Why are these people still employed?

because summers, bernanke and geithner still are?

masaccio,

a personal note of thanks for all your work here – your gift for explaining arcane, complex material to the unwashed likes of me is greatly appreciated. ironically, I have also deduced that “arcane, complex” thingy may have been their most reliable defense .

p.s. was stunned by how much they got right in this piece -

Credit Default Swaps for Dummies – 60 Minutes

Why are these people still employed?

Because Geithner and Summers see nothing fundamentally wrong with these business practices. They just want to pretend that once this unpleasantness blows over we can go right back to business as usual and all their little chums can laugh all the way to the bank at our expense. And then, we get to bail them all out all over again once things blow up yet again. Rinse and repeat.

It just slays me that the pinheads promoting infinite tax dollars to bail out the formerly-fabulously-wealthy, have the unmitigated gall to refer to Social Security and Medicare/Medicaid as “Entitlement Programs”. There has never been a program more about “Entitlement” than TARP.

They all got rich on their illegal scheme. They avoided regulation by avoiding use of the word “insurance” in the name of the insurance policies they were writing, instead referring to them as “swaps.”

If they all got rich, and all of the counterparties are getting paid at par (100%) on their swap claims, and they are all making billions while we are all paying for it..who are the stupid ones?

This entire boom and bust was planned a decade ago, and the rich are just nailing the coffin shut on America, free market capitalism and our constitutional republic.

Follow the money to the traitors who planned on enriching themselves by our demise.

Maybe the execs shorted AIG stock. Otherwise, why should they be given the big ’signing bonuses’ needed to retain their talent? /s/ It would be laughable if the consequences weren’t so tragic.

AIG management was dreadful.

Their 10-K for 12/31/07 said they tested the CDS against scenarios in “severe recessionary” models and that the risk of AIG having to pay was “remote.”

Regulation to prevent recurrence of this level of stupidity is absolutely required.

They should be in jail for RICO and fraud. Gambling is regulated as far as I know.

AIG is toast. They simply decided to charge heft fees for the CDS which is unregulated insurance (bets) that the insured would not “submit a claim”. So they sold so many of these things – way more than they could ever pay and guess what? They are having to pay out on these “claims” and guess who has been paying off their “policies” CDSs??? US Taxpayers.

Insurance is supposed to share to risk among the insured with little likelihood of all of the insured filing claims. Law requires the insurance co to maintain cash reserves to pay out claims.

But insurance companies are in the money making business to they “invest” the premiums and play footloose with the insured’s premiums. When they are not making enough they ask and always get a rate increase…. all the while playing the financial markets to make the big pay off for their shareholders.

The ENTIRE insurance industry is a scam and needs to be scraped and made into a not for profit public utility. Sh*t happens – people share the risk – no one gets rich on accidents or disaster.

Their 10-K for 12/31/07 said they tested the CDS against scenarios in “severe recessionary” models and that the risk of AIG having to pay was “remote.”

So, they knew they would be bailed out way back then?

You ask, appropriately enough:

“How Stupid was AIG Management?”

and

“Why are these people still employed?”

You overlook the “technical” name for what AIG was doing when it both wrote the insurance against failure of mortgage backed securities and bought a bunch of mortgage backed securities. That’s called a “Texas Hedge“

From AMEX:

Texas Hedge
A transaction that increases risk. Alternately, two or more related positions whose risk is additive rather than offsetting. An example might be buying calls to “hedge” a long position in the underlying.

From another dictionary:

the opposite of a normal hedging operation, in which risk is increased by buying more than one financial instrument of the same kind.

As it was taught to me, this sort of stupidity got its name because it was a favored technique of Texans playing the commodities futures markets, particularly those in cattle. In the classic Texas hedge, a cattleman would be “long” “physical cattle”, in other words, he would be raising actual cattle to drive across the prairies and sell at market. He would have to get a certain price per pound to make money. He would have to deliver those cows in, say, October, and be looking at beginning his cattle drive in, July, after calving season in March. (I’m picking months out of the air to illustrate – I’m not up on when calving and cattle drive seasons are.)

