Don’t Pay Your Mortgage

March 18, 2009

Comments

It’s a sucker’s game if you can get the President to think of it as an outrage that requires the government to tear up contracts after the fact. Of course, a significant part of the problem here is that the government didn’t do its job. They didn’t check to make sure this wouldn’t happen. Guess the only question I have is when will President Obama ask Secretary Geithner to fall on his sword for him?

Update: Via Tyler Cowen, will Obama return his AIG “bonus”?

AIG executives gave more than $630,000 during the 2008 political cycle even as the company was falling apart According to the Center for Responsive Politics, which tracks campaign finance reports, more than $120,000 of that money was donated after AIG received its first $85 billion in federal bailout funds in September.

Obama collected a total of $130,000 from AIG in 2008, while McCain accepted a total of $59,499.

Based on all the bailout money that AIG has been getting lately, I think President Obama can honestly say he’s earned that money.

Note: An earlier version left out the phrase, “ask Secretary Geithner”, don’t know what happened, it was in an earlier draft. Must have deleted that portion by accident.

37 responses to “Don’t Pay Your Mortgage”

steve

March 18, 2009 at 6:34 pm

What they should have done with the first bailout money is institute a system of incentives/bonuses for the AIG staff who performed best at minimizing losses and getting as much money possible back to us, the taxpayers.

BTW, you usually write better than this. There are so few conservative sides devoid of partisan hackery. I am grateful to James for this site.

Steve
PD Shaw

March 18, 2009 at 6:36 pm

The Democrats want to break contracts and steal wages. The Republicans complain that they should have done so last month. I feel like I’m living in a Banana Republic.
sam

March 18, 2009 at 6:42 pm

About the contracts, as I mentioned below, if the contracts have a performance clause in them, well, what’s the problem in abbrogating them? Unless you think the performance has been outstanding. Maybe Cuomo shed some light on the substance of the contracts.

Moreover, why should those contracts be any more sacrosanct in these times than union contracts that are to be renegotiated in order to help auto makers get help? Are white collar workers somehow more deserving of the maintenance of their contracts than blue? Does anyone believe that AIG cannot renegotiate those contracts, really?
Steve Verdon

March 18, 2009 at 6:57 pm

How is it partisan hackery to point out the problematic nature of the government voiding contracts?

Frankly I think the whole AIG issue is a non-issue. It is trivial compared to the amount of money that has been lost due to the financial crisis in general and the recession on top of it. It is less than 0.1% of the AIG bailout and an even smaller percentage of GDP. Our political leaders have better things to be spending their time on. The only upside that I can see is that this might be Obama’s ClintonCare momment where his presidency is temporarily derailed and he has to eat some humble pie and not go on swinging for the fences.
Steve Verdon

March 18, 2009 at 7:01 pm

Moreover, why should those contracts be any more sacrosanct in these times than union contracts that are to be renegotiated in order to help auto makers get help?

My understanding is that with the UAW is that there is a negotiation and that the government is making it a precondition for the UAW and the automakers to walk away from those contracts as part of the bailout. Further, that this “due diligence” was not done with AIG.

Does anyone believe that AIG cannot renegotiate those contracts, really?

Sure it can, but now the government is demanding they void them simply because “it” says so. It sets a dangerous precedent and I wouldn’t be surprised if the overall market reacted negatively. The thinking might be, “What other contracts might be voided by the government…?”
sam

March 18, 2009 at 7:04 pm

The only upside that I can see is that this might be Obama’s ClintonCare momment where his presidency is temporarily derailed and he has to eat some humble pie and not go on swinging for the fences.

Good luck with that. I just caught his town hall in California. He gets it and the people, judging from the audience reaction, gets that he gets it. BTW, it just occured to me that the AIG bonuses are equivalent to the rapist getting compensation from the Victims Fund.
PD Shaw

March 18, 2009 at 7:08 pm

About the contracts, as I mentioned below, if the contracts have a performance clause in them, well, what’s the problem in abbrogating them?

