Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say

By Christine Harper

November 11 2008

U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don’t want executives’ bonuses reduced. They want them eliminated.

“I may not understand everything, but I do understand common sense, and when you lend money to someone, you don’t want to see them at a new-car dealer the next day,” said Ken Karlson, a 61-year-old Vietnam veteran and freelance marketer in Wheaton, Illinois. “The bailout money shouldn’t have been given to them in the first place.”

Compensation at Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and the six other banks that received the first $125 billion of the federal funds is under scrutiny by lawmakers, including Rep. Henry Waxman, a California Democrat, and New York Attorney General Andrew Cuomo, also a Democrat. President-elect Barack Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it’s “not unduly rewarding the management of financial firms receiving government assistance.”

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms’ most productive workers.

“There are instances where bonuses are justified, deserved, and in the best interests of the investment bank involved,” said Dan Lufkin, a co-founder of Donaldson Lufkin & Jenrette Inc., the investment bank acquired by Credit Suisse Group AG in 2000. “Your very best people are people you want to hold, and your very best people will have opportunities even in this environment to transfer allegiance.”

`Your Jaw Drops’

The companies, which set aside revenue throughout the year to pay bonuses, haven’t commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent.

“Even really sober people are saying this is the worst financial crisis since the Depression, and they’re saying bonuses are just going to be reduced?” said Patrick Amo, a 53-year-old retired merchant marine in Seattle. “Oh my God, you read that and your jaw drops.”

Wall Street firms’ pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.

Blankfein’s $67.9 Million

The nine banks that Waxman pressed to detail their bonus plans asked for more time to respond, according to his spokeswoman, Karen Lightfoot. She said they’ve been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company’s annual meeting in April, because of Goldman’s superior financial results.

“We’re very much a performance-related firm,” he said. “If those results don’t come in, I assure you at Goldman Sachs you won’t see that compensation.”

Goldman’s profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month. Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment on the company’s plans for bonuses this year.

`Appalling’

“The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,” said S. Woods Bennett, a 57-year-old lawyer in Baltimore. “Their sense of entitlement is appalling.”

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government’s Troubled Asset Relief Program were Merrill Lynch & Co., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., State Street Corp. and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven’t been profitable since early last year. Earnings at each of the other firms, except Boston-based State Street, have been dropping.

`Money’s Money’

“Bonuses and severance packages will obsess the American public” and become “a humiliation and embarrassment,” said Arthur Levitt, a senior adviser to the Carlyle Group, former chairman of the Securities and Exchange Commission, and a board member of Bloomberg LP, the parent company of Bloomberg News. “Compensation committees, believe me, are paying close attention to this.”

Several of the companies — including Citigroup and Wells Fargo — have said they won’t use federal funds to pay bonuses. That’s disputed by some, including former compensation consultant Graef Crystal.

“The argument of saying we’re not using the bailout money is just crap because money’s fungible, money’s money,” said Crystal, who writes the newsletter graefcrystal.com. “It exposes them to ridicule.”

A renegotiated government rescue for American International Group Inc., which was once the world’s largest insurance company, includes a freeze on the bonus pool for 70 top executives and imposes limits on severance benefits, the Treasury said in a statement yesterday. AIG’s bailout is separate for the $125 billion being invested in nine banks.

Economy Contracts

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs, according to data compiled by Bloomberg.

A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

“This is the real economy these vultures have wrecked once again,” said Leo Gerard, president of the Pittsburgh-based United Steelworkers, which represents 1.2 million active and retired members. “Workers are taking it on the chin through no fault of their own.”

Top Executives

“Please explain how miserable performance of biblical proportions warrants any bonuses, particularly using money from me the customer and taxpayer,” said Glenn Brown, 67, who recently retired after 21 years as a researcher in the department of surgery at Beth Israel Deaconess in Boston and as an adjunct assistant professor at Harvard Medical School. “I don’t understand how they can even conceive of doing that.”

“If these guys were so talented how did this problem happen anyway?” said Mark Whitling, 63, who works as the chief financial officer of a steel service company that employs 125 people in Eastern Ohio. “We don’t feel sorry for them.”

Attention is most focused on the top executives at the banks that are receiving federal money. They’ll have to take the steepest pay cuts because their pay is disclosed in proxy filings, according to Alan Johnson, managing director of Johnson Associates, the compensation consulting firm that estimates bonuses will decline between 10 percent and 70 percent.