In a normal hedging transaction (which is what the commodities futures markets were intended to do), the sane cattleman would know by the end of March how many cows he would have come July and October because all the calves would be then have been born and from experience he would know how many he would lose to all the reasons cows die along the trail. So, knowing that, he would sell (go short) commodities futures contracts for October delivery at a certain price and in an appropriate quantity to cover his risk in the physical cattle. Thus, if come October the price realized from his physical cattle was more than he expected, the short position in the futures market would balance that out. OTOH, if come October the price of cattle had crashed, the short position in the futures market would balance that out, too. He would have properly hedged his risk in physical cattle by using futures contracts to lay that risk off into the futures market.

Well, it took those greedy Texans no time at all to figure out that, if in addition to his physical cattle he had gone long in futures contracts instead of hedging by going short, he could double his profit. This, because if he bet the physical cows would be worth 60 cents a pound in October (when they and the October contracts were 40 in March), he would make 20 cents on the real, physical cows and another 20 on the futures contract.

If, OTOH, it went the other way, he would double his losses (instead of having balanced them out). Then, he could retreat to his homestead, sandbag the house to hold off the creditors until Texas’ generous homestead law kicked in to protect the ranch against those scalawag creditors, and look for some new cows with which to try again.

In other words, you would either make a pile of money or lose it all. In losing, you would often leave some other sucker holding the bag full of your losses.

Given that the recent Preznit and Phil Gramm were both Texans, and the last administration was laden with exactly the kind of greedy idiot who would gleefully gamble on a Texas hedge, the real question you should be asking is

“why am I surprised AIG did this?”

Regulation to prevent recurrence of this level of stupidity is absolutely required.

There is a regulatory check, of sorts, already. It is called the free market. Stop giving them money and they will disappear.

In other words, you would either make a pile of money or lose it all.

That’s true of leverage in general.

This entire boom and bust was planned a decade ago, and the rich are just nailing the coffin shut on America, free market capitalism and our constitutional republic.

Your logic escapes me. I have a hard time imagining that segment of the wealthiest people on earth planning on much of their holdings being worth pennies on the dollar. If they had planned this so well I think they missed the collapse of both the tech and housing bubbles.

True, but this is a very specific model of leveraging transaction and one which sane, sensible brokers will not execute, even for sophisticated clients.

[At least formerly] One really had to twist some arms to get a broker to allow one to get a Texas hedge going because it is almost universally recognized as a hideously dangerous position to take. It’s the opposite of sane.

And that’s what AIG was doing, but cloaking it in fancy names and impenetrable derivatives.

Okay, so I bought a house in the Lower 9th Ward of New Orleans the week before Hurricane Katrina and had it insured with AIG. Then, as a hedge against me loosing my house to flooding, AIG bought all the other houses on my street. (not a perfect analogy, by any means, but it works for me)

What kind of losses is AIG looking at in the future? Under what conditions are they likely to lose more money? Can we more importantly afford to pay those losses?
Does AIG have any means of paying us back this century with a reasonable rate of return?
In other words forget AIG what kind of IDIOTS in government are lending them cash?

As I recall (not the best memory) from 60 min TeeVee there is a collective sum of 60 ‘T’rillion dollars in CDSs. All guaranteed and most on margin.

Texas hedge

?

The real question here is how to make this SOBs accountable and get back their ill gotten wealth – every last nickle w/ interest, lay payment fees and penalties.

True but the money is imaginary America, Europe China the World does not have that kind of cash to spend but maybe if we mortgage everything in all our countries.

posted this epu.
if you missed it, everyone should watch this daily show clip with joe nocera from the nyt from 3/4/09–explains it all.joe explains why we have to give money to companies like aig.in a nutshell.
five stars.
http://www.indecisionforever.c…..oId=220254

and the spot about cnbc financial reporters

cnbc gives financial advice
http://www.indecisionforever.c…..oId=220252

and this show is the repeat today–2pm and 8pm on comedy central.
the colbert report from that day was a keeper, too.

I have to simplify for my brain. I am fond of saying there are 3 ways to make above average returns for extended periods: illegal, buying hot new issues at issue price, leverage. But the last works in both directions. One of the themes in financial market deregulation since at least the 1980s is figuring out ways of increasing leverage (remember LBOs?). Not surprising that some of those ways are even worse than others, but all of them have ended in their own particular debacle.