Do you have any basis beyond sheer conjecture to believe there is a performance clause in the contracts? AIG has indicated that they are retention bonuses, not related to performance.
tom p

March 18, 2009 at 7:21 pm

Steve: Is my math off? You said,

AIG executives gave more than $630,000

and

Obama collected a total of $130,000 from AIG in 2008, while McCain accepted a total of $59,499.

That adds up to a total of $189,499… What happened to the other $430,001? Did they give it to the tooth fairy? (and how did McCain get cheated out of that $1?)
sam

March 18, 2009 at 7:26 pm

PD, did you miss the ‘if’ in the question? And this:

Maybe Cuomo [can] shed some light on the substance of the contracts.

Will you admit that if there is a performance clause in the contracts, then….?

As for what AIG said, really now, c’mon.
tom p

March 18, 2009 at 7:29 pm

Sure it can, but now the government is demanding they void them simply because “it” says so.

I know… we can argue about the pros and cons of this (and I agree with you up to a point) but doesn’t the gov’t own 80% of AIG??? What is wrong with an 80% majority stake holder dictating the compensation packages?

I know if I did, I would…
Bernard Finel

March 18, 2009 at 7:31 pm

This is part of the reason I think we should just force all of these firms into bankruptcy. The bailout was a terrible idea and now we’re stuck as taxpayers making good on all sorts of idiotic commitments.

A lot of these AIG guys are going to end up in jail anyway… so let them enjoy their ill-gotten gains for a few.
PD Shaw

March 18, 2009 at 7:40 pm

As for what AIG said, really now, c’mon.

Let’s me see here. AIG puts together a white paper to explain to the federal government the facts and law surrounding the bonuses. Since the federal government owns 80% of the company, any misleading statements would be securities fraud.

But of course, let’s pretend that the contracts have a clause that allows Obama to break them on St. Patrick’s Day.
PD Shaw

March 18, 2009 at 7:47 pm

“Bills of attainder, ex post facto laws, and laws impairing the obligations of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. … The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less-informed part of the community.” James Madison, Federalist Number 44, 1788.
PD Shaw

March 18, 2009 at 8:52 pm

sam, sorry, I should lighten up my tone a bit.

tom p, have you ever heard of a construction contract in which the contractor got paid 10-20 percent on completion? Doesn’t the contractor earn the completion bonus? Or does the owner just get to call that a compensation package, subject to negotiation after completion?
Bernard Finel

March 18, 2009 at 9:58 pm

What was completed here, PD?

What we have is nothing short of a blackmail situation. The AIGFP guys are saying, “we screwed stuff up so bad that only we can fix it, so you need to pay up suckers.”

When, in reality, (a) it is a fantasy that they can fix anything, and (b) anything that is actually fixable is likely to be fixable by any number of people in addition to the great minds that brought us the debacle in the first place.

If your contractor built you a house that fell down the day after it was complete, would you still feel obligated to pay the completion bonus? A contract ought to have a quid pro quo at its core. What is the quid pro quo here?
just me

March 19, 2009 at 5:07 am

Okay-it any of the companies that received funds hadn’t received them and gone into bankruptcy, those contracts would have been renegotiating anyway as part of the bankruptcy procedure.

I have no problems with the government attaching-please look at your contracts and see about renegotiating them string attached. Since those funds are preventing, or at least hopefully preventing the bankruptcy.

Personally, I am not now and never was all that keen on all these government bailouts, but my opinion lost the day.

I am kind of peeved at the manufactured outrage from the political class though. From what I have read-these bonuses were known about for months-and apparently government officials gave AIG the go ahead to pay out the bonuses.

As for your question about Geithner-I bet Geithner goes under the bus before the end of summer.
sam

March 19, 2009 at 5:40 am

That’s OK, PD, no offense taken. This is a contentious subject, and I do understand your point about the maintenance of contracts. But it’s Bernard’s point about the AIG guys that galls: Only we know how to fix this, because only we know how we effed it up. The truth is going to turn out, I think, that they don’t know how they effed it up (in anything more than a general sense). And I’m being charitable here. If they do know how they did it in detail, then they should have been aware of the danger. For not exercising adequate foresight, they should then be charged with reckless endangerment of all of us. (Just kidding.) Masters of Universe, indeed.
odograph

March 19, 2009 at 5:51 am

I think James Hamilton has a much more rational and thoughtful answer. The public anger about AIG is just noise, but to the extent that Wall Street gives out short term bonuses for long term risks they are NOT doing us any favors.

