By now you must have heard that the US congress has decided that it would rather punish the employees of AIG than respect the rule of law. And if that sounds at all hyperbolic to you then it’s clear that you don’t know the facts. Let me enlighten you.
First of all, the people who lost all that money for AIG are long gone, and have been for some time. None of the traders and executives who lost that money in the mortgage markets are getting any of the money that congress is so shocked and horrified over. The people who remain and who are getting these retention bonuses are middle office staffers, IT professionals, and members of other business units of AIG who were otherwise profitable. Their profitability might have been completely overshadowed by the losses in the CDO group, but that’s hardly their fault.
Anyway, last year, when it became clear that the company they work for had lost so much money that they would not be able to reward them for their sound and prudent decision making, they could have done like any other reasonable person and left. But instead, the new management of AIG persuaded them to stay by offering them something. Not much …not nearly as much as they might have gotten taking their prudent and careful decision making elsewhere, but something. And it was enough to convince a few of them to stay and help clean up the mess.
And now for their trouble… for being the kind of people who will stick with a firm that has done right by them in the past even though they probably won’t be able to in the future…. their loyalty has been rewarded by having the US Congress and that shameful tyrant Andrew Cuomo do all they can to put their lives and risk. In his ceaseless ambition to become New York governor, Andrew Cuomo isn’t even making a pretense of remaining within his authority as Attorney General and is blatantly and publicly abusing his power in every way he can to get to the forefront of the populist revolt against capitalism. And the US Congress has proven themselves to be perfectly willing to surrender the rule of law in America to the goal of making sure they aren’t the ones being blamed for this catastrophe.
The contracts that gave these people those retention bonuses are roughly a year old, but congress doesn’t care about a silly little thing like a contract. Instead, they are implementing a plan to tax back 90% of the money that these people were paid, even though they aren’t the people who caused the problems that congress is so upset about. It’s ex-post legislation that uses taxation as a weapon in the war the administration has declared on capitalism. And Cuomo has used New York’s ‘flexible’ legal system to subpoena the names of all bonus receivers, and has announced his plans to make them public, in spite of the numerous public threats these people have received to their lives and property.
It’s easy to imagine a rabidly power hungry partisan like Andrew Cuomo saying that if a few bankers have to die to make him governor, then it’s a small price to pay. But it’s pretty clear that the Congress hasn’t thought the consequences of this act of theirs through. After all, if contracts no longer matter to them why should they matter to the rest of us?
And they have also apparently forgotten that the document by which they derive their authority over the citizenry is itself a contract. That’s right; the US Constitution is a contract. In the broadest sense, it’s a contract where the government agrees not to be tyrannical, and the citizenry agrees not to kill them all and burn their homes to the ground. The rest of the document is really just the terms and definitions that set up that agreement, and give us a framework for knowing when it’s OK to go get grandpa’s duck hunting gun and break out the maps of greater Baltimore. And if that had occurred to Congress then I can’t believe they’d have gone through with this decision. Contracts protect them from us as well as it protects us from them. Well… at least they used to until last week anyway.
What’s worse is that the more the government gets involved in the minutiae of running the financial business the worse they make things. They say in Washington that they want to establish ‘private public partnerships’ to deal with the toxic assets, but as a professional institutional investor, let me say this about that idea.
Anyone who thinks seriously about getting involved in a "public-private partnership" in a political environment like this one should have his freaking head examined. Heaven forbid he does something wrong like ….make a profit, or something. If he does then Congress will simply subpoena him to a committee meeting to explain the ‘greedy profits he’s making on the backs of the US taxpayer’, and then they’ll have another ‘ex-post’ law to snatch back the money and that’s that. You would have to be a genuine imbecile to partner with these liars and thieves.
And all we professional investors in hedge funds who haven’t taken a penny of federal funds should be very wary. We are all like the Jews in Germany during the 1930’s, where there is no specific evidence that we’re responsible for anything but everyone is certain we had something to do with it all the same. It doesn’t matter if you’ve been profitable for your investors, or if like me, you don’t even work in the mortgage markets. In an environment like this where the rule of law is suspended, you don’t have to do anything wrong to be found guilty. And ‘everyone knows’ the hedge funds are guilty of something, even if they can’t prove what it is. It’s capitalism that’s turned into the great sin of our age. And winning at capitalism is more than enough evidence of your wrongdoing.
All of this ignores the fact that it was Congress who spent a decade telling mortgage underwriters that it was wrong of them to consider credit worthiness as a factor when lending. It ignores all the special deals they got, and campaign kick-backs they happily accepted. It ignores their repeated intentional distortions of the market for the sake of social engineering. And it forgets all about how they set up the twisted accounting rules which made trillions of dollars of perfectly reasonable home loans into worthless pieces of paper along with the junk they forced the banks to create, and how they were all too happy to throw the taxpayers money at the problem when it could no longer be ignored.
As usual the real villains here are the ones who are banging the gavel. But they better take care. Because pretty soon the US public is going to figure out that if contract law is suspended, then so is all other law. And I’d hate to be a guy like Barney Frank or Andrew Cuomo without the protection of the legal system to elevate them above the unwashed peasants. I’m not advocating violence here, I’m just pointing out the risks their taking. And as a guy who manages risk for a living, it’s a risk I wouldn’t take if I were them.
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