Posted on 03/20/2009 6:52:32 PM PDT by Steelfish
Bonfire of the Trivialities
March 20, 2009
By Charles Krauthammer
A $14 trillion economy hangs by a thread composed of (a) a comically cynical, pitchfork-wielding Congress, (b) a hopelessly understaffed, stumbling Obama administration, and (c) $165 million.
That's $165 million in bonus money handed out to AIG debt manipulators who may be the only ones who know how to defuse the bomb they themselves built.
Now, in the scheme of things, $165 million is a rounding error. It amounts to less than 1/18,500 of the $3.1 trillion federal budget.
It's less than one-tenth of 1 percent of the bailout money given to AIG alone. If Bill Gates were to pay these AIG bonuses every year for the next 100 years, he'd still be left with more than half his personal fortune.
For this we are going to poison the well for any further financial rescues, face the prospect of letting AIG go under (which would make the Lehman Brothers collapse look trivial) and risk a run on the entire world financial system?
And there is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?
Even worse are the clever schemes being cooked up in Congress to retrieve the money by means of some retroactive confiscatory tax. The common law is pretty clear about the impermissibility of ex post facto legislation and bills of attainder. They also happen to be specifically prohibited by the Constitution. We're going to overturn that for $165 million?
(Excerpt) Read more at washingtonpost.com ...
Don’t forget- all insurance contracts is based on risk assessment.
True. They call them actuarials. However, in traditional insurance, they must by law keep enough reserves to be able to pay claims. Credit default swaps aren't like that. They're unregulated and no reserves are required. You must simply trust that a company like AIG can pay the claims, or hope that the housing market always goes up and the entire house of cards doesn't go up in flames with you in it.
But why do the taxpayers get stuck with the bill and the crooks get the bonuses? Revolutions have been started for much, much less.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
“...and no reserves are required”
Exactly, and this was unfortunately allowed for by law that permitted this creative system and encouraged the ballooning of the housing bubble.
> There have been no allegations ...
The only part of your post that was accurate.
AIG was insuring speculative risk, rather than casualty risk. They insured the CDO’s full value, and obviously underpriced the risk enormously. These CDS’s should have carried a much higher price. They weren’t required to hold a loss reserve, as CDS are unregulated and don’t require it. Also, they were selling CDS to counterparties that had no insurable interest in the underlying assets. This was a major part of the problem, sort of like being able to buy fire insurance on your neighbor’s house and then storing flammable materials in very close proximity to it.
Even if they had held loss reserves, it wouldn’t have mattered. They would still be insolvent because their risk models were bad. No one there anticipated the extent of the
losses. The very nature of insurance is that only a very small percentage of exposure units will suffer losses.
Even the best, strongest insurance companies will quickly become insolvent if they underestimate losses, underprice the risks they are underwriting, invest poorly themselves, or fail to control expenses.
Incidentally, the CDS market went from something like $7 trillion in 2001 to over $70 trillion now. This whole thing is like a guillotine blade over our necks. Not enough money in the world to cover the insured risks.
You also agreed that there is money laundering.
> You also agreed that there is money laundering.
I still agree with money laundering; I was referring to the second post.
We really should not try to help this government in diverting attention from real problems. There was nothing illegal about the bonuses; at the time the government had two ways to stop them:
1) Let the company go Chapter 11, or
2) negotiate the bonuses prior to finalizing the rescue package. The employees in question would have been presented with a choice - voluntarily surrender the bonus or get fired to allow the government funds to be received.
Making spurious assertions about the bonuses contributes nothing to the conversation. In fact it provides cover for the blatantly illegal attempt by the Congress to impose 90 - 102% tax (depending on the Social Security/Medicare) on specific individuals.
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