2009 March

The New York Times prints a resignation letter from Jake DeSantis, an EVP of the AIG’s financial products unit after being hounded for his three quarters of a million dollar bonus.

Imagine DeSantis was in a gold medal winning Olympic relay team, where several of the members cheated.

From his letter:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

Translation: Its not my fault, why should I give up my medal, I didn’t cheat. Take the other guy’s medal back. I don’t care about the team, what about me.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

Translation: Although I knew other members were taking reckless risks, this meant our team might win big, it was the best team to be in. I didn’t do anything at the time, but when they were caught, I helped with the doping enquiry, therefore I should keep my medal and be awarded another one. Its so unfair, everyone is against me, its nothing to do with me, I trained well and ran well. I’m not giving my medal back so you can decide who to award it to, I’m giving it to whoever I want.

DeSantis is someone who thinks of himself as being isolated from the organization and team that rewarded him. Its less a case of the ‘I was only following orders’ excuse as: ‘I worked in the barracks not the gas chambers’.

If DeSantis had been working for a boutique ‘eat what you kill’ hedge fund, then selfishness would not be an issue, but he wasn’t.

Link

McKinsey mapped innovation based upon the number of patents filed per company, the number of companies filing patents, the diversity of the sectors they were filed in and the growth in patent filing.

By measures such as these, Silicon Valley, Tokyo and Yokohama are twice as innovative as any other place on earth.

Big ‘old’ cities like Paris and New York do relatively poorly, but London stands out as being particularly dire with a measure of innovation equal to a provincial French city such as Grenoble, despite having a population 50 times its size (8M vs 150K).

Ah, but there is so much more to London as a financial capital?

But the banking industry has collapsed.

Ah, but there is so much more to London as the center of the country that brought us the industrial revolution?

But the manufacturing industry collapsed.

Ah, but there is so much more to London as a cultural capital?

But artists and creative types can’t afford to live there.

Ah, but there is so much more to London as a tourist destination?

But the weather…

The writing is on the wall for London. Its needs to invest in the future through innovation rather than the transient hubris of the Olympics, or its recent period of prosperity will mark the beginning of a secular decline. There were 1.8 million immigrants, representing 26 percent of the population, that flocked to London in the last ten years as the financial services industry sucked everything up in its wake. Many of these people were from developed countries with the ability and incentive to return home to places like Paris and Warsaw unless London promises more.

Via Oobject

James Galbraith (the son of J.K.) argues for a wartime scale peaceful mobilization to deal with the economic crisis through government initiatives.

“It was the war, and only the war, that restored (or, more accurately, created for the first time) the financial wealth of the American middle class. “

The problem with this is that where natural forces prevail, the most efficient means of creating wartime scale initiatives happen through – war. In other words, no government is ever going to persuade people to spend as much within the system (i.e. domestic economy) on things like infrastructure, global warming and energy initiatives without the galvanizing force of directed hostile energy, outside of the system that happens naturally in a conflict. If Galbraith is right in his pessimistic but non-hysterical analysis then the equilibrium state of the global economy creates a very high risk for a large war in 5 to 10 years.

But there is a silver lining. Galbraith himself notes that:

The deepest belief of the modern economist is that the economy is a self-stabilizing system.

Anyone that has studied physics knows that this is provably wrong. The economy is an open system: money flows in, work is done and goods come out. All open systems are held far from equilibrium and are prone to periods of unavoidable, and provably unpredictable instability.

In other words, the principal tenet of current economic theory is a provable fallacy. Which is a good thing, else there will certainly be a large war.

James Galbraith: no return to normal.

In the 70s, in Sweden, it was possible to pay more than 100% tax i.e. a raise would net less. The 90% TARP relief bonus tax tax would end up being over 100% for New York City residents (although half is shouldered by the company rather than the individual).

Here’s what AIG have to say about it:

To those who say it’s okay because taxpayers effectively own AIG, Gleckman said: “Do we really want Congress to micromanage the business practices of this firm? That’s the quickest way I know to drive the value of the company’s remaining assets to zero and guarantee taxpayers will get no return on their investment.”

Wrong.

1. No we don’t want the government to micromanage business practices, which is why the 90% tax will encourage companies like Goldman return TARP funds to avoid government micromanagement.

2. The quickest way to drive the value of a company like AIG’s assets to zero would be to have let it go bankrupt and not had any government intervention.

I suspect the 90% tax levy may not help bribe people to unwind things, where necessary. A better approach would be actively going after fraud.

