Matt Yglesias

The Constitutionality of Bonus Tax Bills

Since the great wave of AIG outrage crested, I’ve heard lots of speculation as to whether or not the bills under consideration to retroactively tax bonuses paid out at bailed-out firms might be unconstitutional. The Congressional Research Service has a useful discussion of the issues (PDF) which reveals that lots of the things some people have deemed potential constitutional problems are fine, but that there may be a viable constitutional challenge under the “bill of attainder” clause of the constitution.

I continue to find the specific focus on bonuses to be somewhat mysterious. If executives were getting less money in the form of “bonuses” and more in the form of base salary, what would that really change? I’m all for measures to curb excessive compensation, but zeroing in on the bonuses seems like putting semantics ahead of real policy goals.

Richard Holbrooke Served on AIG Board Until July 2008

From the “I Can’t Believe It Took The GOP Oppo Shop Until Just Now to Bring This Up” file, it turns out that from February of 2001 until July of 2008, Richard Holbrooke was on the AIG Board. This has no particular relationship to his work as special envoy to the Afghanistan and Pakistan issues, and I think spokesman Tommy Vietor’s statement that “Mr. Holbrooke had nothing to do with and knew nothing about the bonuses” is quite credible.

But of course it’s a little too credible and points toward the rotten nature of corporate governance in America, as well as the incestuous relationships between our overlapping elites in big-time politics and big-time finance. One assumes Holbrooke had nothing to do with any substantive aspect of AIG’s business—he was just there so AIG could fill the board seat with someone important and unlikely to make any trouble for whatever anyone at the firm was doing.

Carol Baum: Welfare CEOs are Just Like John Galt

Bloomberg columnist Carol Baum puts together a baffling analogy:

The hero of Ayn Rand’s “Atlas Shrugged” is smiling because he’s seen it all before: the government’s intervention in the private sector; the constraints placed on business in the name of the people; the desperation on the part of government bureaucrats when they realize their leverage is limited; and — this part is still fiction — the decision on the part of business leaders to walk away from the enterprises they built. [...] The government needs Liddy and Citigroup’s Vikram Pandit and Bank of America’s Ken Lewis to continue working to restore their firms to prosperity in the same way the looters in Rand’s novel need Hank Reardon and Francisco d’Anconia and Dagny Taggart, respectively, to run their steel mills, copper mines and railroad.

Atlas Shrugged is a stupid book, Ayn Rand is a stupid woman, and John Galt’s ideas are stupid. That said, none of them are nearly this stupid. Rand’s novel isn’t about a world in which executives who build companies based on a lot of incorrect decisions, then pay themselves millions of dollars while bankrupting their firms, then come to the government hat-in-hand asking for bailouts, then find that the bailers-out want to attach some strings to their hundreds of billions of dollars in public funds and then go to hide out in Galt’s Gulch. That doesn’t make any sense at all.

If the folks running Citigroup and Bank of America and AIG were good at their jobs, we wouldn’t be in this situation in the first place. That’s the point. But they weren’t good. They lost staggering sums of money. Their companies went broke. They had to beg for taxpayer dollars. You don’t get to do that and then turn around and “go Galt.”

A Sense of Perspective About AIG

It’s a little bit difficult to know exactly how to phrase a post about the AIG suggesting that people need a bit more perspective about this that doesn’t come across as mere apologetics for the AIGsters and for screwups at the Fed, at Treasury, and at the White House. But read what Noam Scheiber has to say about this. Or note Ezra Klein’s observation about quantitative easing:

News of Bernanke’s “money from helicopters” maneuver is below the fold on the Wall Street Journal’s front page (though they do have a good roundup of expert reactions elsewhere on the site). Same goes for The Washington Post. Everyone, however, has continuing, above-the-fold coverage of AIG’s bonuses, which are about one-ten thousandth monetary value of the Fed’s move.

And it’s not just that the money is different in scale. The big macro moves out of the White House, the Fed, and the Treasury Department—the stimulus, the TALF, quantitative easing, the “stress tests”—are all important determinants of whether or not we’ll recover from this recession in a timely manner. Things like the administration’s health care and budget proposals are important determinants of social justice in the United States. The AIG bonuses are largely irrelevant to the recovery issue, and while important as a social justice matter they’re primarily of symbolic social justice importance. It’s good that people are outraged by this—it’s outrageous! And it’s good that in response to the outrage the government is now working to correct the problem. That’s the media-political-outrage cycle at its best. But it’s not healthy to just go ’round and ’round in circles over this issue endlessly. If 18 months from now the economy’s still shrinking and unemployment’s at 15 percent, nobody’s going to feel particularly happy about the fact that we stuck it to some scumbags from AIG back in early ‘09.

