Mass hysteria over AIG obscures simple truths

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This is a guest contribution by Michael Lewis*.

Last September the U.S. government began to dole out the first of $173 billion to American International Group. A big chunk of it passed right through to banks that had bought insurance from AIG against mortgage and corporate defaults — foreign banks such as Deutsche Bank and Societe Generale but also some domestic ones, such as Goldman Sachs and Bank of America.

U.S. government officials then went to great lengths to disguise from the public exactly what they had done, and why, going so far as to declare the ultimate list of recipients of taxpayer funds off limits to the taxpayer. To its immense credit, the media – or, rather, a handful of diligent reporters, the New York Times’ Gretchen Morgenson chief among them – prevented the public officials from getting their way.

This incredible act triggered hardly any political backlash. In effect, the U.S. taxpayer had paid off AIG’s gambling debts. The end recipient of the money was not AIG, but Goldman Sachs, Deutsche Bank and the others.

Some large portion of the billions obviously wound up, in one form or another, in the pockets of their employees and shareholders. A few people on Capitol Hill moan and groan but there is popular agreement on the wisdom of this transfer of ONE HUNDRED AND SEVENTY THREE BILLION dollars from the taxpayer to the financiers.

Hara Kiri

But when AIG itself pays out $165 million in bonuses – money it is contractually obliged to pay – the entire political system goes insane. President Barack Obama says he’s going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.

Every recriminatory bone in the political body is aroused; the one thing you can do right now in Washington without getting an argument is to rail against the ethics of AIG’s bonus payment.

Apart from Andrew Ross Sorkin at the New York Times, it occurs to no one to say that a) the vast majority of the employees at AIG had as little as you or I to do with its quasi- criminal risk taking and catastrophic losses; b) that the most- valuable of those employees can easily find work at AIG’s competitors; and c) that if the government insists on punishing those valuable employees they will understandably leave, and leave behind a company even less viable than it is, and less likely to give the taxpayer back his money.

And also – oh, yes – that if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.

Big Numbers

From this episode we can observe several general truths about the financial crisis, and the attempt to end it:

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)

2) As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy.

On the Line

But now that taxpayer money is on the line the story has changed: innocent taxpayers are now being exploited by horrible Wall Street financiers. The guy who defaulted on mortgages on his six spec houses in the Nevada desert has turned himself into the citizen enraged by the bonuses paid to the AIG employees trying to sort out the mess caused by his defaults.

3) The complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it.

I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue. For instance, Goldman Sachs, which received about 8 percent of the pile, or $13 billion, has claimed publicly that the money was, to them, a matter of indifference, as Goldman had hedged itself against a possible collapse of AIG – by making bets against AIG.

Goldman’s Clue

This suggests that it was clear to at least one market player, before the collapse, that AAA-rated AIG was behaving in ways that might lead to its demise – which is to say that there was really no responsible place to lay off these bets. (So why bail out those who made them?)

It also suggests that it is a matter of indifference to Goldman Sachs whether AIG lived or died, as either way it was protected. (So why bail it out?)

Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem – the people who borrowed money to buy homes they shouldn’t have bought.

Now I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn’t deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.

*Michael Lewis is the author of “Liar’s Poker,” “Moneyball” and “The Blind Side” and a columnist for Bloomberg News.

Source: Bloomberg, March 20, 2009.

 

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12 comments to Mass hysteria over AIG obscures simple truths

  • anton kleinschmidt

    I find one comment particularly relevant…”b) that the most- valuable of those employees can easily find work at AIG’s competitors;”.

    I would wager that most of the top employees are already actively looking for new jobs. Why would the really good people stay with a lame duck like AIG.

  • Leonard S

    Easy to rant and rave on all sides. The non-serious financial media (CNBC etc.) are particularly good at it. They were screaming for the heads of people at AIG et al and are now screaming about how stupid the government is.
    A contract is a contract and that’s what Geithner did-honoured the contracts. Now he is being skewerd for it. Imagine the same commentators if he had abrogated them.
    Nota job any normal person would want so let’s congratulate him on doing it.

  • Chad

    I agree with most of what you’ve said. However, you casually grouped “innocent taxpayers” and “the guy with 6 mortgages in Nevada” who are now outraged.

    I pay my 1 mortgage and my taxes. I’m also outraged out how my tax money is being thrown away to bail out people whom I believe knew exactly what they were doing which was reckless gambling for short term profits.

    On average, the executives at these companies have greater education and financial knowledge than the average citizen who took the loans they couldn’t afford. The executives are in a leadership position but they failed themselves, their companies, and their customers.

    FAIL.

  • Just in case anyone has missed this point.NOT ONE OF OUR MEDIA NETWORKS HAVE EVEN MENTIONED THIS OBVIOUS FACT. Well done!

  • Richard D.

    Michael Lewis is to be commended for his commentary on a few simple truths.

    Goldman Sach’s Behavior
    Among the most noteworthy of Lewis’ “truths” is the following:
    I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue.

    Yes, the theft of $173 billion certainly qualifies as far more serious.

    Mere words can not describe the shameful behavior of Goldman Sachs and JP Morgan (and a few others, such as Merrill Lynch, Citi, etc.) throughout this crisis. Some day, Americans will learn just how much of that $173 Billion went directly into the pockets of the management of those firms.

  • marilyn

    … hmmmm … think the fact that Hank Paulson came from GS had any bearing on this?

  • xoted

    Ohhh Puuhhhleeeaaasssee!

    Please don’t print this clown again.

    I remember thirty five years ago, fresh out of college being rejected for an Exon credit card from lack of a credit history. The banks have the money, they could have just as easily said NO!

    Some claim they were forced to lend money, However, it seems that while all this lending was going on, the financial industry was making a profit. Puhhleease, this was their own self interest.