Paul Krugman says:

“It’s not the way you should make policy — it’s clumsy, and it will punish some innocent parties while letting the most guilty off scot-free.”

But it is what it is and if it passes a senate vote, it shows that the US is capable of acting quickly, whereas the UK with its inaction over RBS looks spineless.

Link

“The Treasury will use a $30 billion infusion into AIG to force the company to repay all of the bonuses promised to employees of its Financial Products group, a White House official said.”

This is a political magic trick, the same one used in the UK with RBS. Here’s how it works:

AIG agree to repay bonuses to prevent the $30 billion being stalled. But the bonus payments already went out on Friday and can’t be recouped.

The money to return to the government comes from AIG, not the bonus recipients, and therefore creates a cost which in turn comes from the government which potentially plugs the hole in the books by handing the money back.

The sleight of hand is that everyone is so fixated on the name AIG as the villain, that they don’t see that AIG is largely nationalized and therefore themselves, whereas ‘bonus recipient’ is the real target.

Link

Nicholas Ashooh, AIG’s SVP of Communications sold his soul to the devil long ago, but he’ll still say anything to keep getting paid.

His latest gaff concerns why the people in the AIG gambling division in London who destroyed the company and who AIG specifically said wouldn’t be rewarded, are.

“You really do need these people, because they are the ones who know these contracts.”

Yeah, like you shouldn’t shoot the guy who is holding you over a cliff.

It would be naive to think that we could avoid paying these people, they have us over a barrel as well as a cliff. But the reason they have this power is nothing to do with contractual obligations. A law would be required to nullify their contracts, but a law was required to secure bail-out funds to stop AIG going bankrupt. Without that law nobody would get bonuses.

The rule of law would not break down, if a contract which could only be preserved by changing the law was broken by changing the law.

Unlike the Financial Products guys who are needed to diffuse the ticking bomb they created, Ashooh has nothing to offer the taxpayer, so there is the opportunity to put him over a barrel, now, if people want to.

After I blogged about the original furor about AIG compensation, in January, I received the email below from AIG flacks, where Ashooh’s principal defense was that the people receiving bonuses: “are not with, nor have ever been with AIG Financial Products, the group that sold the credit default swaps.”

The Washington post writes that AIG Financial Products employees are being given bonuses totaling $450M.

Ashooh has a BA in Journalism, Journalism, philosophy, psychology (I thought you could only get this kind of thing in France) from the Marquette Jesuit University. Here is their ‘fighting song’, which he can perhaps recite to keep his spirits up, since he’ll soon never be able to show his face in a restaurant again. “Goooo! Goooo! Go Ashooh! Go! Go! Go! Go!”

Marquette University fight song – Ring Out Ahoya

Ring out ahoya with an M-U rah-rah!
M-U rah-rah!
M-U rah-rah! Rah rah rah!
Ring out ahoya with an M-U rah-rah,
M-U rah rah for Old Marquette!

(Chanting)
Goooo! Goooo! Go Marquette! Go! Go! Go! Go!
Goooo! Goooo! Go Marquette! Go! Go! Go! Go!

And here is Ashooh’s original email:

Dear David Galbraith:

Given your recent coverage of our company, I wanted to let you know that you can contact me if you are looking to get AIG’s perspective on an issue relating to the company.

I also I wanted to give you a heads up that we have responded to a letter from Representative Cummings regarding AIG’s retention planning. Here is the letter we have sent (I have attached it above).

Our key point is this: our highest priority is to pay back the government. We will do this by selling some of our high quality businesses. In our industry, the value of those businesses is based on two things: people and capital. The people that run those businesses are stars in their field. They are the ones who made AIG the largest player in insurance, and they are constantly being solicited by our major competitors. These employees are not with, nor have ever been with AIG Financial Products, the group that sold the credit default swaps. These folks are employees of AIG’s core insurance operations. Moreover, we’ve been informed by credit agencies that if we lose key insurance employees, our credit ratings will suffer (this is detailed in Mr. Liddy’s letter to Mr. Cummings).

For us to get the best value out the businesses we’re selling, and to ensure that our core insurance businesses remain profitable, we need them to stay. If they leave, the value our businesses will decline, and we will have less money to pay back taxpayers.

Regards,

Nick Ashooh

AIG

Elia Dattolo

Admin. Mgr. & Exec Asst. to

Nicholas Ashooh, SVP, Communications

Tel. 212-770-3150

Fax: 212-785-0785

elia.dattolo@aig.com

… and is still a Philistine. Economists are not Concerned Only with the Financial Value of Things:

Link