The law has finally caught up with the stumbling insurance giant’s out-of-control compensation and highflying junkets.
It took the sight of flashing red and blue lights in their rearview mirror before the visionless directors of AIG finally got the message about their failures and shortcomings. Last week, we commented on the excesses in executive compensation and numerous public relations disasters that have occurred on their watch. That was, of course, in addition to the complete meltdown of the company that resulted in the U.S. government’s huge bailout. We said at that time:
AIG’s directors should either get a grip on the company and show they comprehend the new public dimension to their duties, or they should find another line of work.
Yesterday, New York state’s top cop and Attorney General, Andrew Cuomo, sent a blistering letter to each member of AIG’s board demanding that they shape up and behave like the trustees of billions of dollars in public funds which they have become. As Mr. Cuomo wrote:
In the last several months, as AIG was teetering toward bankruptcy, and operating with unreasonably small capital, AIG nevertheless made numerous extraordinary expenditures in the form of executive compensation payments, junkets, and perks for its executives.
The letter went on to demand:
…the Board should immediately cease and desist these improper and extravagant expenditures which exploit the taxpayers of this Nation.
Today, in the wake of yet another revelation -this time, AIG executives taking a private jet to enjoy an $86,000 weekend of pheasant shooting at an English estate- the company announced a new policy to retrain pay, account for previous compensation deals and end highflying parties.
Is it possible the sirens of public outrage have finally awakened the slumbering insurance giant’s board? Stay tuned.
The British breakthrough, and how it managed to smash the U.S. bailout logjam and get it moving, is just one more of those crazy, topsy-turvy turns on the bumpy road to financial sanity -and another indication that America’s global preeminence is facing some challenges.
Finally, a coherent plan seems to be emerging to address some, and some is the operative word, of the excesses, failings and weaknesses that have arisen in the financial markets. The origin is revealing. U.S. Treasury secretary Henry M. Paulson Jr.’s plan has had more iterations and setbacks than a bad Hollywood script. They were the product of a Republican administration which had a reputation for being pro-business. The British plan, on the other hand, was not only a model of speed and simplicity, conceived and adopted in a matter of days, but it came from a Labor government. Generally, business does not find itself applauding that leaning. Credit belongs to Prime Minister Gordon Brown, who actually seems to know what he is doing and what is necessary to restore confidence in the functioning of the markets.
Now, the U.S. has decided to follow the British lead and announced tonight a massive injection of capital into nine banking institutions. These measures notwithstanding, more needs to be done to understand how the world was hurled to the shaky edge of the financial abyss, who is responsible and what the costs are for the solutions that are being proposed. No reasonable person can be happy or satisfied that the excesses and senselessness of Wall Street and its counterparts elsewhere must be underwritten by public funds that soar into the trillions. Evidence suggests that public outrage is soaring just as high.
The British breakthrough, and how it managed to smash the U.S. bailout logjam, is just one more of those crazy, topsy-turvy turns on the bumpy road to financial sanity -and another indication that America’s global preeminence is facing some challenges. Perhaps Mr. Paulson should try a cup of tea more often.
Paul Krugman made some interesting observations on these points in The New York Times on the day the Nobel committee announced his prize for economics. It’s good to see someone win who has demonstrated a keen grasp of the human dimension to economics. A giant of that field, the late John Kenneth Galbraith, never received the Swedish honor, though many of his followers, including this observer, felt it was an unfortunate omission. Just before his death, Mr. Galbraith predicted the coming of a major disruption in the banking and credit sectors. He was a student of the market crash of 1929 and never really bought into the idea that it couldn’t happen again. He was correct.
Mr. Krugman is in good company taking up the Galbraith banner of making economics accessible to the people most affected. We wish him well and salute him for his distinguished achievement.
Incidentally, Mr. Krugman publicly became one of America’s newest millionaires today. The prize is accompanied by a cash award of $1.5 million. I believe the technical term economists use to describe such events is “awesome”.
The board’s actions and events in the company it oversees have already made its members look like fools. They should not be permitted to add the trappings of clowns to the boardroom as well.
