Why Geithner Should Go

Joan Vennochi of the Boston Globe does not have a warm regard for Timothy Geithner as our Secretary of the Treasury. Basically, she feels that he pleads ignorance too often, e.g, with regard to his non-payment of taxes and his lack of knowledge re the AIG bonuses. On this latter point Vennochi in the following excerpt from her column demonstrates quite clearly that any sensible person would have doubts as to the veracity of the latter claim.

Reporting by The Wall Street Journal and The New York Times establishes the following chronology:

AIG cited the bonus retention plan in a public filing in early November. Geithner, then president of the Federal Reserve Bank of New York, was involved in major AIG matters until he recused himself around the time of his Nov. 24 nomination as Treasury secretary.

Some lawmakers raised the matter of AIG bonuses at a December hearing. Over the next weeks, AIG officials briefed lawmakers about the retention bonuses. On Feb. 28, Treasury Department staff were briefed on AIG matters, including the bonuses, by the New York Federal Reserve Bank.

On March 3, Geithner was asked directly about the bonuses at a House Ways and Means Committee hearing.

During that hearing, Representative Joseph Crowley, a Democrat from New York, asked what could be done to stop AIG from paying $160 million in bonuses.

Geithner responded by saying executive pay in the financial industry had gotten "out of whack" in recent years. He promised to do something about it when companies getting taxpayer bailouts were involved.

The bonuses were front-page news on March 15. Geithner eventually said he would take "full responsibility" but insisted he did not learn of the bonuses until March 10. A Treasury Department spokesman later said Geithner "was not aware of the timing or full extent of the contractual retention payments or other bonus programs until his staff brought them to his attention on March 10." It took until March 20 for Geithner to confirm that his department pushed Dodd to write the budget loophole into the economic stimulus plan.

The president has made it clear Geithner is his guy. What he has never made clear to the American public is why.

Obama stood behind Geithner when his then-nominee said he didn't pay his taxes because of some misunderstanding of the tax code. Now Obama is standing behind Geithner when he says he didn't know about the AIG bonuses because he didn't fully understand what his staff was negotiating.

The president is now asking American taxpayers to trust Geithner's plan to help buy up so-called toxic assets, as well as to expand the government's authority to take over troubled corporations like AIG. (my emphasis)

That's asking for a lot of trust. So far, on a personal level, Geithner has done little to show taxpayers he deserves it. But Obama continues to praise him, and even said in a "60 Minutes" interview that he would reject Geithner's resignation, if offered.

A market rally boosts Geithner's stock when it comes to pleasing Wall Street. But it shouldn't erase the honesty question for Main Street.

A Treasury secretary who trims the truth on any level is a liability. But Obama is sticking with his investment, out of loyalty, stubbornness, or both.

There has been plenty of time to figure out who knew what about the AIG bonus formula and when they knew it. If the full calculation doesn't get Obama angry, it should.

We're not going to take it anymore

On a day when even my closest friend, who has almost zero interest in most economic matters, is trying to start a protest march on AIG comes this good idea from Bill Black, one of the main people in resolving the S&L crisis, and three other heavy hitters.

Remember that this is a firm that is 79.9 percent owned by the United States government. It is therefore quite possible to abort this outrage, by decisive exercise of public authority. Within existing law, there is more than one way to do it. But a direct solution is readily at hand: Firstly, the U.S. trustees in charge of the firm must immediately instruct the corporate treasurer to make no payments of any bonuses. They also need to order him to issue stop-payment orders on any checks that fly out the door at the last minute, as with Merrill Lynch. Then the trustees need to split off the derivatives unit from the rest of the firm and separately incorporate it. This step leaves AIG's other businesses free to operate as usual. If the recipients of the bonuses refuse to waive them, then the derivatives unit should at once be thrown into bankruptcy, terminating all obligations to pay them. Right now, press reports suggest that the firm's top management waited until the last minute to inform the government of what was happening. AIG CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake of public confidence and to send a clear signal that gaming the system is unacceptable. It is also past time for an investigation of the validity of AIG's past accounting and securities disclosures and its executive compensation program by the Office of Thrift Supervision, the Securities and Exchange Commission, and the FBI.

And Glenn Greenwald demolishes the 'sanctity of the contract' argument:

As any lawyer knows, there are few things more common - or easier -- than finding legal arguments that call into question the meaning and validity of contracts. Every day, commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions.