That is the real issue, and IMO when Cowen just responds to the anger, he misses the story.
sam

March 19, 2009 at 6:40 am

Well, here’s the sour cream of the jest:

AIG staff: We deserve this money

Make of it what you will.
steve

March 19, 2009 at 7:39 am

“When, in reality, (a) it is a fantasy that they can fix anything, and (b) anything that is actually fixable is likely to be fixable by any number of people in addition to the great minds that brought us the debacle in the first place.”

Who would they hire? Who would be willing to work there? For how much? Liddy testified that they are unwinding their positions. What is his motivation for telling lies? The guy is getting $1 a year. Looks to me as though he is just running a business and trying minimize overall losses.

Steve
PD Shaw

March 19, 2009 at 8:59 am

What was completed here, PD?

They completed the term of employment. They entered contracts in the first quarter of 2008 that promised substantial bonuses if they stayed through the year. They did it. They earned the money; the people not wanting to pay it are simply thieves.

Look, American law recognizes the right of an employee to leave his/her job at any time. Free labor. An employer cannot sue for specific performance. If you can find a better job, you can leave your employer in the dust no matter what hardship. And when I say better, I mean not just jobs with better salaries, but jobs with better long term prospects. These people at AIG appear to mainly be unwinding positions. Does that sound like a good long-term job?

So, the employer can try a few different things, but the most effective is to back-end compensation. Instead of paying a $120,000 contract in monthly increments of $10,000; the employer pays $8,000 a month with a $24,000 bonus for staying the year. The employee isn’t likely to leave before the end of the year.

Note that the AIG employees were eligible for additional performance-based bonuses, for which they received $0 last week.
Bernard Finel

March 19, 2009 at 9:22 am

They completed the term of employment. They entered contracts in the first quarter of 2008 that promised substantial bonuses if they stayed through the year. They did it. They earned the money; the people not wanting to pay it are simply thieves

But the contracts only exist on the fiction that AIG is a going concern. It is a ward of the state.

Are you arguing the narrow technical point that contracts must be honored? Or the broader point that somehow they deserve these bonus? Because if the former, then I think you are slicing the salami too thin. Yes, they have contract, but looks, on the day before the payments went out, the government could have simply forced AIG into bankruptcy and forced the traders to line up with all the other creditors. Their contracts exist purely due to the goodwill of the government.

I find a lot of this maddening. The same people who will jump up and down screaming about moral hazards and how the losers who borrowed too much should just lose their homes and get kicked out into the street and often the same people who are arguing that traders who engaged in fraudulent business activities must be made whole.

Oh no, we can’t wipe out the shareholders who didn’t exercise control over their managers. Oh no, we can’t wipe out the bondholders who made risky investments and reaped rewards for years while the going was good. Oh no, we can’t even think of withholding million dollar bonuses being paid by tax payer money. But if you borrowed too much, screw you, go live in a shelter.
odograph

March 19, 2009 at 9:48 am

I think Bernard is right. The defense of bonuses amounts to an endorsement of “private profit, socialized losses”
PD Shaw

March 19, 2009 at 10:10 am

before the payments went out, the government could have simply forced AIG into bankruptcy and forced the traders to line up with all the other creditors.

I think that is probably wrong. Bankruptcy is just a means of gathering assets and paying debts. Back wages are priority debts in bankrupty, so they would have very likely been paid unless there were no assets. This is why AIG’s hand was so weak in trying to voluntarily renogiate the mortgages.
PD Shaw

March 19, 2009 at 10:18 am

I meant voluntary renegotiate “the bonuses.”
Drew

March 19, 2009 at 11:01 am

The silence on retention bonuses for Fannie is deafening.

Separately…..