It was a board that presided over the largest insurance company in the world. Yet it was apparently oblivious to the mounting derivates risks being taken on by AIG’s Financial Products unit. When the Office of Thrift Supervision sent a letter to the company in March, advising of material weaknesses in oversight of the unit and in the valuation and accounting of its products, whatever steps were decided upon did nothing to remedy the problem. Even the company’s own auditors warned the board about accounting problems in the unit. These two revelations should have set off alarm bells in the boardroom. There is no evidence that anyone even woke up long enough to call 911. The board was apparently stunned to discover the dire state of the company the day federal regulators and officials walked in to say liquidation or nationalization were the only choices remaining, and the first option was not really on. It is the history of countless corporate catastrophes to find boards dazed and suprised about the arrival of disaster in the boadroom when everyone else could hear its heavy footsteps coming closer and closer for some time.
In 2007, the board’s compensation committee agreed to ignore AIGFP’s losses so that executive bonuses would not be adversely affected. How thoughtful a board can be when times are tough for its friends at the top. But as losses soared into the billions and obligations because of risk failures spun out of control, the company foundered and the U.S. government had to prop it up with an $85 billion loan.
Undeterred by the outrage the unprecedented bailout prompted among taxpayers and shareholders, the company’s tone-deaf public relations talents masterminded another blunder. AIG decided to spend $440,000 on a weekend retreat at a luxury spa in California for employees and independent agents. It was explained that the event was planned for some time and that the agents were looking forward to it. There would be no reason why the near-collapse of the company and the unprecedented rescue by the federal government should cause any disruption to the social calendar.
Just today, it was announced that the government had to put up a further $38 billion to keep the company going. Share value is all but shattered and with its close today at $3.19, the stock remains a faint shadow of its 52-week high of $70.13. It is difficult to know why directors with a record like this are still on the job. The question also needs to be asked, especially in light of this second multi-billon dollar bailout and recent spa-junket, how many more disasters are going to occur on their apparently shut-eyed watch?
The board’s actions and events in the company it oversees have already made its members look like fools. They should not be permitted to add the trappings of clowns to the boardroom as well.
AIG’s directors should either get a grip on the company and show they comprehend the new public dimension to their duties, or they should find another line of work.
It would be difficult to see how the company would fare any worse for their absence.
When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. But when fate and fortune retreat and reverse direction, these CEOs suddenly claim only to be human, an attribute with which they had previously never shown much familiarity.
It was, in many ways, a script that has become all too familiar in recent months. The well-dressed CEO appears before a committee of the U.S. Congress, says he takes full responsibility for the collapse of the company he headed, and then goes on to blame short-sellers, the housing market and a run on the bank. He says there was no need for more capital, but now, as a result of that decision, there is no company either. And yes, he, too, was worth the fortune he was paid. The problem was that, although its CEO received close to half a billion dollars since 2000, the company that prevailed for 158 years through a civil war, financial panics, economic depressions and two world wars could not survive the leadership of Richard S. Fuld Jr. So Lehman Brothers is no more.
There is a way that the spotlight of Congressional investigations and live television reveal dimensions to CEOs like nothing else can. Yesterday, it was Mr. Fuld’s turn before the U.S. House Committee on Oversight and Government Reform. A familiar pattern emerged from the hearing.
When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. A company’s success is seen pretty much as a one-man show. This was especially true for Lehman’s Mr. Fuld, who apparently was so crucial to the bank that they needed to replicate him as chairman of the board of directors, CEO of the company and chairman of its executive committee all at the same time. No private jet is too luxurious, no pay package is too extravagant, no amount of directorial slumber too deep that otherwise might challenge the modern boardroom Caesar. As noted on these pages last month, the CEOs of Merrill Lynch, Citigroup, AIG, Bear Stearns and Lehman Brothers’ Richard Fuld received an aggregate compensation in excess of one billion dollars over the past five years.
But when fate and fortune retreat and reverse direction, these CEOs suddenly turn humble and claim only to be human, an attribute with which they had previously never shown much familiarity. They speak plaintively about the vicissitudes of life, look for empathy and understanding –and a lot of scapegoats.So much of the world they once ruled is, they admit, really beyond their control. As Mr. Fuld testified before the Committee:
In the end, despite all our efforts, we were overwhelmed… A litany of destabilizing factors: rumors, widening credit default swap spreads, naked short attacks, credit agency downgrades, a loss of confidence by clients and counterparties, and strategic buyers sitting on the sidelines waiting for an assisted deal were not only part of Lehman’s story, but an all too familiar tale for many financial institutions.