Since the contracts are secret and we're apparently just supposed to rely on the claims of AIG and Treasury Department lawyers, it's impossible to identify these arguments specifically. But there are almost certainly viable claims to be asserted that the contracts were induced via fraud or that the bonus-demanding executives themselves violated their contracts. Independently, it's inconceivable that there aren't substantial counterclaims that AIG could assert against any executives suing to obtain these bonuses, a threat which, by itself, provides substantial leverage to compel meaningful concessions. Many of these executives were, after all, the very ones responsible for the cataclysmic losses.

The only way a company like AIG throws up its hands from the start and announces that there is simply nothing to be done is if they are eager to make these payments. One might expect AIG to do so -- they haven't exactly proven themselves to be paragons of business ethics -- but the fact that Obama officials are also insisting that nothing can be done (even while symbolically and pointlessly pretending to join in the populist outrage over these publicly-funded "retention payments") is what is most notable here.

Legal strategies aside, just as a business matter, one of the first things which every compnay in severe distress does is go to its creditors, explain that it cannot make the required payments, and force re-negotiations of the terms. That's as basic as it gets. To see how that works, just look at what GM and other automakers did with their union contracts - what they were forced by the Government to do as a condition for their bailout. Obviously, if a company goes into bankruptcy, then contracts to pay executive bonuses are immediately nullified, but the threat of bankruptcy or serious financial distress is, for obvious reasons, very compelling leverage to force substantial concessions. And the idea that, in this economy, AIG executives (of all people) will be able simply to leave and go seek employment elsewhere unless they receive their "retention bonuses" (even assuming that's an undesirable outcome) is nothing short of ludicrous.

It is a different world

If you were operating in an industry where many have lost their jobs, would you pay bonuses to your current staff? If your company had received billions of dollars in taxpayer money, would you pay bonuses to your current staff? If your answers were "no", then you would not be in the brokerage business.

Morgan Stanley recently took control of Citibank's brokerage unit (probably using taxpayer money). Now they will be paying $3 billion in so-called retention bonuses to the brokers. And, the bonuses will be based on what the brokers did in 2008.

It really is a very different world these people operate in. Will the guardians of the TARP let it happen? Do you have any doubts?

Advice for the Defense Department

Lawrence Korb and others have advice for President-Elect Obama with regard to our military forces. As readers will know, I've quoted Korb often as, despite his being Reagan's Assistant Secretary of Defense, he makes a lot of sense to me.

Looking at the Defense Department alone, why Obama wants this job is beyond me - two wars going on, real difficulties maintaining a volunteer army, unbelievable cost overruns, accusations of torture, etc. But Korb etal have great faith in the second level command and assert that the major problem may be the retention of these officers.

Korb argues that, despite the fact that we are spending more money on defense than at any time since WWII, we do not have a better military. Moreover, this largesse has enabled DOD to avoid having to make choices; they can have it all. "Sound strategy and military policy requires choices about organizational structure, resources, training, and other important issues."

Somewhat surprisingly, Korb is not recommending cuts in the budget overall. He does think that we have to spend our money on 21st century issues and, by cutting back on weapons designed for 20th century warfare, we can save enough money to pay for new capabilities.

Korb really pushes the idea of 'people, not hardware' being the sine qua non of the 21st century military. He wants to increase the size of the force but without the lowering of standards we have seen over the past few years. And, of course, we need people who can actually manage DOD.

Please don't leave

Fannie Mae is another company that needs to retain the best and the brightest. So, naturally, it has to pay them money to stay as well as money to do their jobs. Can you quarrel with paying the COO a 'retention bonus' of $611,000? Heck, his regular salary is only $616,000.

And because there are so many jobs available in the financial field and so few people to fill them, we need to pay the COO almost three times more this year than we paid him to stay last year ($260,000).

Did I read that the company was on its way back to profitability? Only in the tea leaves. In reality, that day is far, far away.

A Different Way

What state does not have a jobs problem? North Dakota. Its unemployment rate in July was 3.3%, a rate this country hasn't seen in the 21st century yet. It has had the lowest rate in the country every month for the past three years. Last year it had the greatest increase in payroll (5.2%) in the country.

What state is in very good financial shape? North Dakota. It has had a budget surplus since 2008. It has been able to reduce "individual income taxes and property taxes by a combined $400 million, and is debating further cuts. It also has the lowest foreclosure rate and lowest credit card default rate in the country, and it has had NO bank failures in at least the last decade."

