Wednesday, March 18, 2009

Martin Feldstein & AIG (& Mankiw)

The famous Harvard-based economist Professor Martin Feldstein is on the board of the American insurer AIG that received $200 billion in handouts from the US government and which has just paid over $160 million in bonuses mainly to those managers responsible for its massive financial failure.  The bonuses were 'justified' by AIG as retention bonuses designed to retain staff although 11 executives paid the bonuses quit AIG anyway

Feldstein is a conservative Reagan-backer who is now a member of Obama's 'economic recovery team'. Gulp.  A great man - Feldstein has won all sorts of awards and is still prospering.

(Feldstein's Harvard colleague Greg Mankiw argues that Americans shouldn't worry about the bonuses to AIG - they are only 0.001% of annual GDP anyway.  On this basis every criminal in the US justice system should be released from jail.  Disagree with you Greg and more than just emphatically.  Like Feldstein, Mankiw is one of those nominally skilled economists in the US universities who has no sense of the deep dilemmas that confront the US.  Mankiw has learned a little but his intelligence here does not roam beyond the glib and the cute. His views on this issue illustrate the poverty of academic sensibilities in US universities).

11 comments:

Slim said...

I agree with John Quiggin's conclusion on the Austrian School (and hence much of what as passed for economic expertise) - it "is based primarily on a priori logic and not on openness to empirical evidence."

For me, Harry, foxes like the AIG executives who have been robbing the hen house, symbolise all that I distrust about the last decades of free-marketism and the cult of consumerism.

jc said...

Of course you would, Slim. Perhaps you should ask Professor Quiggin if he knows of a better way to allocate resources in an economy seeing that 70's years of trying the socialist method certainly showed the Sovs etc. they were on a real winner.

jc said...

Harry:

They had to pay retention bonuses or those people would have simply left a sinking ship and you would’ve ended up with the tea lady handling the book run off.

Here’s a suggestion if any economist wants to talk about financial markets they ought to work there for a few years and really get a handle on what the hell goes on.

I never really realized, or it didn’t click until I saw the Hank Greenberg interview that the trouble started in the AIG Financial Products arm. AIG Financial Products was perhaps the best operation in dealing with complex structured products all through the 90’s. Seriously they hired some of the best brains around through that decade and there were masses of people trying to get jobs there as they were hugely profitable and did some truly excellent things. Apparently it was only after 2005 that the firm went haywire with CDO’s after they hired a group of idiots in London and no one was watching the hen house. This wouldn’t have happened if Greenberg was still there as he was run out of the firm by the prick Spitzer on trumped up charges that not only didn’t stick but were totally without merit as we later found out. So another member of the Dem(olition) party ends up fucking the economy big time.

Not all the people at AIG were involved in the racket. Believe me when I say it that it was better that they kept the people on who knew how to handle the book rather than fire them all or see them go and the firms books were left without real supervision. The $160 million could actually be well spent seeing that they ran some really complex positions and deals. They fired the CDO group so it seems the guys handling the things were the better operators that didn’t get the firm into trouble.

The real question that ought to be asked is why didn’t the government know about these bonuses until now. They would have gone through the various commitments with a fine toothcomb and signed the various loan agreements etc. that would have detailed various contractual agreements, yet the Obama administration only learned about the bonuses from the newspapers. That’s the real question and is also further evidence that a government couldn’t run a freaking bath without screwing it up.

One other thing, Slim go ask Professor Quiggin if demand/ supply curves are downward sloping. If he says they are then ask the professor if he sees there is anything in what free market proponents wrote to suggest otherwise. Also suggest to him that if disagrees with the things they wrote whether he in fact is suggesting they are upward sloping. That would be an interesting series of comments from the erstwhile professor.

Here's a sober defense on paying the bonuses... in the NY Times Deal Book ,no less.


http://www.nytimes.com/2009/03/17/business/17sorkin.html?_r=1&scp=5&sq=aig%20bonuses&st=cse

observa said...

Well Slim, the Austrian School would have wry smiles on their faces. Firstly their salutary warnings on printing money were ignored and as predicted those who get hold of the funny money first do best and given the size and scope of the global money creation, didn't they just?(eventually over 40% of corporate profits in the US were coming from financial intermediation)As the inevitable occurred with the AIGs in come the Keynesian experts and prop them up with $200bill of the usual and are then absolutely mortified by the continuation of exec bonuses. AIG then offer to give back the $160 mill cost of the bonuses out of the $200bill in bailouts and naturally reckon that's got everyone covered now. In one word- Priceless!

observa said...

Basically Greg Mankiw has an Austrian sense of humour, but as the cartoon said- 'Fer gorsakes stop laughing, this is serious!'
And they wonder why serious investors have clammed up and are seriously contemplating gold, guns, ammunition and a well stocked bunker?

hc said...

You are on weak grounds here JC - the current CEO of AIG (Liddy) says that the practices of that business over recent years leave him ashamed. The levels of incompetence here are astounding and yet many of the bonuses went to people who made these inept decisions. Liddy has asked them to give half the bonuses back.

I wonder if these people would have walked. Who on earth would give these clowns a job?

I agree - the bonuses should have been made clear to government when it bailed this bunch of losers out.

jc said...

Harry

Liddy is just posturing hoping, Congress won't pitchfork him .

True, these guys wouldn't have got a job, however they're all millionaires so do you reckon they would have stayed closing the books for the salary base of $150,000 a year? Is that the risk the firm should take knowing they are the only people around who know how the stuff will be untangled.

furthermore they know the size of the book, how it's skewed in terms of risk, so what would happen if they went to a friendly hedge fund which went out and cleaned the market up on them?

harry, you can't quantify it, but the best decision was to keep them there and unwind the book.

This is now certain.... the idea of the Federal government nationalizing a US bank is totally and completely off the table. Citi would be 100 times more complex than AIG. Imagine the grief they would get with that behemoth. Geithner would be pitch forked by main street if he took over citi and $2 million went astray.

Who was the bright spark that thought they should nationalize US banks?... better not say.

This is too funny if it wasn't so tragic.

Damien said...

I completely agree with Harry on this. It was necessary to rescue AIG in order to protect the counterparties to their very unwise trades.

But, paying bonuses to the people who work at AIG is a classic example of moral hazard. It sends exactly the wrong incentive. For the good of society, we need to fix the financial markets culture of rewarding people too much, and rewarding them even when they fail.

If anyone argues that the bonuses to AIG executives are irrelevant, I think they have lost their moral compass.

observa said...

"If anyone argues that the bonuses to AIG executives are irrelevant, I think they have lost their moral compass."

Umm.. errr..

'Obama administration special envoy Richard Holbooke was on the American International Group Inc. board of directors in early 2008 when the insurance company locked in the bonuses now stoking national outrage. Holbrooke, a veteran diplomat who is now the administration's point man on Pakistan and Afghanistan, served on the board between 2001 and mid-2008.'

vancouver real estate agent said...

Well, that's a new information! I thought these bonuses, which are partly withheld salary, can be only paid to those who stay with the company until the bonuses are to be paid. If 11 of them left, then the tiny bit of understanding I had for this whole affair is gone.

Jay

Anonymous said...

this is what he's been up to
http://online.wsj.com/article/SB20001424052970204683204574358233780260914.html#articleTabs_comments%26articleTabs%3Darticle
Bias?