House Financial Services Subcommittee Hearing

Posted on March 20, 2009 by Liz

Here are high points of the Hearing I found interesting and some of my own thoughts. (Quotation marks are included where statements are actual quotes rather than the “sense” of what was said.)

BARNEY FRANK, Democrat & Financial Services Committee Chairman. As major stockholders, the US Government should try to recoup $165 million in bonuses by filing a lawsuit alleging “poor performance” on the part of bonus recipients. He also demanded the names of bonus recipients and updates when bonus recipients either return or refuse to return bonus money. (Although New York’s Attorney General Andrew Cuomo is in receipt of these names, Liddy expressed a need to protect bonus recipients because of deadly threats made against them and their families.) (According to the Center for Responsive Politics, Frank received $202,548 in contributions from the Insurance Industry.)

OLYMPIA SNOW, (R) Maine. Offered AIG bailout provisions which would have disallowed most of the oversized bonuses. (Received $5,000, according to the Center for Responsive Politics.)

CHRISTOPHER DODD, (D) Connecticut. Snow’s amendment was (allegedly) struck by Connecticut’s Chris Dodd. How he did it is unclear. At first, he denied the act. Subsequently, he said he received instructions from Treasury and/or The White House. Regardless, striking the provision resulted in Congressional approval of bonus contracts entered into before February 11, 2009. As a result, 165 million taxpayer dollars have been paid to architects of the debacle. Reportedly, Dodd received $852,556 from insurance lobbyists. (Center for Responsive Politics)

STEPHEN LYNCH, Massachusetts: “We amend contracts all the time. My auto workers were badgered and badgered…. These [AIG] guys lost billions of dollars and still believe they’re entitled to these bonuses.” (Lynch received $35,299 according to the Center for Responsive Politics)

PAUL KANJORSKI, Chairman, Financial Services Subcommittee on Capital Markets (D-PA). Admitted to knowing about the incipient bonus payments two months ago and “warned Liddy that paying the bonuses would be a big mistake.” “You [CEO Edward Liddy] should have told the bonus recipients to ‘sue us.'” (Kanjorksi did not mention warning anyone else and according to the Center for Responsive Politics, received $345,548 in donations from the insurance industry.)

Joel Ario, State of Pennsylvania Insurance Commissioner and Chairperson of the National Association of Insurance Commissioners. Ario believes that AIG’s toxic holdings could be walled off from its healthy funds-at-large. (NB: Therefore, the company at-large could survive if its sick subsidiaries were permitted to fail.) (Also see: [Funny] Side of the [Wall] Street: Obamanomics.)

Neither the Government Accountability Office (GAO) nor the federal Office of Thrift Supervision (OTS) have investigated whether AIG fraudulently misrepresented its health and wealth at the time it was creating “retention” and other bonus contracts “to the tune of $400 + million with the division that was bleeding to the tune of $40 billion.”

Another committee member asserted, [“The distribution of these bonuses] borders on fraud and criminality.”

According to Scott Polakoff of OTS, his agency knew the risk of the credit default swaps in 2004 and did nothing to avert the collapse. OTS did not close AIG’s toxic financial products division even though “the agency had a complete picture and oversight authority” to do so. Polakoff further stated that “OTS had sufficient expertise and personnel” but in effect, since Congress didn’t instruct OTS to review the bonus contracts before AIG’s bailout was approved, the agency didn’t do the research.

Rodney Clark of Standard & Poor’s (S & P) rating agency was asked, “How can we depend on you and were mistakes made?” Clark answered, “Hindsight being 20-20…, our conclusions [of AIG’s solvent value] changed rapidly once the market started to collapse. Market values are important as a guideline. We could not understand how quickly the value of mortgage backed securities would decline…. (NB: On what basis, then, did S & P justify its AA- rating until September 15, 2008 if ?) S & P hedged its bets. Ratings are based on current value and give prospective investors a factual basis for predicting future performance.) Clark went on to say, “In 2008, excluding investment losses, AIG would’ve been profitable.”

Really? Does that mean S&P didn’t see the looming losses or didn’t consider them relevant to the total value of the company? (See: Ratings Agencies falsify reports or search CSPAN’s archives for quotes from ratings agents who knew full-well that the mortgage-backed securities were toxic but provided healthy ratings because…that was the outcome corporations paid them to obtain. (See: previously-cited statement from Joel Ario.)