    It wasn’t the homeowners who leveraged the contracts 30 to fifty times. This guy is a shill for the securities industry.

    He also has a short memory as there was an outcry with the Merrill Lynch bonuses, but that was under a different administration.

    This is normal operation of the financial system, be it the dot-com blowup, Long Term Capital Management, The Latin American Crisis, or from a long time ago by Andrew Jackson:

    Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

    ~ President Andrew Jackson 1832

    Unfortunately, we have more financial system sycophants trying to get money from them and us than there are people willing to work for a more equitable system.

  • Marco

    Dear Mr. du Plessis,

    I suppose that, by posting the Mr. Lewis’s article on your blog, you, at least, agree about its title.
    Well, I have to dissent.
    People are NOT hysteric. They are just pissed-off.
    Is that so strange to understand ??
    All around the world, people live, right now, with the fear of their future.
    No one really know when all this mess will end (and the ones that states that it will end by end of current year either are irresponsibles ore just liars).
    Then there are a few hundreds (may be less) people, mainly based in London, NOT USA, that pretend to get their bonuses paid for being not manager but, instead gamblers ?? !!
    And they want to get paid with the US taxpayer money ?? !!
    Please, be serious !!
    I’m not involved at all, since I’m Italian, but, honestly, still me, I’m pissed-off just in hearing about that.

    Regards

    Marco

  • Wher is the outrage over the Paulson GS connection?

    Another great M. Lewis article
    http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=1

  • Frank Lotrario

    I take issue with Michael Lewis when he says ” millions borrowed money they shouldn´t have borrowed, not because they were duped or defrauded but because they were covetous and greedy, they wanted to own stuff they hadn´t earned the right to buy. ” This is only one side of the story. I agree that people have responsibility for their decisions, however there is a phrase in law called ” custom and usage in the trade. ” When I go to a bank each year for ten years and fill out a mortgage application to buy a house and the bank denies the mortgage and then I go the eleventh year and they give me the mortgage, I am led to believe that I can AFFORD THE MONTHLY PAYMENT because the bank knows better than me; because the bank would never give me the loan if they thought I couldn´t afford it. I was conditioned by the system to believe and rely on their judgement and not mine !!!
    We have a generation of people that have been bombarded and thus conditioned with propaganda by business, bank and media advertising telling them what they deserved and not cautioning them about what they could afford. Did everyone forget the banners that were waved saying ” your house is your bank,” ” take the vacation you always dreamed of, ” ” buy the car of your dreams, ” etc……..YOU CAN AFFORD THE MONTHLY PAYMENT…..TAKE ADVANTAGE OF THE AMERICAN DREAM !!!! They all did their job very well because the consumer accumulated unmanageable debt and buinesses, banks, etc. made a lot of money trying to satisfy their uncontrolable GREED while closing their eyes to the impending disaster coming !!!
    The average american was not sophisticated enough to understand the danger of what he was doing and he is paying dearly for his stupidity. But for me, the real crooks are all the bankers, business owners, government representatives, etc. that were making milliones taking advantage of this stupidity !!! The little guy was trying to realize a dream, but the big guys were the ones that were driven by GREED !!!! THEY ALREADY REALIZED THE ” AMERICAN DREAM ” AND IT WASN´T ENOUGH, they had to have more and more and more and wanted it at any cost !!!Millions wasn´t enough for them, they wanted billions !!! THAT IS GREED !!!!!
    In reference to the issue of the contracts in Mr. Lewis´piece. I don´t understand his rational. When a contract is with a blue collar worker working for CAT or GM making $24 hr, and the employer says we will drop your wage to $18 hr or move the company overseas, the general response by media is that the worker was making too much money anyway, but when the contract is with a millionaire white collar worker, it is all of a sudden a SACRED DOCUMENT and they become ” valuable employees ” and if the contracts are not honored somehow our free mkt capitalistic system will be destroyed !!! If they are so valuable, let them go find a job with an AIG competitor, if one is available and live by the same rules as the blue collar guy !!!!

  • Ian Nunn

    In their November letter, http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%201108.pdf, Absolute Return Partners state that AIG’s stake in the $50 trillion CDS market is $500 billion. The street now has it at $1.6 trillion.

    This has to be viewed as the total taxpayer exposure – through AIG. The problem seems to be that nobody can accurately assess the risk of this exposure. The only measure to date is after the fact when AIG makes their monthly penance journey to capital hill asking for another x billion dollars or they will go under and take the world financial system with them. (If Archimedes had a lever this big…).

    The point is the taxpayer won’t know their exposure until the last contract is unwound or has expired. One can call for the transparency of glass in AIG’s balance sheet, but when it turns out to be made of concrete that would have been the envy of the New Jersey Mob, I think we’re out of luck.

    So, one answer to the question, “How much more will the taxpayer have to dole out?” is another trillion – maybe.

    But I am left with some puzzling worries. If AIG had only about %3 of the CDS market, what is happening with the other 97%? Some ideas:
    • AIG was the only issuer of CDSs that got it wrong.
    • No other issuer was big enough to raise a ripple. However, I haven’t read of any other insurer about to go under due to their CDS book. That’s not to say there haven’t been or aren’t any.
    • The AIG book is largely a con game with the counterparties in cahoots.
    • You ain’t seen nothin’ yet, Ben.

  • Ian Lynch

    Valuable employees?Were they the ones who played a significant role in bringing AIG to its knees?Contracts signed?Fair enough,but if AIG did not make any profit itself to honor these contracts and was left to completely go out of business then the contracts would not have been paid.Why should the taxpayers bail out have been seen as manna from heaven to meet them?
    Pay employees for honest success,but not for failure.AIG employees have to feel the pain as well.

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