Tag: AIG

FSOC’s Arbitrary, Ever-Changing Double Standard

In the Dodd-Frank Act, Congress, without irony, decided the best way to end “too big to fail” was to have a committee of regulators label certain companies “too big to fail.”  That committee, established under Title I of Dodd-Frank, is called the Financial Stability Oversight Council (FSOC) and is chaired by the Treasury Secretary. Like so much of Dodd-Frank, FSOC gets to write its own rules. Unfortunately FSOC won’t even write those rules, but instead it has decided that it knows systemic risk when it sees it. This has led to an ad hoc process that almost makes the bailouts of 2008 look systematic.

Compare the process for asset management firms and that for insurance companies. In late 2013, the Treasury released a report on the asset management industry. It was widely viewed as an attempt to make the case for labeling some asset management firms “systemic.”  The report was widely criticized. Such criticism did not stop FSOC from conducting a public conference on the asset management industry in May 2014.  Whether it was the public reaction to the conference or the paper, FSOC has largely abandoned labeling asset managers as “too big to fail.”  That was an appropriate outcome as firms in that industry are not systemic and shouldn’t be lead to expect a federal rescue.

Now don’t get me wrong: A shoddy report and a conference do not constitute a thorough process. As someone who has overseen a rulemaking process, I can say they do not even meet the basics of the Administrative Procedures Act. But just when that process seemed wholly inadequate, along comes the “process” for insurance companies.

Not unexpectedly, AIG went along without a peep. Given its role in the crisis that’s not a surprise. But there’s been no report or even a conference on whether insurance companies pose systemic risk. Completing either one would, of course, require FSOC to define systemic risk and to offer some minimal metrics. Instead, what we have is unelected bureaucrats simply making it up as they go along.

And here I was thinking Dodd-Frank was meant to end the haphazard behavior of regulators in 2008 and lead us towards a predictable rules-based approach to ending systemic risk!

Chutzpah in the Bailout Nation

Bloomberg reporter Andrew Frye plays it deadpan here.  I don’t think I need to comment, either, except to note that the taxpayers’ commitment to AIG peaked at $182 billion:

American International Group Inc.’s mortgage insurer does more business in Republican-leaning states as it signs up more reliable customers than those in “more liberal” areas, Chief Executive Officer Robert Benmosche said.

“All of the states where we’re a leader, where we’re the No. 1 insurer, are red states, all of the states where we’re at the bottom are blue states,” Benmosche, 66, said yesterday at a conference in Washington. “Part of what we found out is that our model is about culture and it’s about the attitude in the public. And what we find is where there’s more of a tendency for people to be more liberal, more that the government is responsible for what happens to me.”

Benmosche oversees an insurer propped up by more than $40 billion in government capital while competing mortgage guarantors operate without U.S. Treasury Department assistance.

More on chutzpah in the Bailout Nation here and here.

Lehman’s Failure Taught Us Nothing

Several commentators have reacted to Senator McConnell’s floor statement regarding the Dodd bill as a defense of “doing nothing”.  And accordingly argue that such a position would be, in the words of Simon Johnson, both dangerous and irresponsible.  This familiar canard is based upon the oft repeated assertion that the failure of Lehman proved that we cannot simply let large financial companies enter bankruptcy.

The simple, but important, fact is that we have no idea what would have happened had we let AIG and Bear go into bankruptcy proceedings.  Nor do we know what would have happened if Lehman had been saved.  Macroeconomics does not have the luxury of running natural experiments to determine the impact of a corporate failure.   Scholars have an obligation to accurately reflect the uncertainties in the debate.  Those that assert Lehman proved anything, are being at best disingenuous, and at worst, dishonest.

Let us, however, put forth a few things we do know:

  1. We know none of Lehman’s counterparties failed as a result of Lehman’s failures.  Just as we know none of AIG”s counterparties would have failed if they did not get 100 cents on the dollar from their CDS positions.  So where exactly is the proof of contagion?
  2. We know we had a nasty housing bubble.  We were going to lose millions of jobs in construction and real estate regardless of what we did.  We knew financial institutions heavily invested in housing would suffer.  How exactly would saving Lehman have prevented any of that?