Republics will fight really hard to keep that from ever happening.

Or just stop bailing them out and get what we can from them we will never get the imaginary money back.

We need to attack the idea of systemic risk. Our elites keep invoking it to defend the actions they take. Their story is that the financial system is basically sound but that it can be “panicked” into imploding. The truth is systemic risk is code for the insolvency of the whole financial industry. The sheer size of the Treasury and the Fed’s interventions, the trillions upon trillions of dollars pledged or spent, all show just how unsound the system is.

Our government’s massive infusions into the system are not about preventing panic but avoiding reality. Systemic risk = bankrupt financial system.

That’s an exercise in futility. The American taxpayer might, repeat might, be repaid some of the tax dollars used to bail these people out. I’m not gonna hold my breath. It is not in the best interests of Congress to punish those who pay enormous sums to get these fools elected.

Texas hedge

A faulty strategy that increases the risk; what looked like a hedge (protection) turns out instead to increase the exposure.

http://www.anz.com/edna/dictio…..exas_hedge

Sounds like the perfect term to describe the Bush Presidency!

It’s worse than that. The authorities are going out of their way to increase systemic risk via the moral hazard of bailouts with no consequences for perps.

If you hold short bets as oil descends from $150/bbl to $40, you get just as rich as if you hold long bets from $40 to $150/bbl.

When you know tomorrow’s news today, you can place bets to enrich yourself on what is apparent bad news for everyone else.

Recall the number of short positions held on the airlines prior to 9/11 for example.

Those who write the script get rich in both directions, by placing bets in advance of the news that they know they will create tomorrow.

http://oxdown.firedoglake.com/diary/3743

http://oxdown.firedoglake.com/diary/3820

Shorter the Banks are already Dead the government just doesn’t believe it.

Are the banksters paying bonuses or blackmail

Yet another part of the Bush legacy. No wonder Republics want everyone to believe that OBama did all of this in just two months.

Remind me again about when the Rethugs admitted we were in a recession. I guess they date the recession from either 4 Nov or 20 Jan, just like the history of Israel starts in 1967.

That story won’t play cept for the 20%ers:)

And again it is important to name names:

Joseph Cassano is the guy who sold the CDSs that bankrupted the company

Hank Greenberg ran the company from 1968-2005 and hired Cassano

Martin Sullivan ran the company from 2005-2008 after Greenberg was forced out and heavily supported what Cassano was doing.

These guys were worse than Madoff but unlike him have kept their money and their freedom.

It’s worse than that. The authorities are going out of their way to increase systemic risk via the moral hazard of bailouts with no consequences for perps.

Yes, this is the very opposite of financial reform.

Yesterday Gingrich said that we should forget about clawbacks. He said that if we went afterthem they would be afraid to invest “their” money.

check out this video re: AIG:

http://bigdanblogger.blogspot.com/

Go see mine at 9 on this thread, defining it.

We could invest that money on stuff that pays real dividends, like universal health care, public schools, infrastructure, etc. If the rich don’t have the money to “invest” in the market, boo fuckin’ hoo.

the world does not have that kind of cash..

could raise most of it by taxing top one percent of incomes, including secret Swiss bank accounts..lol

well done!

Thanks for doing the spadework and then explaining this mess to us.

The question of why these people are employed probably has lots of answers, none of them pleasing. But I’ll hazard one based on experience: employment at the rarified levels we are talking about is not earned and has not been for a generation or two at least. These are entitlement positions, and have been for long enough that the concept of working to get and keep them is pretty much forgotten.

You get executive management jobs by going to college as a legacy so that you can join the right fraternity (the one your dad and grand dad were in). You go to b-school and repeat. Then you join the lower ranks of upper management at the firm of one of dad’s old frat mates (no starting at the bottom in the mail room for you). You join the right country club. Repeat.

From what I can see, promotion from the ranks of middle management, much less from the ranks below, is almost unknown in US corporations. “Individual contributors” enter as such and remain as such or are, rarely, promoted to middle management. Middle management generally comes in as such (as a new MBA) and stays there. What minimal upward mobility there is is the product of sycophancy.

In short, we have a de facto, degenerate aristocracy.

