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So it’s been a while since I last blogged because my time is very tight lately…I’m working, looking for a new position in the company, taking a class to get my Six Sigma green belt certification as well as a beekeeping class given by the Montgomery County Beekeeper’s Association here in Montgomery County. Even so I’m trying to keep up with what’s been going on in the state of economic affairs and last night’s New York Times story about A.I.G. is a doozie.

A.I.G., once the world’s largest insurance company and who has to date taken $170 billion dollars from the U.S. government (i.e. taxpayers) in bailout money is now planning to pay $165 million dollars in bonuses to executives in the same business unit that last year brought the company to the brink of financial collapse (Andrews, Edmund L. and Peter Baker, “A.I.G. Planning Huge Bonuses After $170 Billion Bailout“, The New York Times, March 14, 2009). The reasoning, according to the government appointed chairman Edward Liddy is that

We [A.I.G.] cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury

(Andrews, Edmund L. and Peter Baker, “A.I.G. Planning Huge Bonuses After $170 Billion Bailout“, The New York Times, March 14, 2009)

Retention bonuses? Where does Mr. Liddy really think these guys (and gals) are going to go in today’s Wall Street environment? Mr. Liddy also points out that these bonuses are contractually obligated in that they were agreed upon in the early part of 2008 — before A.I.G. fell apart and that both A.I.G. lawyers as well as Treasury Department lawyers have determined that there is no way to abrogate this contract.

This is truly an insult to the American taxpayers who are currently keeping A.I.G. afloat. In my mind these executives who are offered the bonus should be told that their services will no longer be needed if they take the bonus. The American taxpayer should not have to be continually insulted by Wall Street this way. We’re the ones who are bailing them out…it seems that A.I.G. executives still haven’t figured this out and seem to be playing the game as though they deserve this money. When will this administration and Congress get it. If they don’t find a way put a stop to this nonsense and these institutions that have taken taxpayer money in order to survive continue to behave this way then it will be the voters of this country who will make their voice known in 2010. And if that means that every single Congressman (and woman) and Senator should be voted out of office then that’s just what it might take.

I’ve thought about it quite a bit and I’m about to do an about face…but I think it’s time for Congress and the Obama administration to cut GM and Chrysler off from the government dole. It’s not an easy decision as I know that it will affect thousands of people but I think it’s time for the government to say “enough.” Both GM and Chrysler received about $17 billion back in December and now come back to the government and are asking for another $20 billion. Where does it stop? When will they do what is really needed of them — massive restructuring, renegotiation of union contracts, eliminating top management — when?

If the Obama administration gives them this new round of money what does the American taxpayer get in return? While I haven’t finished looking over GM’s restructuring plan (also available here) it’s already being criticized by GM’s bond holders. According to the Wall Street Journal

A group representing General Motors Corp. bondholders fears that the auto maker’s latest restructuring plan fails to address all the challenges facing the company and doesn’t cut costs enough in light of the deteriorating economy, a person familiar with the bond negotiations said Wednesday.

(“Bondholders Say GM’s Plan Fails to Tackle Issues”, The Wall Street Journal, February 19, 2009)

If General Motors and Chrysler can’t come up with plans that will bring them back to profitability within a reasonable time frame then they will simply become another welfare recipient like the banks currently are. As John Stoll of The Wall Street Journal noted, Senator Richard Shelby of Alabama argued, after receiving the plans from GM and Chrysler, “The focus of the restructuring process should be to make these companies self-sufficient, not to increase their dependence on taxpayer money.” (Stoll, John, D. “Sen. Shelby Says GM, Chrysler Viability Plans ‘Fall Far Short’”, The Wall Street Journal, February 19, 2009). The best course for these companies may well be bankruptcy protection under Chapter 11…and this may well apply to some of the banks as well.

It’s time that the government do what it needs to do to truly head off this continuing downward spiral. If that means nationalizing the banks in order to sort out the healthy from the weak — mirroring the Swedish model of the past — then that’s what needs to be done. If that means cutting GM and Chrysler off and letting them sort their problems themselves then that’s what needs to be done. We cannot continue to subsidize these failing entities, propping them up. If we do so then we will not have the money available to invest in other startups to take their place or in other industries like green energy.

