Geithner Needs To Grow a Pair

This has not been a good week for Treasury Secretary, Timothy Geithner. It is now coming to light that not only did he know about the AIG bonuses before last week, he and Larry Summers pressured Senator Dodd to add an amendment to the stimulus package that, in effect, protected the bonuses. Then he pinned it on Senator Dodd.  Timeline, via HuffPo.

In general, cooler heads should prevail in these tense and uncertain times, but Geither comes across as rather too reticent and/or mild. Unlike Obama, who is unflappable but no pushover, Geithner is emerging as something of a doormat. We need someone to take a stand and make a symbolic gesture to right all this corporate malfeasance, not underwrite it.

AIG's argument is that the problem is so esoteric and complex that none but their own can unravel it. Wasn't that essentially the same reason Bernie Madoff was able to run his Ponzi scheme -- his brilliance was of such a high order that his methods were completely opaque and beyond scrutiny, making him a "wizard"?

Geithner bought wholesale AIG's claims that they needed to retain their "best and brightest" in order to understand the contraption the Financial Products unit had built, made of algorithms, fairy dust and 401ks. We can understand the structure of DNA, pinpoint the gene responsible for Parkinson's, invent a polio vaccine, clone sheep and put robots on Mars, yet we cannot find people outside of AIG who are smart enough to decode the subroutines dreamt up by a few rogue derivatives traders? Does it even matter? Those algorithms were fraudulent to begin with. Garbage in, garbage out. And at the end of the day, isn't it essentially going to boil down to forensic accounting like it did for Enron? No one from Enron hung around to help clean up. A couple of them even croaked. But the Feds still got to the bottom of it.

I'm no expert on derivatives trading or the economy, but if you sent in, say, the dynamic duo of Henry Paulson and Eliot Spitzer -- both of whom need jobs -- along with a crack team of economists, lawyers and other credentialed eggheads to dig through the AIG muck, they'd get the task done. With their expertise and no bullshit management style, they'd produce results, with or without AIG's cooperation. Sure, they're unpopular and unlovable and it'd be a bit of a PR nightmare, what with Spitzer's extramarital dalliances with ladies of the night, but is the public's rapidly waning confidence in Geithner any better than that?

Instead of public hand-wringing over legal roadblocks invented by himself, Geithner needs to start playing some serious offense, even at the risk of offending a few dozen precious derivatives traders and their lawyers. Fire the clowns and send in the A-team. If he assigns a high-profile, independent team of experts to clean up the mess, Geithner will be freed up to do the most important part of his job, which is fix the economy.

Corporate Welfare You Can Believe In

In case you've been hanging out under a rock for the last week, there's been a bit of a scandal involving AIG. The insurance behemoth siphoned $165 million in federal bailout funds for "retention" (don't call it a 'bonus') awards to employees of the financial products division -- the same one that helped implode the economy. Someone leaked a few names of the recipients, and now all hell's broken loose. There is populist outrage!

AIG's CEO, Edward M. Liddy, went before Congress to complain that executives were receiving death threats on the interweb, that bastion of civility where there are no, you know, wackos or anything. Never mind that Senator Charles Grassley (R-IA) called upon them to commit harakiri.

According to an article in today's Times, an AIG flack said one executive, Douglas Poling of Fairfield, CT, who received a $6.4 million bonus, offered to return it, “because he thought it was the correct thing to do.” Says his PR guy. And his boss reports he's doing an "outstanding job" winding down the division for whose collapse he is also presumably partially responsible. It's like an arsonist hanging around to sweep up the ashes. Or a murderer joining the search and rescue team for his victim. And is handsomely rewarded for it. The article cites another source -- his daddy's servant -- who vouches that Doug is a really nice guy. Daddy is Harold A. Poling, a former chief executive of Ford Motor Company.

Another recipient of a multi-million dollar bonus, James Haas, choked back tears when asked how he was doing.

“I feel horrible. This has been a complete invasion of privacy... I didn’t have anything to do with those credit problems... I told Mr. Liddy I would rescind my retention contract."

Oh dear. We are faced with an economic collapse, a touch of cultural revolution, and this dude's biggest worry is that some people are trash-talking and there are reporters at the end of his driveway. His privacy is being invaded at his oceanfront property. Someone call Human Rights Watch.