Edward LIDDY, AIG insurance Chairman & CEO (temporarily appointed in 2008 to detoxify AIG). Prior to Mr. Liddy taking his witness seat, he was stopped by “pink lady demonstrators” who questioned him (in part) about consequences to returning war veterans whose savings were invested with AIG. If he answered, it wasn’t televised.

He did tell us that the risk to AIG was unacceptably high if we did not pay the $165 million in bonuses. “It was my determination,” he said, “that AIG-FP would unravel if employees weren’t retained to wind down the projects they were working on. Which they did. They’ve reduced $2.7 trillion in toxic assets to $1.6 trillion. It’s my intention to reduce those debts, sell AIG’s insurance companies and strengthen the healthy portions of our business. If we don’t pay our debts, that triggers bankruptcy. I’ve asked AIG-FP (financial product) employees to return a portion of the bonuses. Believe me, I wouldn’t have approved the contracts if I’d been CEO at the time they were created.”

Liddy further asserted that Federal Reserve Chairman Ben Bernanke acquiesced to the payment of retention bonuses.

“We didn’t tell Congress because nobody told us to,” Liddy explained. “We’re partners with the Federal Reserve. They participate in activities leading up to board meetings and they attend board meetings. I asked if they had comments or different points of view as far as bonuses and everything else. The Federal Reserve did not disagree with our assessment that AIG-FN was at risk of jeopardizing the monies already given if we didn’t pay the bonuses. We were told by our attorneys that the contracts were unbreakable. I assumed they shared with Treasury and Congress information they gained from us. The Secretary of the treasury did not know we were going to make the [bonus] payments though the Federal Reserve did. It’s up to the Federal Reserve to discuss” salient issues with the Secretary of the Treasury.

Later, Treasury Secretary Timothy Geithner said he didn’t know about the bonus contracts until two weeks ago.

Countering assertions of possible fraud, Liddy said he believes, “AIG was solvent when the retention contracts were drawn.” (On what factual basis did he develop this assessment? Or, is he just repeating assessments from ratings agencies which regurgitated AIG’s own corporate projections? Isn’t that the same self-quoting claptrap that got us into Iraq?)

Liddy continued, “AIG has problems besides the mortgage-backed securities. There’s oil accounts and other utilities in trouble.” (This appears to contradict his assertions of fundamental solvency.)

ED PERLMUTTER, Committee Member. “There’s a whole fraud concept that says ya’ can’t be handing out bonuses when you’re insolvent. I don’t think these bonuses should have been paid.”

Some legal issues, AIG’s Employee Retention Plan and relevant case and statutory findings.

Currently, some members of Congress are promoting tax legislation which would target bonuses paid by corporations that received stipulated bailout funds. Their idea is to re-appropriate the funds already disbursed. (There is every reason to believe such targeting is unconstitutional. Seeing as how Congress writes the laws and has more than its fair share of attorneys, you’d think they’d know that.)

AIG-FP 2008 Employee Retention Plan, effective December 1, 2007

(Importantly, there is no signing date on the Retention Plan although it specifically covers 2008 and 2009.) According to CEO Liddy’s Executive Summary of the retention plan in which he discusses the bonuses, “The plan was implemented because there was a significant risk of departures among employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders…. This resulted in a $313 million total for 2008 and a $327 million total for 2009… The 2008 awards range from $1,000 to slightly less that $6.5 million. Only seven employees will receive more than $3 million…. The retention plan is governed by Connecticut Wage Act. (Section 4.04)” (NB: The law provides for the recovery of double damages and attorneys’ fees when wages are improperly withheld and the employer’s refusal to pay wages lack a good faith basis. Conn. Gen. Stat sections 31-72.) “In addition,” states Liddy, “individual managers who decide to withhold wages that are due are individually liable for violation of the Wage Act…We have been advised that the bonus provisions of the American Recovery and Reinvestment Act of 2009 prohibiting certain bonuses specifically exclude bonuses paid pursuant to pre-February 11, 2009 employment contracts.” (Apparently, this is the alleged “Dodd Provision.”)