It’s a far cry from the tone struck before by executives like Mr. Fuld. In the good times, success pretty much has only one father and that’s the CEO, according to many board compensation committee reports. Failure’s paternity has many culprits, including always short-sellers and the occasional abrupt change in the weather.
We’ve heard this song before. Conrad Black when he headed Hollinger; Enron’s Jeffrey Skilling; James Cayne, who ran the board and management of Bear Stearns for many years; and Angelo Mozilo, the subprime czar of mortgage giant Countrywide Financial all cut a swath of media adulation and investor diffidence during their reigns. But the perverse gods of markets and boardrooms insist on having their laughs. The CEOs whom they raise up to such rarified heights that they actually begin to think they are god-like themselves soon have a harsh reconnection with human frailty and imperfection when they fall back to earth with a hard thud. For some, like Conrad Black and Jeff Skilling, that sudden descent to a decidedly undeferential world comes in the form of prison time for corporate crime. For others, like Cayne, Mozilo and Fuld, a different kind of prison locks them into a sentence of personal failure and public disgrace from which there is seldom any escape, no matter how impressive their mansions and luxury condos.
If you did not know that Mr. Fuld had run one of the largest and oldest investment banking institutions in the world and that he was compensated in sums that defy human comprehension, there would be nothing in his performance yesterday to suggest that he had ever occupied such lofty office. His speech was halting, his manner often disingenuous, his memory selective, his words unevocative, his judgment unimpressive. There was no hint of insight or foresight that was any greater than that of a million middle managers, let alone a five hundred million-dollar man. Mr. Fuld, who claimed the company was in good shape one week apparently could not see even into the next, showing his vision lacked something of the reputed prescience of the Davos clan. (Mr. Fuld is a long-time attendee at the World Economic Forum, another puffed-up institution of over-hyped CEOs and hangers-on that has become an annual fashion show for the emperor without clothes.)
One more thing that might give reason to pause and reflect about the man who presided over the largest collapse of any corporation in American history: Until a few weeks ago, Mr. Fuld was a director of the Federal Reserve Bank of New York. He was elected by other member banks –and hold onto your hats for this one– to represent the general public.
The besieged state of the world’s economy seems to be in the process of separating models of genuine leadership, which emphasize value and character, from their long-reigning impostors. It has taken the worst threat since the Great Depression for Wall Street and Main Street to comprehend the depth of the scam that has been occurring under their beguiled eyes over the past number of years. Assurance of value was taken for granted; the skill and accomplishment (and need) of grandly compensated egos was not even to be questioned. Their word was gold, so we were told. What we have discovered in recent months after trillions in losses and government interventions, however, is, to paraphrase Gertrude Stein, there was no there, there.
Perhaps when this unseemly procession of failed and discredited CEOs, whose arrogance, greed and misjudgments have brought Depression era fears to Main Street and necessitated the largest private sector bailout in history, is over and the extent to which the world was taken in by the myth of their excessively compensated abilities becomes inviolably clear, we can return to a time of real leaders whose attributes include some of the most paramount and uncommon abilities of all:good judgment, common sense and two feet planted squarely on the ground.
How sharper than a serpent’s tooth it is to have a thankless child! –King Lear.
When the U.S. House of Representatives rejected the $700 billion Wall Street bailout last week, stock markets promptly plunged. Advocates of the plan were quick to blame opponents for the record drop in the Dow. Dire warnings were issued that incalculable damage would be inflicted if the bill were not passed. It was portrayed as a rescue of Main Street and something that was absolutely essential to avoiding Armageddon in the credit markets. The fate of the economy and the ability of families to send their children to college were hanging in the balance, we were told.
When the House finally passed the Senate’s revised legislation on Friday, stock markets again promptly dropped. No recriminations were heard this time, only demands for more. And more. 
So it is with the largest single expenditure in the history of government, where nearly one trillion dollars was added to the taxpayer credit card with the stroke of a pen. Once again, Main Street has failed to satisfy Wall Street.
