Research, an investment consultant in Jupiter, Fla.
Wagoner Softens View Of Bankruptcy (WSJ)
You really have to give it to this guy: he’s a master spin artist. In a world where CEO’s have started keeping things private until the very last second to then drop them on investors like a 40lb bags of flaming excrement, it’s nice to see someone that actually takes the time to lay the ground work softening the general public before major action.
This should also read as a pretty good indicator of the firm’s general direction in the near future; they can now call in attorneys and bankers without there being a scandal. AIG/ML and anyone else who is looking to adjust/amend payouts to finance kids in the near future could learn a little from this.
Buffett Called To Action, Investors Want Moody’s Reform (NYT)
The Oracle, a 20% stakeholder in Moody’s, is facing pressures from his shareholders to do something to fix the company.
Burning it to the ground would be a good start.
“But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)”
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$$$ Madoff’s Wife Declares Palm Beach Home Main Residence [Bloomberg]
$$$ AIG not just wasting money on bonuses. [Cityfile]
$$$ Seriously, CNBC? SERIOUSLY? [CNBC]
$$$ Corzine sues Lehman officials for fraud to recoup stake [Reuters]
$$$ Mailbag: “The Premier group at BOA will lay off 90%+ of its workers tomorrow. ”
Finally, the crisis has made abundantly clear that our financial system would benefit from a regulator whose focus is on risks across the financial system. While the Fed is assumed to have this role, it does not have the mandate or powers to carry it out effectively. There is already growing support for the blueprint’s recommendation that Congress explicitly give this responsibility to the Fed, and provide it with the tools to meet that mandate. It would require the Fed to have access to information from a broader set of financial organisations, including hedge funds and systemically important payment systems. This authority should also have the power to intervene if it concluded that the financial system was at risk. Because the breadth of authority provided must be great, the standard for using such authority – to protect the system as a whole – should be high.
Reform the architecture of regulation [FT]