NB: The definition of “executive employee” rests largely on whether an employee is salaried, is required to exercise personal discretion in performance of duties, earns in excess of certain dollar amounts and has (usually) some supervisory responsibilities.

According to the Connecticut Wage Statute (sec. 31-71(e). “No employer may withhold or divert any portion of an employee’s wages unless (1) the employer is required or empowered to do so by state or federal law and (i) “Wage” means compensation due to an employee by reason of his employment. (Italics added for emphasis.)

Liddy’s Executive Summary referenced Schoonmaker v Lawrence Brunoli, Inc. 828 A.2d64 (Conn.2003). Schoonmaker established that double damages could be paid when salaries are withheld for reasons of “bad faith, arbitrariness or unreasonableness.”

The courts have also established that, “Punitive damages may be awarded in suits in which it is proven by clear and convincing evidence that the defendant’s [employer’s] actions showed willful misconduct, malice, fraud, wantonness, oppression or [lack of care] which would raise the presumption of conscious indifference to consequences. Under O.C.G.A. 51-12-5.1(b), it remains the rule that something more than the mere commission of a tort is always required for punitive damages. There must be certain circumstances of aggravation or of outrage.”

New York’s Attorney General Andrew Cuomo may attempt to use the Fraudulent Conveyance Act to recover the bonuses.

In order to pursue Fraud charges, “… the misrepresentation [or omission] must be made knowingly and intentionally, not as a result of mistake or accident; that is, that the person either knew or should have known of the falsity of the misrepresentation [or the false effect of the omission], or that he made the misrepresentation [or omission] in negligent disregard of its truth or falsity.

NB: Under the Bankruptcy Code, insolvency exists when the sum of the debtor’s debts exceeds the fair value of the debtor’s property, with some exceptions. It is a balance sheet test. 11 USC § 101(32)

18 USC CHAPTER 47 § 1031 concerns “major fraud against the United States” and is another statute being considered by New York State’s Attorney General Cuomo. It provides the following:

(a) Whoever knowingly executes, or attempts to execute, any scheme or artifice with the intent-

(1) to defraud the United States; or

(2) to obtain money or property by means of false or fraudulent pretenses, representations, or promises.

Therefore, the two most important facts to ascertain are, “What was AIG’s actual state of solvency when the bonuses were contracted and did its officers misrepresent that state?”

House Financial Services Subcommittee Hearing

Posted on March 20, 2009 by Liz

Here are high points of the Hearing I found interesting and some of my own thoughts. (Quotation marks are included where statements are actual quotes rather than the “sense” of what was said.)

OLYMPIA SNOW, (R) Maine. Offered AIG bailout provisions which would have disallowed most of the oversized bonuses. (Received $5,000, according to the Center for Responsive Politics.)

Another committee member asserted, [“The distribution of these bonuses] borders on fraud and criminality.”

Liddy further asserted that Federal Reserve Chairman Ben Bernanke acquiesced to the payment of retention bonuses.

Later, Treasury Secretary Timothy Geithner said he didn’t know about the bonus contracts until two weeks ago.

ED PERLMUTTER, Committee Member. “There’s a whole fraud concept that says ya’ can’t be handing out bonuses when you’re insolvent. I don’t think these bonuses should have been paid.”

Some legal issues, AIG’s Employee Retention Plan and relevant case and statutory findings.

AIG-FP 2008 Employee Retention Plan, effective December 1, 2007

New York’s Attorney General Andrew Cuomo may attempt to use the Fraudulent Conveyance Act to recover the bonuses.

18 USC CHAPTER 47 § 1031 concerns “major fraud against the United States” and is another statute being considered by New York State’s Attorney General Cuomo. It provides the following:

(a) Whoever knowingly executes, or attempts to execute, any scheme or artifice with the intent-

(1) to defraud the United States; or

(2) to obtain money or property by means of false or fraudulent pretenses, representations, or promises.

Therefore, the two most important facts to ascertain are, “What was AIG’s actual state of solvency when the bonuses were contracted and did its officers misrepresent that state?”

[F]unny side of the [Wall] Street: Obamanomics

Posted on March 20, 2009 by Liz

Imagine you’re the on-duty emergency room (ER) nurse in a small country hospital. Your resources are severely limited by high unemployment and a health insurance crisis.

A healthy snowboarder hobbles in with a broken leg and dislocated shoulder.

