Yeoman Joe
I never dreamed that I would avidly read the “Business Section” of the Times with a mix of fascination and dread. But such are the times that are upon us.
A great help, for their clarity and moral indignation, have been the columns of Joe Nocera, in my humble view, fully meriting a Pulitzer.
Today he writes about the American International Group (A.I.G.): “Propping Up a House of Cards.” Here’s part of what he says:
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
Karl Barth famously counseled the preacher to preach with the Bible in one hand and the daily newspaper in the other. As we prepare for the First Sunday of Lent with its gospel of the temptation narrative, I finally understand that Barth meant the “Business Section.”
Nocera has been terrific. Was he there before the meltdown? Or has the meltdown given him a more prominent place in the paper? Saturday’s business section, first column on the left is to be anticipated with awe and dread.
This Amecican Life had a great show today explaining the current banking meltdown.
After March I, the show will be available in streaming audio at:
http://www.thisamericanlife.org/
“the sins of the AIG brothers [not sisters] will be visited upon all.
As an old pensioner I said to myself and wife…. ‘looks like us too?
simplicty forced, is still a virtue…
Simplicity has its limits.
The apocalypse in “A Canticle for Leibowitz” was referred to as “The Great Simplification”.
Antonio, Yes, I read that book 50 years ago and I always remembered the ‘ecce agnes dei’ near the end…
Rocco Palmo gives us Benedict’s answer to the Roman priests yesterday;
Benedict said he did not want to give a simplistic answer to a complicated question about the reality of global finance and said that, in fact, the complexity of the current situation is what has delayed the publication of his social encyclical, tentatively titled “Caritas in Veritate” (“Love in Truth”).
“As you know, for a long time we have been preparing an encyclical on these points, and on its long journey one can see how difficult it is to speak competently about it,” the pope said.
The virtue of prudence finally rears it’s rare/fair head in the Vatican???
John Mack of Morgan Stanley was on Charlie Rose this past week. They’re old friends from North Carolina. So there was the southern lilt from both. But what was a surprise was that Mack seemed as befuddled as everyone else about what happened, what is happening, and what will happen with the economy.
Is he one of those heads of company who nodded Yes as long as the profits were rolling in but didn’t really understand what the financial devices were all about? It was disconcerting. Or may be he was being disingenuous, a good old boy come to talk troubles with his good old friend.
I worked for AIG almost 40 years ago. The original name of the company was American Asiatic Underwriters. It was started by a Californian by the name of C.V. Starr in Shanghai, China. Starr moved the company to New York City when the Communist came to power in China. I had no idea till recently that AIG had become the largest insurance company in the world. It amazes me how quickly that happened. It would be huge mess if it failed.
Recently I bought “A Canticle for Leibowitz”. I read it over 40 years ago. Perhaps it is now time to read it again.
Antonio,
I had supper this even with a couple from the parish in which I live, and he was raving about the “This American Life” show. I look forward to hearing the audio, thanks for the link.
As for “those in the know” being befuddled, I remember the same impression from Robert Rubin on the “News Hour.”
The scary thing is that are these the same guys who are trying to get us out of what they got us into?
In fairness to Mack, Morgan Stanley is one of the few companies that already tied bonus compensation formulas to a longer payout and the company’s enterprise value (beginning at least three years ago).
I keep coming back, however, to Michael Lewis’s simple stupid explanation: Bob Rubin and John Mack are among those who started out their professional careers working for partnerships, and their perspective on risk included the risk that they personally could lose everything they worked for. When the companies they worked for became publicly traded, they continued bonus compensation practices but never internalized the fact that, fundamentally, they were now playing with other people’s money and their risk management mechanisms needed to be more robust. I have to believe that they, personally, simply can’t imagine how a trader could not care less about anything that happens to either the company or the people and companies they advise once he gets a hold of his bonus, but that’s the culture they are part of.
Personally, I think they should have figured it out after Enron. And I will just add that part of the problem with Enron, and the government’s response, was to personalize it as the result of bad actors like Jeff Skilling, rather than to look at it as the result of systemic risk factors (bonus compensation system, leveraging and complex trading strategies to capitalize on otherwise marginal profits) that remained in place long after Enron declared bankruptcy. (In particular, the government should have taken notice of how simple it was to bamboozle the ratings agencies.)
Barara –
Your contrast of Skilling and Rubin is, I think, a very important one. It is a lesson of no small practical importance that we need protection from the Rubins (and Greenspans) as well as the Enron tpye.
Do you have any thoughts on how to identify the Rubins of this world? I keep thinking that perhaps he embodied too much American optimism, too much of the Aericans-can-do-amything view of life. But I suspect the explsnation is a lot more complex than that.
The Rubins of this world? Aren’t Summers and Geithners apprentices of Rubin and Co.?
Barbara — I apologize for your misspelled name. It was the phone that did it. (Is misspelled misspelled?)
Ms. S. — I think you’re right.. Would there were some test to identify the Emersonians among them, such as: do they read Whitman every night before bounding into bed? If Obama starts saying Americans can do *anything* I’m going to start worrying.
Just saw this:
The problem with the bathtub metaphor is the people in the bathtub. In particular the thousands of people in the GM bathtub. Their jobs would go down the drain with the water. In the Times editorial today (I think today) they point out that GM bondholders and the untions could do a lot more to clinch a deal. I suppose they are in the bath water too, but not as much as the workers.