“I’d advise the CEO to say he can’t take anything if it’s one of these firms getting bailed out by the government,” said Crystal. “I think he’s just going to have to go down to just his salary.”

Pay or Lose

That’s probably not the case for employees whose pay isn’t disclosed, even those who get bonuses that exceed $1 million.

Both Johnson and Crystal say that top performers should receive bonuses this year or companies risk losing their best workers. Of about 600 people who responded to an online survey on the eFinancialCareers.com Web site, 46 percent said they would be unwilling to take any pay cut this year.

“You could build up, I would think, a lot of resentment on the part of people who say, `Look I did give my all this last year, and I know it’s been a bad year, but everything that was asked of me I accomplished and then some,”’ said Crystal. Eliminating bonuses across the board “could be very demoralizing in the long run and it could lose you some people.”

Larry Frank, a 60-year-old retired software company owner who lives in Ormond Beach, Florida, said he told his broker at Merrill Lynch that he would pull his money from the company if it paid the $6.7 billion it has set aside this year to pay bonuses. While he thinks top managers should suffer, he doesn’t think everybody should lose out on getting a bonus.

`Bunch of BS’

“Individual brokers, if they’re performing and their areas are profitable and they’re doing their job, I can’t see punishing them,” he said. “The CEO shouldn’t get anything.”

Still, other people say that all employees working at companies receiving bailout funds should pay the price.

“It’s crazy, it’s all one company, it’s the same thing,” said Scott Floyd, a 37-year-old marketing executive in Manhattan Beach, California. “For people to say the guys in the brokerage should get bonuses because they did well, but it was just the mortgage lending division that did terribly, that’s a bunch of BS.”

Amo, the retired ship captain in Seattle, said that since most financial companies are cutting jobs, they shouldn’t worry about paying bonuses to keep people from leaving.

“Where are they going to go? Don’t let the door hit you on your way out,” he said. “It’s not like it’s just one company — the entire Street is frozen.”

`Thumbing Their Noses’

Karlson, the Vietnam vet, said he thinks Wall Street executives are “thumbing their noses at the common people” if they pay themselves bonuses while people in the country are losing their homes.

“The rationale that they depend on their bonuses, come on, how are we supposed to relate to that?” he said. “You don’t get a bonus from your company if it doesn’t do a good job.”

Jim Beachboard, a 57-year-old lawyer in Little Rock, Arkansas, compared taking a bonus to “kind of like being on the Titanic.”

“It was supposed to be women and children first, so the guys that tried to jump in the lifeboats weren’t really looked upon with much kindness,” he said. “When you start thinking of this many tax dollars being injected into the system, I know there are all sorts of rationalizations and justifications that you can use to try to justify almost anything, but it’s just really in very poor taste.”

Taking a bonus isn’t something executives should be proud of, Beachboard added.

“My mother always told me, don’t ever do anything that you would be too ashamed to tell me about, and I thought, would they really want to tell their mother that?”

Source

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The Federal Reserve Defies Transparency Aim in Refusal to Identify Bank Loans

By Mark Pittman, Bob Ivry and Alison Fitzgerald

November 10 2008

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

“It’s your money; it’s not the Fed’s money,” said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. “Of course there should be transparency.”

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn’t respond to a phone call and an e-mail seeking comment.

The Fed’s lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan — without safeguards put into the TARP legislation by Congress.

$2 Trillion

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the “lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,” according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

`We Need Transparency’

The legislation didn’t require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used “when appropriate.” In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

“We need oversight,” Paulson told lawmakers. “We need protection. We need transparency. I want it. We all want it.”

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. “Transparency is a big issue,” he said.

Banks Resist Disclosure

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

Frank Backs Fed

The nation’s biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed’s disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

“I talk to Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

`Unclog the Market’

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

TARP’s $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks’ troubled assets while markets were frozen.

The Bloomberg lawsuit argues that the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

AIG Lending

The Fed has lent at least $81 billion to American International Group Inc., the world’s largest insurer, so that it can pay obligations to banks. The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

“As a taxpayer, it is absolutely important that we know how they’re lending money and who they’re lending it to,” said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank’s rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody’s Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed’s collateral “absolutely should be made public,” said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed’s moves.