You start a prophylactic IV drip of normal saline, pain killers and antibiotics to protect the snowboarder from dehydration, pain and infection.

In a corner of the emergency room is a bloated near-corpse in systemic organ failure. His liver’s shot. His heart’s all but stopped. The smell of his rot and disease are spreading out of the ER, down the corridors and into the rooms of recuperating patients.

Emergency room protocol requires you to infuse the snowboarder’s IV solution through the bloated near-corpse middle man first, rather than into the snowboarder’s arm directly.

Proponents of this bassackward policy say that if the gas in the bloated guy explodes, it’ll jeopardize everyone in the hospital so we have to treat him with the best of the drugs and hope enough benefit reaches the snowboarder to prevent her relatively minor injuries from becoming a systemic threat. If you’re the cynical type, you might think the nearly-dead guy’s membership on the hospital’s Board of Directors is significant, too.

Whatever the reason for the policy, the outcome is assured: the bloated near-corpse will drain your few precious resources on its way to the morgue and the healthy patient will die of preventable consequences.

In the spirit of Jon Stewart, “Let’s just cut out the middle man.” Break with protocol and centuries of obsolete thinking. Infuse the snowboarder directly. She’s going into shock. Microbes are chewing on her broken, exposed bone. It’s a matter of basic triage: apply your resources where they will do the most good as you asses each situation uniquely, dispassionately and quickly.

The snowboarder (like most of our neighbors) will heal quickly and be ready to continue her education, develop new products, create new markets and in general, become the new economic engine. She’ll be rebuilding our nation while the rotting AIG-Goldman Sachs-Citi-Bank of America-corpse that’s poisoning us all is buried quietly in the background.

Stimulate acutely-ill borrowers with a direct infusion of debt-cancelling cash that can be paid by them to their ORIGINATING lenders. The funds will or won’t trickle UP to the bloated entities who bought and bundled the stinky credit card and mortgage loans. Those who are too-big-to-fail will collapse if the funds can’t find their way through the maze of intermediaries. But, by excising the corpse and caring directly for our fundamentally healthy neighbors, we can mitigate the effects of this new shift in focus and purpose.

The “mortgage-crisis” isn’t the root of our problems. And our continued reliance on a rotting corpse to rescue the future may not be the cause of our problems, but it’s certainly proximate. If President Obama is serious about “changing how we do business,” then he needs to roll out something better than his new version of Reaganomics.

* * * *

NEXT: Tell-tale quotes from this week’s House Financial Services Subcommittee Hearing.

The Buddha Plays Baseball

Posted on March 16, 2009August 13, 2019 by Liz

2007 was a time of ill winds, to be sure. Bizarre and endless wars sucked our vitality, job losses mounted, the treasury was being looted and millions of dollars were shipped to Iraq and… vanished. Days and months stretched while an unpopular wastrel fiddled through his second Presidential term. By October, Congress had passed the laughable Honest Leadership and Open Government Act, Pub.L. 110-81 and drought had turned the landscape brown from Tennessee to Delaware.

A definite malaise was leeching the colors from our national self-portrait.

But in a corner of that premonitory year, a mythic battle of underdogs was being waged and their fans were galloping toward an epic finale. Baseball’s American League Championship Series (MLB-ALCS) was swelling hearts with the sweetest agonies of love and loathing.

The Cleveland Indians and their obnoxious Chief Wahoo mascot had swept The Hounds of Hell (New York Yanks) out of contention and the Something-Something Angels had fallen to the cursed Bosox.

The Cleveland team had been my beloved enemy for fifty one years. I’m Charlie Brown and they’re Lucy. Each spring I foreswear my allegiance and by July, I’m mired in another season of crazed hope.

In 1948, five years before I was born, Cleveland captured the American League pennant by beating the Boston Red Sox in a one game playoff. Insult was added to Boston injury when Cleveland went on to defeat Boston’s Braves in the consequent World Series. In the fifty-nine years since, the Indians have played most of their seasons in the dank basement. (One exception was their World Series loss to a not-to-be-named Florida upstart team in the eleventh inning of the 7th game in 1997.)

And Boston…?