Aided by a battery of the best lobbying firms money can buy, Wall Street worked overtime to push for passage of the bill. And it worked. For its part, the Senate approved a bill on Wednesday with add-ons that were on an obvious equal footing with the emergency economic measure triggered by the most serious financial crisis since the Great Depression: $192 million for rum producers; $129 million for NASCAR tracks; $33 million for companies doing business in American Samoa and $6 million for toy arrow producers. Relief from the current crisis will come sooner for some than others, it appears.
Both before and during the House vote to approve the measure on Friday, the stock market soared. Only when it was passed did the Dow start to sink. By the close, it had erased all the day’s gains and finished down 157 points. Wall Street types, some from the floor of the New York Stock Exchange itself, were saying the bill wasn’t enough; more intervention was required. One analyst told CNBC “the idea of passing the bill was a lot better than passing the bill. The more time we had to digest it, the more we realized maybe it’s not such a great bill. Maybe it’s not going to rescue us.”
Another manager with more than $800 billion under management remarked “What we really need in addition to this now is a confidence booster from the Fed.” Don’t you just love Wall Street and its sense of gratitude?
President George W. Bush, who was quick to point out how much the Dow sank on the day the original House bill was rejected, had nothing to say this time about the Dow’s falling by over 300 points. And the bill that was so essential to getting things rolling for Main Street and freeing up those car loans? He said it would now take some time for the measures to have their impact. Why are we not surprised that what is revealed afterwards is not exactly as it was laid out in the case that was made for the bill in the first place? It is a familiar modus operandi for the Bush administration. Exhortations are issued like a thundering herd; equivocations follow soon on cats paws and in whispers.
Let’s be clear: the central purpose of the bill was to help Wall Street restore the glitter, glitz and gravy train to Wall Street. It is designed to help banks and bankers go back to the future and pretend that the mess they made never really happened. Nearly a trillion dollars can help rewrite a lot of history. It has much less to do with easing credit for Main Street, which will now require additional and more targeted government intervention if that problem is to be really solved. One more thing: The freezing of the credit markets was, in significant measure, the result of allowing Lehman Brothers to collapse without any steps being taken to mitigate the blow to other parties. That created anxiety in credit markets around the world. It is another example of how officials in the administration and at the Fed have misread significant signals on the road to this crisis and have taken many missteps along the way.
We expect the bailout will quickly rise to the status of the largest boondoggle of recent times. Huge sums will be misspent. Scandals, delays and ineptitude will emerge that hobble the plan, and it will become a great source of contention -even on Wall Street itself. Many will also manage to make fortunes for helping to “solve” the problems their industry created. It wouldn’t be Wall Street without the aforementioned trademarks.
The era that has culminated in the greatest economic crisis in several generations was the product of unchecked greed and excess on the part of those who have lost any sense of proportion regarding value and forgotten the respect the risk deserves. One might have expected greater due diligence on the part of lawmakers as to what the bill’s intentions were -and what it was actually capable of achieving. Instead, the country is being saddled with and called to underwrite a vague and half baked collection of untested ideas and untried schemes. It is bad enough when taxpayers can’t understand what Washington is proposing; it is a worry of considerably higher magnitude when it appears that Washington and its key players don’t understand it either.
Sill, the mother of all financial bailouts is what Wall Street wanted; what it demanded, what it lobbied for and what it got. It raised few doubts and insisted upon swift and immediate passage. Yet now it appears that even this is not enough for Wall Street. The crisis continues. The reason is simple: Wall Street is the crisis, which is why its disingenuous actions and those of its supporters leading to this thankless point are our choice for the Outrage of the Week.
The public rarely likes to be hoodwinked or dismissed; their ire is almost certain to be raised when they believe their pockets are being picked in the process.
Somewhere at the intersection of Wall Street greed and tone deaf political acumen you will find the shattered remains of the $700 billion Bush-Paulson bailout plan. It collided on Monday with outrage on Main Street. Whatever else the proposal -which was narrowly rejected by the House of Representatives- was intended to do, its first priority was clearly one of bailing out the banks and players who caused much of the current economic crisis. The value to Wall Street of the vaguely crafted plan to buy back securities would have been immediate and clearly defined. The benefit to Main Street would have been longer in coming and more circumspect in specifics.