Personally I like Tom Friedman‘s approach in his opinion piece this morning “Start Up the Risk-Takers”.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.

(Friedman, Tom, “Start Up the Risk-Takers”, The New York Times, February 21, 2009)

This is exactly the approach we need. We need to stop keeping dead corporations on a lifeline simply because they claim that their demise will “would cost more than keeping them on life support” (Friedman, Tom, “Start Up the Risk-Takers”, The New York Times, February 21, 2009). The same approach can be applied to the banks…sift through the wreckage, find the ones that are viable, and cut the rest of them loose (either by forcing them to merge with the healthier ones or by simply dissolving them shutting them down). As it is we are headed down our own “lost decade” as Japan did in the ’90s.

As for stemming the tide of foreclosures…it galls me to no end that I am being asked to pay to help people keep homes that they had no business buying in the first place. To that end I would recommend that the Obama administration look at the cases on an individual basis. As with the banks, those homeowners who have a chance to actually survive and pay their mortgages, the government should offer the mortgage holder an incentive to restructure the mortgage so that the homeowner can succeed. For those who haven’t got a chance…they’ll have to lose the house. As cruel as it sounds, the fact is we cannot reward bad behavior by people who had no business buying a house that they had no chance of honestly affording.

Rick Santelli of CNBC said it aptly in his rant on Thursday morning — “The government is promoting bad behavior.” Yes…yes it is. Rick is absolutely correct in his derision of the idea of giving money to people who made bad decisions and bought houses for far in excess of what they could afford. It’s a good rant and I think it’s worthwhile to view it in full

It’s a very populist message and it certainly resonates as we continue to watch our economy crumble, our net worth drop, and face the spectre of unemployment or even foreclosure ourselves. Especially when those facing these problems did nothing wrong, played by the rules, and made reasonable and pragmatic decisions.

However, if we look at the counterpoint as presented by the New York Times columnist David Brooks in his opinion piece this morning titled “Money for Idiots” the government must do something. If we let the foreclosure rate continue at it’s current pace (or go higher) and do nothing than it won’t just be those who made bad decisions and bought houses that were more than they could afford who will suffer. It will be all homeowners — foreclosures drop property values in the surrounding area dramatically as banks look to offload them as quickly as possible. In addition abandoned houses can become havens for criminals or drug users. It affects us all.

In the same way that giving money to the banks when they are the ones who played a large role in creating this mess may seem to be a “bad idea” — if the banks go down the economic hit would be much more severe. And what about the “Big Three”? Detroit has made blunder after blunder and missed many opportunities to innovate and to take the lead in the global competitive marketplace. Why should they get money? Honestly…that’s a harder one to swallow as the demise of Detroit would probably not have as devastating an impact on the economy as we may think. But the economic repercussions (at least on a regional level) would be dramatic and have farther reaching effects given how intertwined the world’s economies are.

No, we must do something to alleviate this and we need to do it in a way that will save the “Losers” and the Idiots who brought us to the edge of this abyss. We are like an economic train…if the last few cars of the train slide off the edge of the cliff, it drags the rest of the train with it. If enough cars fall down then the entire train is lost. There’s a lot of sympathy for the populist sentiment that we should just let these people lose their homes. But what will be the broader and longer term implication if that happens? It’s the same feeling with regards to the bankers and the auto industry executives. The feeling of “You have no one to blame but yourselves” is appropriate and well-deserved but by letting them slide down the hill they will drag the rest of us with them. President Obama is doing the right thing…but he must make sure that the rest of us doing get the short end of the stick or that the “Loser” and Idiots come out ahead. They need to lose as well. And it wouldn’t hurt to “tar and feather America’s 100 leading bankers” as Nicholas Kristof suggests (Kristof, Nicholas, “Escaping the Bust Bowl”, The New York Times, February 11, 2009) but I’d throw in the auto industry executives just for good measure.

March 2020

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