Source

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Well my take on this is the taxpayers have every right to know where their money is going.

They have the right to know every detail and they have to the right know where every bit of it is going right down to the last penny.

The Federal Reserve in my opinion should be eliminated pure and simple. This type of action re-enforces that thought.

I wouldn’t trust the Federal Reserve as far as I could throw them.

They are just a Private Profiteering Bank. Who I might add were in part responsible for the crisis in the first place.

Considering the “world wide crisis” they above all should be transparent.

So now we all have to wonder about their dirty secrets. They should be forced to divulge this information. Where is the accountability?

The Bush Legacy lives on.

I don’t know about the rest of the World but I for one want to know the truth.

Counties around the World are now being forced to get loans from the IMF or The World Bank which in my opinion aren’t to be trusted either.

The federal Reserve care nothing about the tax payers obviously or who they have hurt.

Their lobby groups were in great part also responsible for the problems now facing many countries as well as the American people.

AIG Already Running Through Government Loans

October 30 2008

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

Mr. Vickrey says he believes AIG must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

But losses on that scale do not show up in the company’s financial filings. Instead, AIG replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.

Mr. Vickery and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

These accounting questions are of interest not only because taxpayers are footing the bill at AIG but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Edward M. Liddy, the insurance executive brought in by the government to restructure AIG, has already said that although he does not want to seek more money from the Fed, he may have to do so.

Continuing Risk

Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

AIG has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

AIG has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by AIG’s many derivatives contracts.

No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring AIG together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.

Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give AIG cash or cashlike instruments in return. Then, while AIG waits for the borrowers to bring back the securities, it invests the money.

In the last few months, borrowers came back for their money, and AIG did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.

A spokesman for the insurer, Nicholas J. Ashooh, said AIG did not anticipate having to use the entire $38 billion facility. At midyear, AIG had a shortfall of $15.6 billion in that program, which

it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government’s original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.

An estimated $13 billion of the money was needed to make good on investment accounts that AIG typically offered to municipalities, called guaranteed investment contracts, or GICs.

When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.

After the insurer’s credit rating was downgraded in September, its GIC customers had the right to pull out their proceeds immediately. Regulators say that AIG had to come up with $13 billion, more than half of its total GIC business. Rather than liquidate some investments at losses, it used that much of the Fed loan.

For $59 billion of the $72 billion AIG has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.

The biggest portion of the Fed loan is apparently being used as collateral for AIG’s derivatives contracts, including credit-default swaps.

The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even AIG does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. AIG wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.

Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, AIG’s chief executive at the time, told securities analysts in the summer of 2007.

Gathering Storm

By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how AIG was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.

But AIG executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.

AIG had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.

When the expert tried to revise AIG’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”

Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight.

About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November.

Still, PricewaterhouseCoopers appears to have pressed for more. In February, AIG said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default

swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, AIG said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness.

Investors shuddered over the revision, driving AIG’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Mr. Sullivan, his credibility waning, was forced out months later.

The Losses Grow

Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought AIG’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through AIG to counterparties.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.

Source

Seems the Bailout money was wasted on AIG. They obviously don’t know how to run a business. I guess they will be begging for more money in the near future. The Welfare bums strike again.

I guess they need another big party the last one wasn’t large enough to satisfy them.

The End of the American order

KEVIN CARMICHAEL ,  From Saturday’s Globe and Mail

October 10 2008

OTTAWA — Before U.S. Treasury Secretary Henry Paulson was pressed into becoming the fire chief of the financial crisis, he had a good thing going as an economic missionary.

Basking in what he liked to call “the strongest global economy” of his business lifetime, Mr. Paulson, who joined President George W. Bush’s administration in June, 2006, embraced with zeal an aspect of his new job with roots in Cold War diplomacy.

In his two years as Treasury Secretary before financial markets came totally unhinged this summer, Mr. Paulson conducted more official business in China than he did in New York. He has visited as many cities in Latin America as he has cities in the United States of America. He rolled through Calcutta, New Delhi and Mumbai in three days in October, 2007; two weeks later, he spent five days in Africa.

The places changed, but the message stayed the same: American-style banking, unencumbered by regulation and open to U.S. financial institutions, is the surest way to create wealth.