If there’s something the administration deserves criticism for, it’s the fact that most observers think their public-private partnership for bank recapitalization can’t work. If you want to talk about latter-day conservative populists being hypocrites, talk about their stances on the tax provisions in the budget. That’s the big stuff that’s still in play. On the bonuses, the politicians have heard people’s outrage and now seem determined to avoid future such blow-ups. It’s fine.

New Deal Lessons for AIG

Eric Rauchway offers some some slices of New Deal history that seem relevant to the current debate over AIG. First, Jesse Jones, head of the Reconstruction Finance Corporation, from his memoir Fifty Billion Dollars (which was a ton in the thirties!):

The RFC acquired voting control of Maryland Casualty in April, 1934, when we first bought preferred stock in the Company. At that time we sent Silliman Evans to Baltimore to take the presidency of the company and Edward G. Lowry, Jr., of our legal department, to be its vice president and special counsel, each being elected as director. Mr. Evans later became chairman of the board…. When we got into the company, the situation was so much worse than had been represented that we felt it necessary to replace the management.

And this from James Olson’s book Saving Capitalism:

For political reasons, Jesse Jones often toyed with the salaries of corporate management, especially if they were, in his mind, “over-paid” Wall Streeters. Jones and Roosevelt knew that RFC loans always had the potential of political trouble—stirring up liberal Democrats and progressive Republicans who were blaming businessmen for getting the country into such an economic mess. Salary reductions were one way of showing that RFC, even while it was pouring billions into private business, was not enriching corporate management. Amendments to the RFC Act in 1933 required Jones to certify the appropriateness of the salaries paid by every corporation accepting loans and investment money. Jones devised a declining scale of salary reductions. Corporate management receiving annual salaries of $150,000 or more would be cut to $60,000, $100,000 or more to $50,000, and other reductions accordingly.

The RFC doesn’t get a ton of discussion today, but I think there’s plenty of evidence that its activities were more important to the 1933-36 growth spurt than was that era’s rather modest fiscal expansion. Basically the idea was to set up a public agency that could make the loans that the banking system couldn’t or wouldn’t do. Today’s TALF, run as a Fed/Treasury partnership, is designed to serve a similar function but works quite differently and has mechanisms in place designed to make it less political—and, not coincidentally, more business-friendly.

Simon Johnson: Mess-Makers Are Not Vital to Mess-Elimination

Is it really true that only the AIG employees who made the mess at AIG can clean up the mess at AIG? That doesn’t sound right to me. And Simon Johnson has his doubts as well:

Simon Johnson, a former chief economist at the International Monetary Fund, has pointed out that in financial crises, bankers often exaggerate the difficulty of cleaning up their mess. They do so partly to justify their own continued importance and also to fight off calls for a government takeover of banks. In reality, Mr. Johnson says, the mechanics of cleaning up hobbled banks turned out to be fairly straightforward during other recent crises, like the Asian one in the ’90s.

I’m not sure the situation is exactly the same, since my understanding is that AIG wrote more “custom” products. At the same time, it’s clear that the incentives point in favor of dissembling about their own indispensability. And at the end of the day, while we have no real way of knowing whether Matt Yglesias or Duncan Black or Simon Johnson would do a good job of handling CDS contracts for AIG, we know for a fact that the people currently in those jobs haven’t done well. What’s more, surely it would be possible to rehire or retain a few AIGsters to help out if that became necessary without paying out lavish bonuses. In general, we’re in the midst of a buyer’s market for paid employment.

Grassley Calls for Contrition, Not Suicide

I thought Senator Chuck Grassley’s initial impulse to suggest that AIG-folk ought to kill themselves, samurai-style, was a bit over the top. But there was a ray of truth in what he was saying. And I think he found the way, saying that there’s a need for some personal responsibility and contrition among the masters of the universe who destroyed the global economy:

In the case of the Japanese, you know, they do one of two things. They either go commit suicide or they take a deep bow and say apologies and then sometimes resign. But they take full responsibility. And we’re not hearing that.

And obviously, I don’t want anyone to kill themselves because I don’t believe in that sort of thing. But I do believe that when you have done bad for your company, for your stockholders, and eventually for the taxpayer…you ought to say I’m sorry.

Right. We’ve somehow managed to construct something of a post-shame society, in which elites have convinced themselves that the rational agent model of human behavior is not just a useful modeling tool, but an ethical guidebook. There’s something to be said for the idea of a sense of honor and personal responsibility. You’d like to see a story in a newspaper somewhere about some Wall Streeter whose lost a lot of money over the past 18 months and is saying “you know what, I lost a lot of money over the past 18 months but I’m still a lot better off than most people are, and unlike a lot of those people I never really did much of anything to earn this wealth — that’s why I’m giving what I have left to the local soup kitchen.” Do I expect everyone to act like that? No, that’s not realistic. But I think that in a healthy society, you see some consideration of issues of honor and duty and moral responsibility and certainly Americans of more humble means don’t strike me as being nearly as taken with the “greed is good” personal ethic.