Some people think that oil is the reason why North Dakota has done so well. Ellen Brown thinks it's because the state has a state-owned bank. Brown cites several oil states where the unemployment rate is in the 7%+ range.

The Bank of North Dakota is something like a mini-Federal-Reserve. It partners with banks in the state with loans and guarantees. It offers towns a loan program which enables towns to help residents borrow for such key items as jobs retention, technology creation, retail, small business, and essential community services. 

The bank makes money; last year it earned 19% on equity. Basically how it makes money and is able to support other banks in the state is due to the fact that the state deposits its tax revenues in the bank. It does not place the funds with private banks that may be located all over the country. So, North Dakota money stays in North Dakota and benefits the residents. Sounds like a pretty good idea to me.

Retention or Recruitment?

In order to meet its goal of increasing its size, the Army seems to be moving towards retaining its current cadre rather than trying to recruit new troops. The reason for the shift is, "We have a sinking pool of qualified candidates", in the words of the fellow in charge of recruiting at the Pentagon. The Army estimates that 26% of those between the ages of 17 and 24 are qualified to serve. The rest have drug or alcohol problems, criminal records, dependents or are just plain stupid. Of this 26%, 11% are in college. So, the base is pretty low. And, as a result, the Army has lowered its standards.

The recruiting problem is particularly acute with regard to officers. The Army needs 3500 more than they have

Citi Shareholders Speak Up

They voted against the bank's pay plan for executives.  Rejection of the pay plan was widespread, 55% against.  True, the vote was only 'advisory' and, thus, is not binding.  But Citi's Chairman said that changes will be made, “We’re going to have some more conversation with our shareholders, make sure we understand their concerns and then fix it.”. 

Citi's stock dropped 44% in 2011.  For such a performance the board was ready to pay Pandit $15,000,000 plus a separate retention deal that could be worth $40,000,000. 

3 Troubled Entities

Congress, the media, Wall Street honchos. Enough already. Let's start doing what you're paid to be doing.

Congress spends most of its time trying to get re-elected. Okay, the auto executives have no sense of modesty. But, is their flying down to DC worth more than one 5-minute harangue? Shouldn't Congress be analyzing the companies' plans for salvation? Yes, AIG was arrogant in spending our money on bonuses to the people who wrecked the company. But, why was the company allowed to pay its counterparties in full although the underlying investments were still solid? Why can't the financial products division be isolated so that it no longer continues to infect the entire company?

Is Congress really the cause of the media's devotion to trivialities? Are all opinions equal and deserving of equal play? Is economics the reason for the preponderance of 'reality' shows on television? Are the arts dead? How can a tv network devote months of daily coverage to the death of one girl in the Caribbean? Do the "pundits" demonstrate anything but the ability to be rude and the ability to yell? How often does one hear reasoned analysis of our current situation? Why does the media remain so insular and chauvinistic?

Okay, Wall Street may have always been a different world. But it has really become divorced from planet earth in this century. When did it become necessary to pay retention bonuses every year? Is it really necessary to pay brokers so much money? Shouldn't the stockholders get some of the profits? Whatever happened to investing for the long term? Should they have spent fortunes investing in securities hardly any of them understood? Why are they upset and threatening to take their marbles because the majority owner - us - starts to exert a modicum of control?

It is the first day of spring. I should relax.

Retention Bonus This

You won't believe that AIG is still screwing us. They really have no shame. After we gave them billions of our dollars, they spent money on entertaining themselves. Now, after supposedly agreeing to caps on executive salaries, they have decided that they need to pay bonuses to 130 executives to ensure that they will stay with the company during these trying times. I'm sure many of these 130 are the people who got the company into this mess. If they left, the company would be better off.

There are always exceptions

Take, for example, Citigroup in 2009, when it was on the ropes and existing largely because of our bailout.  Their contracts with some high-level employees stated that ‘your guaranteed incentive and retention award’ would not be paid upon exit from Citigroup.  Guess what?  There was one exception - you would receive that compensation ‘as a result of your acceptance of a full time high level position with the United States Government or a regulatory body.’ 

Jack Lew, the Obama nominee, for Secretary of the Treasury, was able to bank his $940,000 bonus when he left Citi to join the government.  Is it at all likely that Citi had the money to pay the bonus because we gave it to them? Was Citi expecting that Lew would remember the bonus when making decisions affecting Citi?

What is it with Obama's nominees for this job?  Tim hadn't paid his taxes.