Does anyone know who will be the recipient of the cash/profit from the unwinding activity?
Steve Verdon

March 19, 2009 at 11:28 am

This is part of the reason I think we should just force all of these firms into bankruptcy. The bailout was a terrible idea and now we’re stuck as taxpayers making good on all sorts of idiotic commitments.

Hmmmm…going to the way back machine here….

Should the Feds Bailout AIG?

By the way, bankruptcy would have likely voided these contracts and I have to say the initial justification for bailing out AIG probably doesn’t hold anymore.
odograph

March 19, 2009 at 11:57 am

The silence on retention bonuses for Fannie is deafening.

I’m agin’ em.
Drew

March 19, 2009 at 12:50 pm

I think many people on this forum would agree that the original bailout of AIG was not warranted. However, we all know the rationale: systemic problems if they weren’t.

So once you are in the bailout business, you have to play out the game. And now we have the AIG bonus issue.

The question I asked previously I knew the answer to. The need to unwind these positions as profitably as possible derives from the counter parties…..whom the govt (taxpayers) will in turn bail out if big losses are incurred.

So you pay the AIG bonuses for the effort to unwind them as best as possible…..for the benefit of the taxpayers. Repeat: for the benefit of the taxpayers. (BTW – spleen venter’s, I think few of the execs involved in current bonuses were in the credit swaps unit that caused all the problems. But in any event, the original bailout put this in motion.)

It would be irrational to just shut AIG down.

Oh, and for all you moralists. Unless I see you screaming bloody murder about Chris “The Lying Bonus Maker” Dodd, spare me. Just spare me. You are nothing more than crass partisans.

This is a mess, but as I said: “when you get in the bailout business….”
Drew

March 19, 2009 at 12:52 pm

“I’m agin’ em.”

Me too, Jethro. Sheee-it.
odograph

March 19, 2009 at 12:57 pm

Drew, you know there are two kinds of CDS holders:

1) people who wisely bought them to protect or hedge other holdings (debts)

2) people who bought them as a speculative vehicle, putting small money that would pay long on failures

The first type is legal in the insurance industry. I can buy life insurance on someone I have a relationship with. The second type was made illegal in the insurance industry. It was deemed an unnecessary option to allow random people to buy life insurance on other random people.

So, it is hard in our regulated market economy to split these, but what should we do?

(If I were King I think I’d pay the gamblers less in any bailout.)
Drew

March 19, 2009 at 1:01 pm

odo –

You speak truth and justice. Now let’s deal with the reality of Big Government: Which type gave Chris Dodd and Barack Obama more in campaign contributions?
odograph

March 19, 2009 at 1:09 pm

I’m sure the gamblers hosed everyone down, probably in ratio of their probability of elective success.

That would be the “quants’” allocation.
PD Shaw

March 19, 2009 at 1:29 pm

By the way, bankruptcy would have likely voided these contracts and I have to say the initial justification for bailing out AIG probably doesn’t hold anymore.

I think that might be true if we take Steve’s time machine back to September of ’08. My impression is that the retention bonuses vested at the end of the year, so as of September, performance of the contract had not been completed, so the bonuses had not yet been earned.

But other questions would need to be answered. Was the deferred compensation being accumulated in a trust that protected it from other creditors in bankruptcy? Would AIG do as other companies have done and advance the proportionate share of the bonuses earned on the day before filing bankruptcy? Would a bankruptcy judge determine that reorganization required paying these employees the same compensation they had previously received?
PD Shaw

March 19, 2009 at 1:40 pm

The need to unwind these positions as profitably as possible derives from the counter parties…..whom the govt (taxpayers) will in turn bail out if big losses are incurred.

Yep. I think that needs to be said more often.

I personaly don’t expect AIG to be with us very much longer. Some of its divisions are going to be sold off, some eventually closed. The rest will be reorganized, possibly under a new name and brand.
PD Shaw

March 19, 2009 at 1:41 pm

From today’s Washington Post:

The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.
odograph

March 19, 2009 at 3:20 pm

Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.

When you think about it, that’s a funny definition of “sold out.” Again, without the funds they’d have no jobs.