There’s a swath of baseball fanatics who’ve convinced [our]selves that old teams like Boston and Cleveland wear the mantle of working men and women. (There’s even a blog devoted to Blue Collar Baseball.) When Boston breached the trust by trading The Babe to the Dark Side, the stars were blotted from Boston’s firmament.

For the most part, the Red Sox rotted in their own stagnant brew until 1975 when Carlton Fisk, Yaz and rookies Jim Rice and Fred Lynn inspired their hapless fans to board the train to Armageddon. They came home bloodied by Cincinnati’s juggernaut, the Big Red Machine. Johnny Bench, Joe Morgan and Pete Rose raised their crimson helmets over strewn Boston bodies and were rewarded with gold, glitter and aftershave commercials.

In 2007 (unlike 1975) Good Guys were pitted against Good Guys, or so the ode goes. Baseball would give us a blue collar victory because, whether Boston or Cleveland won the ALCS, an underdog would go to the World Series. Any win was a win worth savoring when President and Congress were busily destroying most other working class dreams. (See: NY Yankee 2009 ticket prices as a sample of what it’ll cost to enjoy a new “Socialist-funded” sports arena.)

In the third game of the 2007 ALCS matchup, Cleveland and Boston dueled through the top of the 7th, locked at one game a piece. Cleveland’s pitcher, Jake Westbrook, peered over the web of his mitt at Jason Varitek, Boston’s formidable catcher. “The Captain” stood nearly upright in the batter’s box, the business end of his bat circling high over his shoulder. Westbrook’s performance in this tie-breaking game had exceeded all expectations but he was visibly worried about Varitek — an explosive hitter — a catcher savvy in the deceit of posture and the fingers’ grip on the ball.

I’d been at a Buddhist Monastery with Thich Nhat Hanh for four days — gliding around with 800 other retreatants — our passages greased by self-conscious and meditative half-smiles.

I needed baseball. I needed the here and now, mindfulness of baseball. The fleeting, combustible sufferings and joys of baseball. I needed cracking bats and bubble gum; the concentration of a pitcher’s eyes peering into the black hole of the catcher’s mitt; the timelessness of a ball traveling 60.5 feet from the mound to the plate; the flight of a ball before its intention is clear. Will it dip? Will it slide? Will it sink heartlessly beneath the bat’s hopeful arc? Will it hang for One. Precious. Nanosecond… wherein the pitcher dies and the batter is resurrected?

The pitcher knows his own intent. The rest of us speculate given the score, the inning, the number of runners on base, the hitter’s skills, the true nature of the on-deck-batter, the wind, the kinds and numbers of bugs; but none of us knows the outcome. We wait, suspended in time and place; locked in a single expectant moment. Even then, some Karmic debt or merit, unaccounted for by our schemes, might send the ball scalding into the dirt, past the straining limbs of the catcher.

When my “monastic” roommate returned to our hotel room, she saw me drop my sneakers in disgust. Westbrook was behind in the count.

“What are you doing?” Her tone was sharply incredulous. As retreatants, we were pledged to silence and meditation.

“Watching the ALCS,” I whispered, eyes fixed on the wind up.

“It’s not very…Buddhist,” she sniffed scornfully.

The 25” TV was housed in a pressed wood cabinet. I scooched as near the screen as I could and wrapped the cabinet doors around the back of my head.

She didn’t hear or didn’t understand the signal crack when Varitek smacked the ball to center. She didn’t see or didn’t understand that before the ball disappeared beyond the centerfield wall, time and gravity hung suspended with hopes and dreams and the eleven alternative universes of string theory.

In the limitless space between past and future — Now is held: complete and fleeting. Fluid and whole. Easily felt. Easily lost. Impossible to trap.

Remember Boston’s Carlton Fisk, bouncing crab-like down the first baseline in 1975, his torso and catcher’s arms waving the ball fair, pleading with the Fates for that one break.

Thirty two years later, as my Indians watched with slumped shoulders, another Boston catcher stoked the boiler and Boston’s train thundered down the track toward a World Series triumph.

“Patience,” The Buddha whispers, grinning. “Time convolutes all things.”

Commercials: Society’s Economic Mirror

Posted on March 12, 2009 by Liz

While knitting and cogitating on the day’s jury* events, the background drone of TV commercials finally penetrated.

“What,” I wondered, “do companies advertise when the stock market’s below 7,000 and new (monthly) unemployment claims regularly exceed half a million? What’s worth the hefty investment in TV advertising?”

During the Wednesday night 7:30-9:30 time slot (MSNBC, USA, CBS) a snapshot emerged. The largest advertising sector was Cable TV’s ads for its own products: new programs, old programs and upcoming specials guaranteed to improve your tax outlook and trim your monthly budget.

In terms of “products,” Madison Avenue supports our return to home-cooked goodness, so gather the family round the table and make some nostalgia as you tuck into old fashioned dehydrated macaroni & cheese and canned chunky soup brimful of luscious garden veggies. Or, for a treat (only your budget knows the limits) try a chef-cooked bucket from the local KFC.

If you haven’t been drinking enough Brita-filtered tap water, stock up on Activia yogurt or the colon cleanser of your choice. Also, if you’re noticing an uptick in cholesterol, edema and/or chest pain and the emergency room’s sick of seeing you, get a bottle of aspirin and join Jenny Craig or a similar national diet plan. (MONEY SAVER IDEA: purchase a single membership and apportion the food to your family of four. Huge budget benefits guaranteed!)

Our neo back-to-Foxfire-basic relies on simple things: Fixodent, toilet paper, TV.com (save electricity by planning your nightly viewing) GMC trucks (if your patriotism includes rebuilding America!) Dunkin Donut’s aromalicious beans for homebrew, Olay deep cleansing wash (for after a day of shoveling compost), Dr. Phil, anti-depressants & anti-constipation drugs of choice sold cheap at Walgreen’s or Wal-Mart (not your local pharmacy), quick-flush toilets, do-it-yourself legal forms and finally, two attorneys — one for torts and one for bankruptcy. If you’re a small business owner who’s still hanging an open sign, Verizon wants their Small Business Toolkit to be your new bff. Yee gads! Verizon’s got your number! What? Well of course they’ll have to turn the phones back on….

For those of us not living in a new back-to-basic tent city neighborhood, add Travelocity to the list of resources bolstering your pared down life.

Except for one final advertiser, that’s it in a nutshell: a yellow brick trip through Madison Avenue Oz and its representative, Cable TV.

I want to underscore my last advertiser for its uplifting message. Bank of America is America’s Bank of Opportunity. I swear on an oath, I smelled green grass and green tech constructing a green and bounteous future. An inspirational partner for each of us, no doubt. As a start, if you were one of the thousands of BOA partners they accidentally socked for improper fees, make sure you apply for your $78 refund from the the class action fund.

* * * *

Skeletal thoughts from the past week:

Jon Stewart’s rip of CNBC, Jim Santelli and Jim Cramer is the most brilliant commentary I’ve seen in years. (Cramer will be Stewart’s guest tonight. That is, if he doesn’t “bail out” like Santelli did.)

In the large picture, Bernie Madoff is a scapegoat. Let’s see what happens to those who made all the destructive schemes possible: the SEC overseers, ratings agencies, Congress and Presidents going back to at least Reagan. For sure, he should go to prison; but how does that benefit his (and the SEC’s) thousands of victims?

CNBC and its guests are taking a hand in shoring up our trust in the financial markets and their institutions. The new confidence game is beefy with cheery language and predictions. MSNBC’s Morning Joe crew groaned at Mark Haines’ proclivity for gloomy predictions. Two mornings ago, Haines eschewed doom and announced the Market had found its bottom. The Dow’s closed in positive territory since. In fairness, his gloomy outlook changed the same day Citi’s CEO announced that his company was doing just fine. Quick fix.

*Aside: Am currently serving on a Grand Jury which has an impact on my writing schedule. More on that near the end of April when the service is complete.

Commercials: Society’s Economic Mirror

Posted on March 12, 2009 by Liz

While knitting and cogitating on the day’s jury* events, the background drone of TV commercials finally penetrated.

For those of us not living in a new back-to-basic tent city neighborhood, add Travelocity to the list of resources bolstering your pared down life.

Except for one final advertiser, that’s it in a nutshell: a yellow brick trip through Madison Avenue Oz and its representative, Cable TV.

* * * *

Skeletal thoughts from the past week:

*Aside: Am currently serving on a Grand Jury which has an impact on my writing schedule. More on that near the end of April when the service is complete.