The debate over ending bailouts and too-big-to-fail will not progress, we will not learn a thing, if we let simple, empty assertion pass as fact.  Much of the public remains angry at Washington because those responsible, such as Bernanke and Geithner, have never laid out a believable or plausible narrative for the bailouts.  It always comes back to “panic.”  If we are ever to hope to return to being a country governed by the rule of law, rather than the whims of men, then we need a lot more of an explanation than “panic.”

Obama Bank Tax Is Misguided

Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit?   But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

If the effort is really about deficit reduction, then it completely misses the mark.  Any serious deficit reduction plan has to start with Medicare and Social Security.  Assessing bank fees is nothing more than a rounding error in terms of the deficit.  Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order.  The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.

The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs.  Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do.   So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.

But now the same administration is proposing to assess a fee on banks to cover losses from the TARP.  Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer.  He appears, however, to be missing the critical reason why:  the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

Crist and Cato

Florida’s airwaves are alive with the sound of Governor Charlie Crist’s radio advertisement trumpeting his grade of “A” on Cato’s “Fiscal Policy Report Card on America’s Governors.”

I am pleased that Gov. Crist values Cato’s ratings because we work hard to make them accurate and nonpartisan. But the radio ad is making many fiscally conservative Floridians scratch their heads because of the governor’s recent policy actions.

The governor earned his Cato grade in last year’s report mainly because of his large property tax cuts and moderate spending approach. The grade was based purely on quantitative data on revenues, general fund spending, and tax rate changes.

However, since I wrote the report in mid-2008, the governor seems to have fallen off the fiscal responsibility horse.

In particular, Crist approved a huge $2.2 billion tax increase for the fiscal 2010 budget, even though he had promised that $12 billion in federal “stimulus” money showered on Florida over three years would obviate the need for tax increases.

About $1 billion of the tax increases are on cigarette consumers, which will particularly harm moderate-income families. The rest of the increases are in the form of higher costs for often mandatory services, such as automobile registration, which is really just a sneaky form of tax increases.

These tax increases will be particularly painful to Floridians in the short-term because of the recession. But Crist has also jeopardized the state’s long-term finances with his expanded subsidies for hurricane insurance. Hurricanes are a major challenge in Florida, but giving big subsidies to coastal property owners, driving private insurers out of the state, and guaranteeing a massive state bailout when the next hurricane hits strikes me as the height of fiscally irresponsibility.

More on the Crist campaign here.

U.S. Cutting Pay for Bailed Out Company Executives

According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:

NEW YORK – The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.

The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.

But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.

This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.

I debate this further on CNBC:

C/P The Hill

Geithner Ignores Bailout History

Perhaps the biggest problem with the Obama plan to “reform” our financial system is the impact it would have on the market perception surrounding “too big to fail” institutions.  In identifying some companies as “too big to fail” holders of debt in those companies would assume that they would be made whole if those companies failed.  After all, that is what we did for the debt-holders in Fannie, Freddie, AIG, and Bear.  Both former Secretary Paulson and Geithner appear under the impression that moral hazard only applies to equity, despite debt constituting more than 90% of the capital structure of the typical financial firm.

Geithner believes he’s found a way to solve this problem - he’ll just tell everyone that there isn’t an implicit subsidy, and there won’t be a list of “too big to fail” companies.  Great, why didn’t I think of that.  After all, the constant refrain in Washington over the years that Fannie and Freddie weren’t getting an implicit subsidy really prepared the markets for their demise.

Even more bizarre is Geithner’s assertion that the government can force these institutions to hold higher capital, maintain more liquidity and be subjected to greater supervision, all without anyone knowing who exactly these companies are.  Does the Secretary truly believe that these companies’ securities disclosures won’t include the amount of capital they are holding?  Whether there is an official list or not is besides the question, market participants will be able to infer that list from publicly available information and the actions of regulators. 

One has to wonder whether Geithner spent any of his time at the NY Fed actually watching how markets work.  Before we continue down the path of financial reform, maybe it would be useful for our Treasury Secretary to take a few weeks off to study what got us into this mess.  We’ve already been down this road of denying implicit subsidies and then providing them after the fact. Maybe it’s time to try something different.