“An open, competitive and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than government intervention,” Mr. Paulson told an auditorium full of officials in Shanghai in March, 2007.

Mr. Paulson’s brand of capitalism isn’t promoting much stability these days, and prosperity isn’t a word that jumps to mind as policy makers from Canada to Japan to France scramble to avert a global economic recession.

The Made in America financial crisis has seriously undermined the U.S.’s standing as the undisputed leader of the international economy, posing the first serious threat to U.S. hegemony since the height of the Soviet Union.

After decades of strong-arming governments in Asia, Latin America and Eastern Europe to keep the state out of the economy, the U.S. government in September put up $285-billion (U.S.) to nationalize mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

That’s nothing compared with the $700-billion Mr. Paulson got from Congress yesterday to purge the financial system of the bad debt at the root of the credit crisis. With governments saving failing banks in Europe, stock markets plunging in China and exports slowing in Brazil, the world is in no mood to take economic lessons from the U.S. government.

“There is a real element of anger and frustration around the planet that this is a U.S.-originated problem with global repercussions,” John Manley, a finance and foreign affairs minister under former prime minister Jean Chrétien, said in an interview. “The world will be looking for a loss of hubris from the United States as a result of this.”

America has dominated global economic affairs virtually unopposed since the collapse of the Berlin Wall, an era marked by the acceleration of global free-trade agreements, the confirmation of the dollar as the world’s de facto currency, and the rise of Wall Street as the world’s financial centre.

The U.S. and Britain dictated the Bretton Woods agreement in 1944, establishing the International Monetary Fund and the World Bank. The U.S. became the largest shareholder in the global institutions, which built their headquarters side by side in Washington. Unsurprisingly, the American vision of private ownership and unfettered markets dominated the prescriptions those agencies imposed on weaker economies in return for financial aid. That culminated in the Washington Consensus, a term coined in the 80s to encompass policies such as privatization, lower taxes and deregulation.

These days, countries can’t distance themselves fast enough from the Washington way of economic management.

“The world is on the edge of the abyss because of an irresponsible system,” French Prime Minister François Fillon said on the eve of a gathering of European Union leaders to discuss the financial turmoil.

German Finance Minister Peer Steinbrueck predicted the end of the U.S.’s status as the “superpower of the global financial system.” Chinese officials are rethinking their embrace of globalization, and Colombian President Alvaro Uribe said the U.S. must ensure the situation doesn’t get any worse.

“The Anglo-American model has suffered a big setback,” John Snow, who preceded Mr. Paulson as treasury secretary and is now chairman of private equity firm Cerberus Capital Management, said in an interview. “We don’t have the moral authority we might have had a few years ago to get others to follow our model.”

Other nations appear ready to assume a more assertive role in the global economy.

French President Nicolas Sarkozy, current President of the European Union, wants to host a summit of the world’s major economies next month to consider global rules for financial markets. Germany’s Mr. Steinbrueck, whose push for stricter oversight of hedge funds and private equity firms last year was blocked by Mr. Paulson, will be a ready ally.

“The whole spectrum of options for regulation is now open again,” said Glen Hodgson, chief economist at the Conference Board of Canada and an IMF official. “You only have moral authority when you have your own house in order.”

A new era of global financial regulation – however appropriate given the serious gaps exposed by the credit crunch – will increase costs for businesses and slow global economic growth.

Say what you will about U.S.-style capitalism, its ability to produce wealth is unchallenged. The world economy expanded at an average annual rate of 3.9 per cent over the past decade, as more emerging market nations embraced free-market ideals. Over the previous 10 years, global growth averaged 3.5 per cent.

There’s a risk that countries such as China and India could become more reluctant to ease barriers to international investors, especially in the financial sector.

“It’s a possibility that you see countries become more protectionist,” said Mr. Manley, who is now a senior counsel at law firm McCarthy Tétrault LLP. “That’s going to slow growth.”

There’s an element of schadenfreude in the world’s criticism of the U.S. government’s role in the financial meltdown.

After all, nobody likes a bully, which is essentially the approach American officials have taken to international negotiations for decades, said John Curtis, a former chief economist at Canada’s Trade Department. “They can be insensitive at times to others’ interests,” said Mr. Curtis, who is now a distinguished fellow at the Waterloo, Ont.-based Centre for International Governance Innovation.