Entitlement and de facto aristocracy produces people that are self-centered and self-absorbed to a degree that is hard to believe if you haven’t seen it. I’ve known a couple of CEOs personally over the years. None of them struck me as particularly bright, competent or hardworking. Yet, unlike really smart people (a few of whom I’ve also known), they think of themselves as considerably smarter than they actually are. All of them think of themselves as more hard-working and more deserving than anyone else. For them, not getting perks and bonuses is as inconceivable as waking up in a world without air.

One example: I once had to sit on a conference call with a bunch of senior vice presidents of a major US company, just in case they needed factual detail before making a policy decision on a specific subject that I was thought to know something about. They spent the first 5-min berating an underling for being a minute or so late and for choosing the “wrong” color for the headings in a spreadsheet. They then spent 30-40 min debating what the color of said heading should be. I had to drop off and deal with a customer-facing issue by then, so I don’t know if they ever reached a real decision. But I bet that getting that color right did more for their careers than any engineering or customer-service triumph did for anyone in my division.

The above is why I think that nothing can ever be done about our economy unless and until it is coupled with sharply progressive income taxation and confiscatory estate taxes. We need to strip away the perks, level the salaries, and keep wealth and status from becoming hereditary. Because, unless we restore some kind of parity between working and owning, these people will continue to run everything and will do so badly.

I just read the bit on Summers’ interview over at TPM, in which he raises the bogeyman that in the thirties, some people thought there should be a replacement for the capitalist system’ and we should stay away from that thought. I’ve been defending him here and elsewhere, but if he thinks that anyone is seriously thinking about substituting a centralized system of economic administration for the decentralized one we have, he’s got rocks in his head. Worse, he obviously absorbed the very distorted meme going around in the 1970s and the 1980s that any attempt to really regulate capitalism’s excesses means the end of capitalism. I’m disppointed, but given how it is the Conventional Wisdon, not too surprised. He’s a smart, basically decent guy who like just about everyone in high places is trapped in a place in his head he can’t escape. It looks like the rest of us are trapped in there with him.

We need more Revolution.

They spent the first 5-min berating an underling for being a minute or so late and for choosing the “wrong” color for the headings in a spreadsheet. They then spent 30-40 min debating what the color of said heading should be. I had to drop off and deal with a customer-facing issue by then, so I don’t know if they ever reached a real decision. But I bet that getting that color right did more for their careers than any engineering or customer-service triumph did for anyone in my division.

Kind of reminds you of that Seinfeld sketch where George Costanza goes to work for a similar firm. I think you are dead right on the recruitment/entitlement angle. We get little whispers or echoes of this from time to time in public statements like ‘taxes are for little people.’ People have noted the unmasked arrogance of the CEO’s testifying lately before Congress.

They way to make a Texas Hedge work is puttin’ it in the Big Thicket.

This is another edition of simple answers to stupid queries:

Very.

My theory is not that there should be a Centralized system of Control, but that the workers of GM and Chrysler be brought into the management of their own companies. Use a mix of government money and their own pension moneys to run the plants. This way you introduce a system in which short-term quarterly gains are not overvalued to the long-term fiscal health of the company. Capitalism developed when the system was based on family-run companies in which many of the members of those families actually worked in the company, or were at the very least, managing on the floor or in sales. No owner would have hired an executive to help pare down the firms operations or enable it to be susceptible to being gobbled up by another.

That’s a common strategy today…creating a business so that it will then be bought by another with the entrepreneur more than willing to jump ship on his “creation”. Arbitrage and mergers are fostered, not feared. Who really has a stake in the sustainability oif a company anymore? It’s only the employees.

masaccio’s posts have been very good on this topic for the most part. A commenter at eschaton linked to this article in the Village Voice which I also found helpful.
http://www.villagevoice.com/20…..s-economy/

The Texas hedge explanation above is also good but there is another difference at work with the financial meltdown of the financial institutions. The CDS and CDO does not even involve the possibility of taking any physical delivery of anything. In ordinary commodity trading which is where hedging is useful, people who grow things for delivery at a market can use the commodity market to limit risk. In financial trading, the entire thing is trading of money or essentially promises or other bets. It is trading on differences in prices which is the classic definition of gambling or wagering.

Many states years ago outlawed bucket shops and other forms of wagering and securities fraud. Interestingly, Congress adopted Commodity Futures Exchange Modernization which preempted these laws and allowed a lot of these transactions to occur without regulatory oversight.

The Village Voice article linked above gives a good background on this and a regulator named Brooksley Born who foresaw some of these problems and resigned form the CFTC after these changes were adopted.

I would phrase your point somewhat differently, in terms of ’stakeholders.’ Workers are stakeholders in any enterprise that they’ve devoted a significant part of their lives and moral energy to. They aren’t just peas in a pod that you can exchange for a new pod of peas when the mood and the market incentive strikes you. That’s what modern management has been doing to its workers. As to the actual nuts and bolts managing, it probably ought to be localized and not committee-ized (please excuse the neologism). The odd thing is, we have an institution that can handle most of the problems: it’s called a union, and it has worked pretty well in a lot of areas of the economy, despite some failures and mishaps. Union’s can’t make Chinese products more expensive than domestic products built with high-priced labour. So that’s not going to change. But they ought to have a say in out-sourcing. If GM wants to build cars in Vietnam, that’s certainly within their purview, but they should be allowed to market them under the GM label, which the workers helped to make and therefore have a stake in. My 2 cents worth.

should NOT be allowed to market them under the GM label. (preview is my friend, previous is my friend).

They felt that if that lost a little on each CDS, they could make it up on volume.

For a good 3 part story of AIG, including the roles of Hank Greenberg, Joseph Cassano, and Martin Sullivan et al., see the Wahington Post’s “The Beautiful Machine”, “A Crack in the System” and “Downgrades and Downfall”

Were the RMBS purchases after the gov. (more or less) took over or months ago? If it’s government direction in effect, then this might mean they were wrapping up their strange involvements in the CDS & MBS market(s).

If, as you suggest, it was done some time ago, then this really is a clear indication nobody is capable of running such a large firm (same with Citi) because it’s just tooo much for one CEO to wrap their head around.

If they all got rich, and all of the counterparties are getting paid at par (100%) on their swap claims, and they are all making billions

It’s par for the course during this crisis that a lot of bad and/or stupid people are making out like bandits. That doesn’t necessarily mean it’s illegal or entirely unwarranted or bad. It just means it’s a real mess and the best way out is to do whatever it takes to unwind all this regardless of who benefits or gets hurt. Hopefully homeowners and the economy can be protected while the mess is getting fixed.

We all want it solved, but I think it’s going to take time. Treasury and the Fed have been at it a while, now the housing foreclosure mitigation program is in place, the bankruptcy foreclosure legislation is to come and the regulation ‘leg’ has to come along next — not that that’s an all-consuming effort of the entire Congress.

I think one good thing about a blog post like this is it shows how nasty the real details are and how impossible it would be to explain any of it to the public. This is the sausage making process at it’s worst and is really best left to the front-line guys at Treasury, the Fed, FDIC, bankruptcy courts and the companies.

Priorities with regard to fixing the financial crisis are

things going now:
fix banks,
stimulus spending to keep economy running,
help car companies,
direct lending and loan guarantees from the Fed for various things,
mortgage foreclosure mitigation;

things to come:
financial industry regulation,
health care reform,
and last (if there is an order/sequence) energy bill,

ALL of that in parallel with the withdrawal from Iraq.

Yes, government will have to do more than one thing at a time. Fortunately some is done by the Treasury, some by the Fed, some by the military, some by Congress.

I think it can be managed, but it will indeed be an unusual time for government.

One of my primary reasons for believing this can be done is that Dems have looked at health care forever and we have the ‘93 experience and we have the Obama plan from the campaign. If we don’t know this issue by now, then we never will. I think if you had 3 senators (2 D, 1 R) and 5 reps (3 D, 2 R) and about half a dozen staff members, you could get a great framework written with general principles and goals in a couple of weeks. Perhaps the early discussion should just be on what those principles and goals should be and on the overall structure the system should take.

We do have enormous issues at hand. It’s time for everyone to rise to the occasion, including Plunger!

They should be in jail for RICO and fraud. Gambling is regulated as far as I know.

Uh, actually no. Specific efforts were made to ensure CDSs would NOT be regulated.