Wall Street’s reaction was a predictable plunge in the Dow. It closed with the largest single point drop in its history. The NASDAQ lost more than nine percent of its value. The Canadian TSX plunged by an unheard of 840 points. Unnoticed in all of this mayhem was the fact that the U.S. dollar actually rose as the bill faltered. The next day, more than half the losses were gained back.
The legislation as drafted, even altered from its original sparse and accountability-challenged state, gave too much discretion to the administration and offered too little assurance that its provisions are what the stalled credit system actually needs. The so-called oversight board for the bailout included the same actors who presided over the explosion of the crisis, denied the obvious storm clouds that were brewing and brought to the American people the draft that wanted no accountability whatever. The architects of the plan, and the ones running it, effectively would have been overseeing themselves. The Treasury secretary, the chairman of the Fed and the head of the Securities and Exchange Commission were named to the board in the plan rejected by the House. Monthly meetings were all the legislation required of the board overseeing some $700 billion in taxpayer funds. This is governance, Wall Street style. It’s one of the reasons why calamity has struck so many institutions and befallen so many investors.
Rarely has such an important and costly public policy initiative been as bungled, or its authors and sponsors so tone deaf to an already disbelieving and angry public. It is as if ordinary citizens were not even in the picture for all the heed paid to their concerns or to crafting a plan that would appeal to their sense of fairness and prudence. Not a good approach when 435 lawmakers have to face the voters in 35 days.
Maybe if a few Wall Street CEOs apologized to the public for the excesses and misjudgments of recent headlines and gave back a good portion of last year’s multibillion-dollar bonuses, people would have some faith that there are real leaders in charge. They might also be more predisposed to a bailout. Maybe if the plan did not start off trying to turn Henry M. Paulson Jr. into a modern King George III, with powers that could not be reviewed by any court or authority, initial reaction to the rescue plan would have been more positive. A reasonable mind might even question whether Secretary Paulson -a former Wall Street titan himself, who for some time has been in denial as to the depth of the problem- is really the best person to be hovering over the financial sector in a helicopter shoving billions out the window to his friends and colleagues.
Speaking about pushing money out the window: Since the beginning of the year, more than a trillion dollars has been pumped into the banking system by the U.S. Federal Reserve. On Sunday, the Fed boosted its currency-swap facility with foreign central banks to a total of $620 billion. Hundreds of billions more have already been paid out or committed for the Bear Stearns takeover, the seizure of AIG, the nationalization of Fannie Mae and Freddie Mac and the housing rescue plan passed in July. If these trillion-dollar-plus steps have failed to smash the ice jam in the flow of credit, what assurance is there that another $700 billion will? Does anyone really have a handle on the problem and what needs to be done to fix it, or are policy makers and regulators just hoping that if they keep throwing money at the problem it will get solved? At least 228 Congressional districts appear to be asking the same questions.
No doubt there are serious problems in the financial system.But little certainty has been offered that buying up structured investment vehicles and bad car loans from distressed banks will achieve stabilization in the housing market, which is the controlling declining asset base that is central to the whole problem.
Funneling $700 billion into the hands of the very actors that caused the financial crisis without any hearings or public consultation, and against the advice of some of the top economic minds in the nation -including several Nobel laureates, was a clumsy way of achieving the consent of the governed. The public rarely likes to be hoodwinked or dismissed; their ire is almost certain to be raised when they believe their pockets are being picked in the process. I seem to recall that the relationship between citizens and those who tax them featured rather prominently in America’s founding.
A sensitive and prudent plan would not have started off with targeting $700 billion at Wall Street. This only magnified the public perception of the wealth and privilege gap that is consuming America and fueling its indignation, which rather notably has reached a point not seen since 1929. It would not have attempted to secure a blank check with little oversight and absolute unreviewable powers. That was too reminiscent of other costly bungles by the Bush administration that did not unfold as promised. The lack of vision that has hobbled policy makers and regulators in the past, which saw them proclaiming the subprime fallout would be contained and where each bailout along the way has been portrayed as what was necessary to prevent a wider meltdown, did not bode well for their ability to get it right this time. The outcome seems unsurprising when you really think about it.
Investors would not lay out $700 billion for an ill-defined and uncertain plan run by people with this kind of track record. It is not surprising that American taxpayers are no different.