That said, turning attention back to Grassley, the man’s a United States Senator. He’s in a position to not only offer commentary on passing events, but to change the structure of American public policy. He could, for example, show his outrage at greedy elites by supporting a budget that undoes the pro-rich-people Bush tax code to finance tax cuts for working people and expansion of health care coverage. Thus far, though, he seems content to stick with his pro-rich policy agenda.

Rep Barney Frank: Let’s Fire AIG Executives

Some of my ThinkProgress colleagues had a chance to interview Representative Barney Frank (D-MA) and he came out swinging against the idea that it’s somehow crucial to retain AIG’s trading “talent”

I think the key point is that “People are sometimes committed to not admitting mistakes . . . the argument that you take the people who made the mistake and put them in charge of undoing the mistake goes against the human impulse not to admit a mistake.”

AIG and the Case for Bank Nationalization

Tyler Cowen says of the AIG bailout outrage “The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.”

I don’t really see the logic there. If Citi and Bank of America are recipients of tens of billions of dollars in government funds, and are staying in business only because of explicit and implicit government guarantees, then all of their decisions are politicized anyway. Avoiding the politicization of business decisions does seem like a good reason to avoid government bank bailouts altogether and just let large firms go bankrupt. But most knowledgeable people—including Tyler Cowen, to the best of my knowledge—think that there are even better reasons to not do that, namely that doing so would make the global economic collapse much more severe. A scenario under which privately owned zombie banks and the U.S. congress spend years in a mutual embrace is the one most likely to lead to large-scale politicization of business decisions. If you rip the band-aid quickly, you should be able to nationalize a firm, split it into “good” and “bad” banks, sell the “good” bank to private owners, and then be left with a publicly owned “bad” bank that can credibly argue that it’s managing assets on behalf of the taxpayers and deserves to be left alone.

Is that a great idea? No it’s not. It’s with good reason that we normally prefer our business enterprises to be neither owned by the state nor dependent on state subsidy to continue existing. But given that we’re choosing between those two options, I don’t see much to like about the dependent on state subsidy path.

For more, definitely read Kevin Drum’s bank nationalization primer.

The AIG Bonuses

You would think that executives at a company that’s so poorly managed that it requires vast government aid wouldn’t be getting big bonuses but apparently not:

An official in the Obama administration said Saturday that Treasury Secretary Timothy F. Geithner had called A.I.G.’s government-appointed chairman, Edward M. Liddy, on Wednesday and asked that the company renegotiate the bonuses.

Administration officials said they had managed to reduce some of the bonuses but had allowed most of them to go forward after the company’s chief executive said A.I.G. was contractually obligated to pay them.

Obviously, I’m not in a position to comment on the legal issues. But certainly there’s nothing preventing moral suasion from being deployed against the recipients of these funds. There are a lot of people in need right now in the world—people losing jobs, people suffering—and a lot of charities that probably need that money a lot more than AIG executives need it.

Getting Some of Our Money Back From AIG Executives

I’m only over the past few days really coming to understand what’s been going on with AIG. But the long and short of it is that all this money we’re giving “to AIG” isn’t really going to AIG, it goes to AIG’s counterparties. These are mostly banks (many of them abroad) who bought insurance from AIG against the possibility of a global financial meltdown. It turns out that AIG can’t actually pay all the insurance claims. So were AIG to go down, all these firms who thought they were at least partially insured against catastrophe would find out that they’ve got nothing and they, in turn, would go under. Hence, the government is stepping in to, in effect, pay off AIG’s debts.

That seems reasonable enough. But the retrospective look at things is truly outrageous. The whole idea of the insurance industry is that if I buy insurance from you, you pay off the claims. Absent ability to pay claims, there’s no business there at all. It’s just fraud. Whether or not it meets the legal standard for fraud, I couldn’t say. But in ordinary language sense, it’s a fraud—you’re selling a service you have no capacity to deliver. And AIG executives made a bunch of money engaged in it. Felix Salmon says: “I wouldn’t be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It’s time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG’s total losses, but it would feel very right.”

I don’t think it would just feel right, it would be right. Thus far, there’s been an extraordinary aversion to actually punishing any of the people responsible. It’s true that most of them are less rich than they once were, but they’re still far richer than most people. And it shouldn’t be that wrecking your company and wrecking the world economy is a good way to become richer than most people.