The article doesn't state when Haas or Poling decided it might be best to return their bonuses. Perhaps only after they came under scrutiny and lived to cry about it.

It's also worth noting that Haas, Poling and another AIG exec who received a bailout bonus, Jonathan Liebergall, have all contributed generously to Senator Chris Dodd's (D-CT) campaigns in the past. Senator Dodd snuck in a last-minute bonus exemption into the bailout bill, and this has allowed AIG to argue that the government offered and they merely accepted, making everything perfectly legit. If so, it will be difficult to determine who is more culpable.

I might storm the Bastille too, but seem to have misplaced my battering ram. I'll just have to join the chorus for now.

Even if it's Ice Cream, it's Ours Now

Just caught this in today's NYT Dealbook:

Just how much of a secret are Merrill Lynch’s bonus numbers? As secret as, say, the recipe for Carvel’s ice cream?

That was the comparison that Bank of America’s lawyers made Friday morning in a New York courtroom, as they tried to persuade a judge to let them keep information about the investment bank’s top-earning employees private.

The lawyers compared the legal battle over the pay data — which Andrew M. Cuomo, the attorney general of New York, is seeking as part of an investigation — to a lawsuit involving the secret formula for Carvel’s famous desserts, according to an audio feed of the testimony from the Courtroom View Network...

Bank of America has tried to prevent the names from being made public, arguing that it would cause the company “grave harm,” making it easier for rivals to poach employees and invading workers’ privacy. The bank’s lawyers repeated those arguments in Friday’s hearing.

Unbelievable.  Could BofA's lawyers flaunt their client's "Money for Nothing" attitude any more obnoxiously? 

If both Merrill Lynch and their parent company, Bank of America,  received billions in bailout money — which they both have — those lists of top-earning employees are now owned by us, the public.  Why is this even in argument?

The last bit about the "grave harm" such exposure poses for the company, making it easier for rivals to poach Merrill/Bank of America's top-employees is laughable, because:

A) Said top-employees pocketed billions and lost much of the rest.  They're as desirable as bunch of toxic assets.

B) They have no rivals.  Do they think Goldman would want these bozos?

C) Who's 'poaching' overpaid executives these days? 

D) We're talking about investment bankers, not black ops specialists of the CIA.

What this illuminates is alarming.  They may have purged John Thain and his band of merry interior decorators, but his Antoinettish "because I'm worth it" attitude obviously still pervades the upper ranks at Merrill cum BofA.  

This culture needs a serious reboot, or a booting of all its top brass.  Rather than fear the poaching of their top executives, Kenneth Lewis et al should fear that we - their new bosses - suggest they purge their precious top employees and start over.  

Maybe it's time we take over the ice cream factory — we own most of it already.

Can't Keep Up

As usual, New Yorker cartoonists hit the absurdity nail on the head, at both ends of the economic spectrum:


And:

Cake, Some Cake, or No Cake?

In their most recent blog post, "Let Them Eat a Little Bit of Cake," David Brooks and Gail Collins ask the oft-posed question, "as our economy tanks, is spending on luxury goods acceptable?"  Their answer:  kinda, sorta — maybe a little bit.

Says Brooks:

As for the culture more broadly, again, I think the code of understated luxury applies. Companies should feel free to throw retreats and meetings at golf resorts, even in these tough times, so long as they serve superb chicken or extremely tasty pizza at every meal. The great thing about sumptuary codes is they force people to show their wealth in subtler forms. If we’re going to impose plain living standards on each other during this recession, at least we should allow for that.

So yes to the Canyon Ranch retreats, but just make sure the execs are limited to free-range chicken and gourmet pizza?  

Collins does no better than Brooks.  She wavers between finger-pointing at real estate magnates who hide their Rolls Royces and fear that spending cutbacks amongst the wealthy will send the economy into a further downturn.

This is pretzel-thinking.  Brooks's and Collins's shilly-shallying marks the deceptive difficulty of this question.  As the Economaggedon deepens and conspicuous consumption moves from seriously un-hip to downright taboo, we Americans are experiencing a collective identity crisis of staggering proportions.  

