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AIG: corporate governance « Previous | |Next »
March 19, 2009

Edward Liddy, chairman of AIG, makes remarks that indicate how the bailout is being used by Wall Street to consolidate their power. He says:

We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers, if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.

The best and brightest?
moirAIG.jpg
The US government had to take over AIG to ensure its survival because of the actions of the notorious credit default swap unit.(It was hedge fund grafted onto an insurance company). AIG was bailed out to prevent a cascade of counterparty failures which could kill the entire financial system. If AIG didn't get the money, the entire global financial system would be put at risk of collapse.

The populist moral outrage is directed at the gaming or looting the corpse: ---those large bonus paid to incompetent, arrogant executives that have resulted in the company AIG hemorrhaging red ink. AIG's near bankruptcy was due to hugely risky and irresponsibly stupid investment decisions. The company fundamentally misunderstood the nature of risks that it was underwriting.

AIG now stands for all that is wrong about Wall Street. Six months after the Wall Street bailout it’s still the case that almost no loans are being made to Main Street. It is not possible for the economy to grow until credit markets are working again. A banking system that is substantially impaired will eat your stimulus. If you do not get the banks lending and creating money, then everything else you do will fizzle. So AIG stands for fiasco--both corporate fraud and government fiasco.

Impaired banks lend less. Edaward harrison at Naked Capitalism says:

This is what is happening now. The problem is that while all this is ongoing, the institutions that issue credit, financial institutions, are hemorrhaging losses. After all, de-leveraging means institutions are selling out of necessity, not out of opportunity. And when everyone's a seller and few are buyers, asset prices fall and massive losses are the order of the day. When banks lose money, they have less capital and when their capital gets low enough they can't lend. Less lending = less credit = less growth. So, if we want to get the economy back on its feet, we need to increase lending.

The banks are not lending because they need their capital to service the toxic sludge already sloshing around their balance sheet.

The US government's programs and bailouts have been designed to recapitalize the banks so that they can start lending again. This has limited effectiveness because the extent of the writedowns of assets already on the books is going to be too massive. The U.S. banking system is effectively insolvent in the sense that the banks do not have adequate capital to absorb the likely losses facing them later this year.

That means the policy response should include nationalization or liquidation of a significant number of banking institutions. The US is engaging in ad hoc measures and for the most part, taking the path of least resistance of propping up zombie banks rather than making banks write down bad assets to realistic values.

| Posted by Gary Sauer-Thompson at 6:37 AM | | Comments (5)
Comments

Comments

banks on government life support should not be taking risks with taxpayer money; they should be cleaning up the wreckage and focusing on relatively low risk business. Will they? 'They' refers to the the state-finance nexus for that is what Wall Street is becoming.

In this interview David Harvey argues that Wall Street (the financial capitalist class) are working to find a solution to the crisis for the capitalist class and if the rest of us get screwed, too bad. He adds that:

the core problem is how you are going to absorb capitalist surpluses in a productive and profitable way. My view is that social movements must coalesce around the idea that they want more control over the surplus product. And while I don’t support a return to the Keynesian model of the sort we had in the 1960s, I do think there was much greater social and political control over the production, utilisation and distribution of the surplus then.The circulating surplus was put into building schools, hospitals and infrastructure. This was what upset the capitalist class and caused a counter movement towards the end of the 1960s – that they were not getting enough control over the surplus. However, if you look at the data the proportion of the surplus being absorbed by the state has not shifted very much since 1970. What the capitalist class did was to stop the further socialisation of the surplus.

Socialisation of the surplus means money for public education, health and housing and our cities.

bonuses should be dependent on overall firm results not seen as an entitlement.

As Robert Kuttner observes the Tim Geithner/Larry Summers approach to solving the banking crisis has been to act on behalf of Wall Street. They are acting mainly in the interests of the banks. Geithner's approach is essentially a continuation of the failed strategy of Bush Treasury Secretary Henry Paulson.

Kuttner also notes that the Republican brand of populism is one where they posture as the populists, expressing faux-indignation that so much taxpayer money has gone to Wall Street.This populism is one part anti-Wall Street, but two parts anti-government and anti-immigrant. It has no strategic coherence as a recovery plan.

The 'conservative' side of politics is confused about how to respond to the global financial and economic crisis. Their populism is basically anti-government, rather than anti-banks or anti-immigrant.

In Australia behind the ‘debt’ and the 'horrors of Whitlam' rhetoric is the faith of economic liberals in the self-equilibrating power of markets. That means that any stimulus package would be ineffective because the crisis must be allowed to run its course by a cleansing recession.

Others--the politicians--- find this too harsh to sell to the electorate to return to power. Their position is that it is better that the Government did something than nothing, so they accept the case for a stimulus but argue that it should be kept small and involve tax cuts.

it is confused because they argue that the stimulus is not working and the solution is to have a smaller stimulus!

Aren't Wall Street bankers just a super-charged aspirationals?