Still, Mr. Curtis and others said it would be a mistake to get carried away with the idea that we’re witnessing the death of the American empire.

The U.S. hardly has a monopoly on economic crises, and the German and French governments, among others, have had to put up billions of their own to save several European banks from collapse, which has muted their criticisms of the U.S.

“I don’t think any country is in position to say they have the right regulatory system,” said James Barth, a senior fellow at the Sana Monica, Calif.-based Milken Institute and a former chief economist at the U.S. Office of Thrift Supervision. “One has to be careful to say the U.S. has a terrible financial system and that capitalism doesn’t work because of this particular situation.”

One reason the U.S. can’t be counted out is that Americans are used to such calamities.

Mr. Paulson would often tell his audiences that the U.S. copes with a financial crisis every decade or so because the country’s entrepreneurs get too greedy and overreach. The cleanup is wrenching, but the country’s economy is left stronger as a result, Mr. Paulson argued. The country’s rebound from the collapse of the dot.com bubble is perhaps the most recent example of Mr. Paulson’s creative destruction thesis.

There’s also the sheer size of the U.S. economy. The spread of the Wall Street crisis to other continents is a graphic example of how much the rest of the world still depends on America for their economic growth. The U.S.’s gross domestic product is three times the size of that of Japan, the world’s second biggest economy, and is four times the size of China’s.

The U.S. dollar still makes up more than 60 per cent of the world’s currency reserves, according to IMF data.

“They are so big, you can’t get along without them,” said Mr. Curtis, who also served at the IMF. “They are pre-eminent, they are no longer dominant.”

The U.S.’s standing in the world of global finance may well be determined by the outcome of Mr. Paulson’s $700-billion rescue package.

Observers marvel at the speed with which Mr. Paulson and U.S. Federal Reserve chairman Ben Bernanke developed the plan after earlier efforts failed to reverse the credit squeeze. It took years to sort out the mess created by the defaults of Argentina and Brazil.

If the U.S. can save its banks faster than the Europeans save theirs, Mr. Paulson will restore some of his department’s reputation abroad, said Daniel Drezner, a political science professor at Medford, Mass.-based Tufts University and a former Treasury Department economist.

But gone are the days when a U.S. treasury secretary will automatically be seen as the smartest guy in the room.

“It’s tough to tell other countries you should privatize and liberalize when you are going the other way,” Mr. Drezner said. “The Washington consensus is dead.”

Source

Privatization benefits only those who operate the corporations etc. It does not benefit anyone else. Everything in the end becomes more expensive.

Like Health Care for example. Those profits made by Insurance companies eat up a lot of money. Government run Health Care is more efficient and more cost effective by a long shot. Of course private companies that have tried and have succeeded in some countries have driven up the cost of Health Care and should be eliminated.

Government run systems have no need to advertise so money is not wasted there. The cost of advertising is massive.

You also don’t have to hire a Lawyer to get treatment, because your insurance companies says no. Universal Health Care is something that needs to be protected at all cost.

Social agencies like Welfare, is another thing that should not now, or ever be privatized.

Child protection agencies, should never be privatized.

Prisons should, never be privatized.

Electricity should, never be privatized.

Water should, never be privatized and numerous other things should always be operated by the Governments for the protection of services to the people.

It also keeps the price of services much lower.

Never believe privatizing anything will save you money.

That is a lie always was and always will be.

Governments have no need for profit to feed shareholders.

Their only share holders they have to protect, are the people of their countries.

That is the Governments Jobs to serve and protect the people of their country.

Capitalism just doesn’t work as we have seen. If anything it has caused a world wide epidemic of problems.

Massive problems. Cleaning up this mess is going to take a long time.

Free Trade Agreements should also be revisited as well and changes to them should be turned in to Fair Trade and be absolutely sure it benefits the people and not the Corporations.  Corperations should be regulated so they are not allowed to pollute or sue governments and numerous other restrictions should be implemented to protect all the people around the world.

Trade Agreements, as they stand now are geared giving profit and control to Corporations and do little if anything to protect people or to enhance their standard of living.  If anything they cause an increase in poverty.  Ask Farmers,  in  countries around the world how Free Trade has helped them. Many have gone out of Business. Problems as these have to be rectified. The sooner the better.

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