PROFILE OF THE CRIMINALLY STUPID ... AIG

AIG, which received $60 billion in taxpayer funded bailout money, for making incredibly stupid business decisions, has now decided that it will give "retention" bonuses to 130 managers as "cash rewards." Included in these cash awards is a $3 million bonus to the head of AIG retirement services, Jay Wintrob.

This announcement came 1 day after AIG said it would not give annual bonuses to executives. Nicholas Ashooh, spokesman for AIG, explained: “We’ve said they aren’t eligible for annual bonuses, and they’re not ... What we’re talking about are retention agreements ..."

How can you disagree with logic like this?

I think I'll play this game with all my creditors. "Hey, I'm not going bankrupt ... I'm just not going to pay you anymore."

- Mark

SIN CITI ... AND THE CRIMINALY STUPID

I had lunch this afternoon with a friend. A very conservative friend. We rarely agree on anything, and are polar opposites when it comes to politics and religion. I still remember a heated "exchange" we had in a restaurant, only to stop long enough to see the people seated around us staring, with one of them finally blurting out: "Go on ... this is better than Cross Fire."

Today we agreed on several things (and no one was staring). We agreed on what needs to be done to fix the economy. But we were especially in tune when it comes to this: there should be punishment and accountability for the big players who contributed to the economic mess we're in.

In a flash of serendipity, when I came home today I found this article, "Sin Citi", which called for exactly the same thing. The rationale for punishing financial stupidity was simple.

Homeowners who made ... bad judgments, by taking on mortgages that they could not afford, are being thrown out on the street. Thousands of Citi employees will be gracing the unemployment lines this holiday season, not because of anything they did but because the people who run their company are, and were, incompetent.

The author of "Sin Citi" is arguing that homeowners and Citigroup employees - those at the bottom of this financial food chain - shouldn't be the only ones held to account here. This is especially the case since homeowners simply took what was offered, while Citigroup employees did their jobs. Someone had to set the game up. And they need to be held to account.

While the "Sin Citi" piece makes a good argument for going after those who helped create the conditions for the market's collapse, this article from Michael Lewis - author of Liar's Poker - explains how we got into this mess by pointing out just how clueless Wall Street Bankers really are. But Lewis' article also tells us something else. There may not be any legal wrongdoing for us to pursue. Incredibly, most of what Wall Street did was legal.

OK. New Christmas wish. Is there any way we can punish the criminally stupid? Just asking.

- Mark

P.S. If you want to understand the individual logic that got us into this market mess you need to read Liar's Poker. Not only is it informative, but it's the funniest book on market players there is. Lewis is a very good writer.

AN INTERESTING STORY ...

I was teaching graduate courses in Mexico in 1993 when I ran across the Spanish-language translation of Benjamin J. Cohen's book, In Whose Interest? International Banking and American Foreign Policy (1986). I had read the English language version of his book a few years earlier, and was happy to see it in Spanish. I used it in one of my graduate courses in Queretaro, Mexico.

I mention this because in his book Benjamin Cohen discussed how bankers understood that if they were big enough and overplayed their hand that they would be bailed out by their governments. My favorite chapter was "So What's New?", which explained how banks and nation-states have historically played a silly game of "Who Needs Money Now?", only to lend and bailout each other when appropriate.

The moral of the story is that what we are seeing with Citigroup and the financial sector in America today is NOT new. Banks know that they will be bailed out if their problems are big enough. This kind of stuff has been happening literally for thousands of years. Moral of the Story: The $3-4 trillion that's been committed by the U.S. government so far is just the beginning (Worse, these dynamics constitute the real Graveyard of Empires).

I share this story because I want to emphasize that what's happening now is not new. This stuff happens for a reason. I'll be commenting on this later.

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Note: When I invited Dr. Cohen to CSUB to discuss his work I complimented him on the Spanish language version of his book. The translation was first class. He replied, "I didn't authorize a Spanish language version." I laughed (nervously) and told him that it was translated in Cuba (the Cuba-Mexico connection is another story). The communists - especially during the Cold War - were always interested in how the state props up capital in capitalist societies. There's an ugly lesson in this for all of us today.

- Mark

RICHARD A. CLARKE, DIRECTOR OF CIA?

From a policy perspective, I'm completely in favor of this: Richard A. Clarke for Director of CIA.


Author of Against All Enemies: Inside America's War on Terror, former counterterrorism czar, Clarke was perhaps the only guy in Washington D.C. who knew what was happening on 9/11.



Richard A. Clarke is so respected that when his book came out, where he essentially said the Bush administration didn't know what the hell they were doing in the War on Terror, the republican-led Congress did nothing. Even Karl Rove and his slime machine goons from the right left him alone. He knew too much.

Anyone who has has read his book understands why he would be a good pick.

- Mark

IN THEIR WORLD ...

With Hannity, FOX News, Dick Morris, and Bill "O" the Clown going nuts over Obama's election this piece captures what the Far Right sees.


- Mark

$7.7 TRILLION?

OK, as predicted, it looks like Citigroup is getting in on the bailout magic carpet ride. Curiously, there are no real strings attached ... you know, like the one's that are being asked of Detroit's automakers (why don't we force Citigroup to renegotiate it's ARM contracts and/or homes that are upside down in value?).

