Even pop conservative outlets, like FNC's "Fox & Friends", have seized on the old bonus pool kerfuffle for AIG executives.
No doubt this morning's discussion was sparked by last night's heavily promoted 60 Minutes segment of former Salomon Brothers bond salesman turned bestselling nonfiction author Michael Lewis. (Michael Lewis is his first best-seller 20 years ago, Liar's Poker, mentions how the bulk of his compensation during his short career, half or more, up to $200K, was in bonuses.) Lewis is promoting his new book, The Big Short. (The "short" concept is a bet that a security's price is above its fair value; a short sale reverses the more usual buy low-sell high strategy.) Thus, if you believed that the market had gotten ahead of itself in the pricing of mortgage-backed securities, particularly those involving subprime mortgage notes, you would bet against the crowd by implementing a short strategy. A proxy for shorting overpriced mortgage securities was the credit default swap--basically insurance to cover MBS losses. AIG wrote a too many of these swaps, not adequately hedging against its catastrophic risks. Goldman Sachs, with a large MBS holding, hedged their position by purchasing AIG (and/or other) swaps. When the mortgage market started deteriorating, Goldman Sachs (and other holders of AIG swaps) started exercising their swaps, essentially wiping out AIG equity, eventually resulting in the taxpayer bailout. Lewis reportedly suffers no fools, among other things suggesting that credit rating analysts are underachieving investment bank wannabe's and the financial sector top executives are often clueless about their underlying house of cards.
AIG problems were already starting to surface months before federal intervention. Companies under similar circumstances want to stave off flight by its best and brightest professionals, offering them retention bonuses which are awarded only if the person stays on. (There are different variations of retention incentives, such as vesting periods on employer contributions to 401K's, stock options, etc. One former employer split my bonus into 6 subsequent consecutive monthly payouts.)
We have to recall that the issue is total compensation. Compensation includes salary, benefits (e.g., health care), and incentives/bonuses. Now, as we discussed as the case of Michael Lewis, the bulk of earnings in this particular AIG division in question was based on incentives, e.g., if the company and/or division met profitability targets (among other factors). It became clear that AIG was in deep financial trouble; they had written off $643B in the last quarter of 2007. What do you do to maintain talented people given the fact that the normal incentive "bonuses" were unlikely to return anytime soon? AIG decided in essence to guarantee their 2007 compensation (except top management which took a 25% haircut on compensation) over the next two years if the employees agreed to stay on and were not fired for cause.
In essence, these were "bonuses" in name only; in effect, the affected professionals and managers were on guaranteed salaries. And AIG in early 2008 made the determination that it was worth retaining these personnel for business reasons, e.g., mitigating losses. Let me just say, when we have nearly $180B in taxpayer money at stake, I don't want the federal government to be penny wise and pound foolish.
These two-year contracts are winding down, and no doubt Obama's pay czar will oversee new contracts. I thoroughly dislike the Politics of Envy, especially when the bashing comes from three overrated, overpaid, uninformed morning show hosts.
Obama Bashing Health Insurance Companies--Again
One of the things I truly despise is when Obama and others on the left (and the same goes with fellow conservatives) exploit desperate ill people or circumstances to sell a white elephant like the Democratic Party Stimulus Bill or the Democratic Party Health Care Bill. Remember JV Martin Junior High School in Dillon, SC, with infrastructure problems, which Obama cited in his first Congressional address? The latest poster child is Natoma Canfield, an Ohio woman, a cancer survivor a decade ago but now has leukemia but dropped her health insurance after a hefty increase in premiums.
"Abusive" health insurance companies? There are financial reasons why insurance companies filter for preexisting conditions and have lifetime caps on expenses--it has to do with containing risk. (Heaven knows after having to clean up after the AIG and other financial institutions during the economic tsunami, you would have figured Obama would be the first to ensure that health insurers have sufficient reserves and price their services accordingly, so the government wouldn't have to bail out health insurers in the future... But you would be wrong.) It's a business, not a charity; it has to control for costs. If Ms. Canfield as a policyholder loses money from day one, it is not really insurance--it's socializing personal expenses. Her costs, net of premiums, must be passed along all other policyholders. And then if the insurance company raises rates, it gets scapegoated by Obama and other demagogues. Similar considerations are in play for lifetime benefit caps.
There are ways to work around this: for example, if an insurer can obtain reinsurance (or transfer the risk, say, to a state high risk pool or the federal government), it could waive lifetime limits; in essence reinsurance premium costs would then be passed along to policyholders. There are a number of ways that the government could help, e.g., be the reinsurer of last resort, reimburse the health insurer at cost-plus, transfer the policyholders to subsidized state or national high risk pools or, say, create a high risk plan under Medicaid, with premiums pegged to some national benchmark.
Obama is intellectually dishonest. It happens in a variety of contexts. For instance, the anecdotal rate increases that the White House has been promoting (up to 40%) do not involve group policies (say, for instance, a large company) but much smaller individual coverage plans (maybe a tenth of the size of group plans). These plans, as I've mentioned before, are largely self-selective, with younger, healthier risks often opting out of coverage in a tough economy, leaving the bulk of costs to be spread among a smaller pool of policyholders.
Then just like Obama has been constantly bank-bashing, although the problem children are really AIG, the GSE's and the auto companies, Obama has been bashing health insurers--which operate on a very small margin--while cutting deals with sectors with much higher margins, e.g., pharmaceuticals and medical device makers. It is puzzling just why Obama is attacking health insurers--they have a higher approval rating than he does. Of the 85% of Americans under a health care plan, roughly 90% are satisfied with their insurer.
Political Cartoon
Glenn McCoy shows us maybe Speaker Pelosi is head over heels with a 2700-page, corrupt-deal Senate bill overwhelmingly opposed by the American people, but will her House colleagues really sacrifice their political careers putting a flawed, opaque, ultra-expensive bill into law? Even liberal TV journalist Tom Brokaw isn't quite sure what the practical implications (unintended consequences) of this massive bill are on 17% of the nation's economy...
Quote of the Day
The way of the world is to praise dead saints and persecute living ones.
Nathaniel Howe
Musical Interlude: Ship Songs
Gordon Lightfoot, "The Wreck of the Edmund Fitzgerald"
Barry Manilow, "Ships"
Beach Boys, "Sloop John B"
Billy Joel, "The Downeaster Alexa"
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