Okay, so I bought a house in the Lower 9th Ward of New Orleans the week before Hurricane Katrina and had it insured with AIG. Then, as a hedge against me loosing my house to flooding, AIG bought all the other houses on my street. (not a perfect analogy, by any means, but it works for me)

This can be very complicated when you take into consideration the huge market that developed on CDSs and the downward trend of the US dollar.

What if they sold you a CDS “insurance”, but then sold that on to someone else. They’d end up with a cash stream from the bigger fool. Having a large market in these things could mean any number of deals would look foolish, but could turn out profitable. A lot would also depend upon how likely it might be for the ‘insurance’ to face a claim during a given time. If it would take a while before a payout (even a 100% guaranteed forced payout), then the value of the money in hand from the CDS sale might be worth more than simply having less cash in hand the whole way and watching it’s value ebb away. Remember, they were selling paper for cash, so they were getting to have LOTS of cash in hand for a time period.

Who can say whether this kind of thinking is what we want insurance companies to engage in. If there’s a street culture where it’s agreed upon as acceptable, viable and for the long run, then why not.

Or just stop bailing them out and get what we can from them we will never get the imaginary money back.

Timing is important. Consider this analogy:

You’re a doctor. A pregnant woman was in a car wreck and is dying. Do you just let her die or do you put her on life supports until you can deliver the baby? “Dr.” Geithner said we should evaluate the patient first with a ’stress test’ to see if we can save both and after that we’ll make further decisions.

Now, want to just toss ‘em both in the trash without doctoring first?

The sheer size of the Treasury and the Fed’s interventions, the trillions upon trillions of dollars pledged or spent, all show just how unsound the system is.

“is” and has been, but doesn’t necessarily have to be in the future. Mortgages were screwed up and lost value and stocks & bonds can be that way too. The whole idea of banks having to keep reserves makes them very sensitive to this and we’re seeing it in action today.

Take away firms that are “too big to fail” and a lot of your problems disappear immediately. Regulate in ways which have worked in the past and you eliminate about 90% of the problems. This can be done quickly.

Texas hedge

A faulty strategy that increases the risk; what looked like a hedge (protection) turns out instead to increase the exposure.

http://www.anz.com/edna/dictio…..exas_hedge

Sounds like the perfect term to describe the Bush Presidency!

hedge, bush what’s the diff?

Just watch out for any politicians from Georgia. Down there they’ve got kudzu and it takes over everywhere.

Recall the number of short positions held on the airlines prior to 9/11 for example.

Those who write the script get rich in both directions, by placing bets in advance of the news that they know they will create tomorrow.

Has anybody ever looked into whether there were credit default swaps “insuring” failure of the airlines used in the 9/11 ‘attacks’?

It’s no wonder the Bushies talked about “creating the future” or somesuch. People have talked down stocks for years to take advantage of shorting. Now there’s real efforts to destroy companies like GM because of CDSs.

It’s very scary stuff.

Yesterday Gingrich said that we should forget about clawbacks. He said that if we went afterthem they would be afraid to invest “their” money.

“Clawback” sounds awful. Maybe we should just tax the super rich to make them pay for the cost of government cleaning up their mess and to help people hurt by it. Or, to focus more narrowly, maybe we should tax financial transactions on “Wall St.” of a particular kind. Justice, as any kid knows, is having to clean up your own messes.

That’s a common strategy today…creating a business so that it will then be bought by another with the entrepreneur more than willing to jump ship on his “creation”. Arbitrage and mergers are fostered, not feared. Who really has a stake in the sustainability oif a company anymore? It’s only the employees.

“Creating Value for the Stockholders” is one current phrase. It leads to short-term bottom line thinking and discourages building for any sake, but to increase the stock value which the top management also owns. Somewhere in there the value to the public gets lost.

Agreed. AIG management was a bit dull (especially given they didnt recognize that the risk they were underwriting was mark-to-market risk not default risk). But the more interesting question is were the banks that bought protection from AIG more stupid? Everyone knew that if and when time came for AIG to pay up on their insurance of CDOs they wouldnt have the cash due to massive wrongwayness of the risk. Ouch! I flesh this out a bit here:

http://www.acredittrader.com/?p=65