But this isn't the story of the day. Neither are the appointments of Barack Obama's economic team - which is a stellar group.

The real story is how much the bailout of the our nation's financial institutions is projected to cost the American taxpayer. On my program this past Saturday, I said that we could forget about the $800 billion price tag that was approved by Congress. With previous commitments (over $1 trillion), and emerging FDIC promises ($1.2 trillion), the bailout price tag is really going to cost between $2-3 trillion, minimum.

Bloomberg.com is also reporting that $2-3 trillion might just be floor. But they're also giving us a number to chew on: $7.7 trillion. That's a lot of cash we're going to have to borrow. I hope the Chinese still like us.

Here's something to think about, and a question.

We called it the Great Crash when markets collapsed 33% in 1929. By the early 1930s, because of President Hoover's bumbling, we would call it the Great Depression. Since the beginning of the year U.S. markets are down 38%. If we compare the market today to its peak in October of 2007 U.S. market are down 43%.

So, what do we call this economic mess?

- Mark

WHY OBAMA'S TAX PLAN IS NECESSARY

More evidence that the private sector doesn't always do the right thing ...

It turns out that the executives at Citigroup didn't want to say anything about their risky mortgage related loans because executives and managers were making too much money in fees and bonuses. This is from the NY Times.

But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.

Keep in mind that these are people who make 6 figures or more every year.

Today, Citigroup is faced with $65 billion in losses, and will be experiencing additional write-downs and other charges for future losses. Because of executive mismanagement and stupid decision-making the company is currently worth just $20.5 billion, down from $244 billion two years ago. About 75,000 jobs are gone or set to disappear.

Obama's plan to increase taxes on those making $250,000 or more per year can't come soon enough. These idiots don't deserve what they "earned".

- Mark

45 YEARS AGO TODAY ...

Forty five years ago today, John F. Kennedy was assassinated. I didn't mention it on today's program but I think it's important to post something.


I was two years old, and didn't know anything. But we all learned that one person can make a difference.

- Mark

"IT'S DEJA VU ALL OVER AGAIN"

It appears that Citigroup is now in talks with the federal government. With Citigroup shares selling at $3.87 (from a high of $35.29) the company is looking for a way to stabilize it's position in a turbulent market.

Problems abound because Citigroup has already taken a bite at the bailout apple, securing $25 billion from the feds in October. And let's not forget the $7.5 billion injection (payable at 11%) from the Abu Dhabi Investment Authority (a Sovereign Wealth Fund) that was made last year.

I'm picking up on this story because not only is Citigroup scrambling for solutions this weekend, but I want to point out that this isn't the first time Citigroup has found itself in such dire straits with other financial institutions. As I pointed out in an earlier post, what was then called Citibank found itself in a terrible mess in 1982 when it - along with 9 other U.S. banks - was over exposed to developing countries around the world.

How exposed, you ask?

By 1982 America's 9 largest banks had loaned out more than 350% of total capital on hand (capital is essentially what you have left after you pay off all your debts). Citibank was one of those banks. When one of their clients (Mexico) said, "We're broke and can't pay you" Citibank had a decision to make. They could act like a free market player, and take their lumps for making terrible investment decisions, or they could go to the federal government and ask for help. They went for help. The "free market" oriented Reagan administration obliged.

As I write these words Citigroup is in talks with the federal government, trying to figure out how to save itself. I could be wrong, but I doubt they'll get the Detroit Treatment. Citigroup is simply "too big to fail."

As Yogi Berra might say, "It's Deja Vu all over again."

- Mark

AMERICAN TAXPAYER ... BEND OVER

After providing record bailout funds for our nation's financial institutions they still can't find it in themselves to lend to each other. Apparently they still don't trust one another.

Enter the taxpayer ... again.

Yesterday the Federal Deposit Insurance Corporation - the institution created during the Great Depression to provide confidence by saving the deposits of the little guy (you and me) - ruled that they will now guarantee loans made between financial institutions. That's right. Banks that don't want to take market risks and lend to each other, because they don't trust their institutional colleagues, now have access to bailout funds AND will get the American taxpayer to insure the loans they make to other institutions.

This is akin to borrowing money from a rich relative and then having them pony up more money when your "investement" goes bad (which is pretty much the story of George W. Bush's investment life).

Estimated Cost to the American Taxpayer: $500 billion to $1.4 trillion. Nice.

Now, to be sure, the money isn't being pumped out immediately. The banks who borrow money have to collapse first. But don't worry. If the Savings & Loan debacle from the 1980s is any indicator of what lurks around the corner this should be no problem. This graph (from Calculatedrisk.blogspot.com) shows what we can expect when an FDIC government guarantee like this is made (click on the graph if you can't read it).


What's important for me to note here is that 1980 was the year that Congress raised the FDIC insurance limit from $40,000 to $100,000 for our nation's financial institutions. Then, in 1982, Congress said S&Ls could essentially invest and make loans wherever the S&Ls wanted. This was like saying, "Go out and have a few drinks with your friends, we just raised your bar tab limit ... which we'll go ahead and pay if you can't." These dynamics help explain the surge in bank failures in the late 1980s.

Today, most of the the drinking's been done, and we're getting ready to tally the tab. But "W" is still at the bar, buying his friends more coctails and paying for their cab rides home. More bank failures are around the corner. Can you guess who's picking up the tab?

- Mark