For what are we, if we are not all conspicuous consumers to some degree or another?  We laugh at the Maries; their tone-deafness over the past months has deserved mockery, but the soul-searching has begun for the rest of us as well. (See Megan McArdle's post answering blogger Laura McKenna's question at 11D: "What Will Make You Feel Poor?"; and see Vanity Fair's recent - and excellent - David Kamp article, "Rethinking the American Dream.")

After 9/11, Bush declared that the best way to help our country recover, the optimum way to assert America's freedom and democracy, was to go shopping.  It sounded ridiculous, but the truth is, it illuminated exactly what we were – and are — about.  In 2001, the idea was that spending kept the economy going and a strong US economy kept the ideals and power of the United States in its dominant place.  

We spend, therefore we are.

This cuts two ways.  As a country, we spend to maintain supremacy, and as individuals, we spend to define ourselves.  It is as conventional wisdom dictates.  With the growth and sophistication of marketing techniques over the past fifty years, this meme has been put on steroids.  Two generations (going on three) have been bombarded, everywhere we turn, with messages of what we should want rather than what we really need.  In the modern age, material consumption is the faith we all follow, no matter what our spiritual beliefs.  

Spending and overspending contributes directly to the mess we are now in.  This American Life's recent (and also terrific) podcast explaining the banking crisis speaks to this.  If you don't have the hour to listen, skip to minute 38:00.  Here, Columbia University economist David Beim points out that since 2000, our national debt-to-GDP ratio (what we owe to what we earn) has been 100%.  In other words, for the last eight years, we've been borrowing (and spending) more than we've earned.  The last time this has happened in history?  1929.  

So now what?  How to undo habits so entrenched as to be almost unconscious?  How does any democracy impose true "sumptuary codes" — codes of luxury spending — or even, lessons of prudent personal spending?  How do we define "responsible spending" across our broad (and now drastically changing) class lines?  While overwhelming, I suppose it's healthy that such questions are coming up.

In fairness to Brooks and Collins, I doubt anyone could come up with a satisfactory answer to the question of "Cake, Some Cake or No Cake?"  But it is key to point out that it is much more than a question of etiquette, and not just a question for the Marie Antoinettes of the world. 

Like it or not, we are all tied together in this mess — nationally, and even globally.  Taking responsibility for personal checkbook and spending habits is obviously a concrete and positive way to do one's part in this confusing climate.

But perhaps a deeper responsibility we owe to ourselves and each other is to take the opportunity to challenge the conventional wisdom of spending, of the acquisition of things as symbols of status, success and power.  If we can let this go, then a freedom beyond economics (and the material) might be ours.

(Image from Cakelove: Vanilla / LCD Poundcake)

We'll Get Blago's Royalties, Too

It's better than a soap opera.  Even reality TV pales in comparison.

The Illinois state legislature impeached Blago and condemned him to a life without aides to carry his hairbrush (aka "The Football") for the rest of his days.  But before two months could pass, publisher Phoenix Books rose Blago from the ashes with a six-figure book deal, delivering the benjamins he so craved.  Blago had lost — but oh, how he had won.

Now, clearly, the good congressmen and women of Illinois refuse to go down without a fight. They're pushing a bill through the state legislature to deprive him of future royalties:

The bill would require “any elected official who is convicted of a felony or of a misdemeanor involving a violation of his or her official oath of office to forfeit any monetary rights derived from any media depiction or detailing of the crime for which the person was convicted as a term of their sentence. The forfeiture lasts during the term of the sentence and any period of probation, parole or supervised release.”

Lest we feel bad for Blago, unusual allies in the form of First Amendment rights groups have risen up against the Blago Can't Win bill because of its inherent free-speech violations.  

While of course I'm pro-Free Speech, I kind of wish the zealous First-Amendmenteers could sit this one out and let the Illinois state legislature settle this for once and for all.  After all, the bill's language does confine itself to "elected officials who have violated his or her official oath of office."  They might as well have said "elected officials with bad hairdos and the initials RB who have solicited bribes from everyone in the state."

Will Blago and the First-Amendmenteers succeed in defending Free Speech, and his hard-earned money, or will the Illinois state legislature ride off into the distance with Blago's royalties clinking in their saddlebags?  

Tune in next time, I know I will.

Cartoon Maries

A classic, from this week's New Yorker: