White House “Fires” GM CEO, That’s OK By Me

The news media is all abuzz with commentary about the White House asking the CEO of General Motors to resign if the company wanted more bailout money. Many people seem appalled that President Obama – and the US Government – would dare to mess with a business in such a manner. While I understand why people may initially be concerned at what they see as government interference, I think that many of these people may be a little naïve on what goes on in the real business world.

First, let’s go back a bit. I wrote last November ("The Frequent Critic – Should the Auto Companies Be Saved?”) that I was leaning towards letting one of the car companies go bankrupt. Of course, the job loss, plus the effects that this would have on other business who rely on GM to sustain them would have a huge negative effect on the economy. I still think this would have been the best way to go, and it would have forced a reorganization of one of these car companies. If that company was GM, then more than likely the CEO would be on the outs anyway.

Headlines like the one written on the CNN web site today - ”Obama To Detroit: Restructure Or Else” - makes it sound like the government is just throwing their weight around. I do not see it that way at all. I see it as the White House just asking for what any person would be asking if they were asked to invest a huge amount of capital in any business. It’s no different than someone who buys enough stock in a company in order to get a say in how it’s run, or what happens when one company acquires another. Executives sometimes find they are quickly out the door once big money comes in and makes an investment. I worked for a company that was purchased by various companies and/or investment groups over a period of 25 years, and almost every time big money came in, a big executive or two got walked out, in many cases because that executive just wasn’t doing the job or wasn’t helping the company to grow. Sometimes there didn’t even seem to be a good reason.

I think that it’s about time that the US Government demands some action for all the money it is putting into these companies. My only regret is that they didn’t do the same thing with the investment banks when they bailed them out. I don’t blame Obama for that issue because the bank bailouts were already well in motion by the time he took office.

I am sure that the US Government does not want GM to go bankrupt. But I also don’t think the US Government wants to continue to throw good money after bad. The car companies need to change, and they need to change fast. The demands made by the White House means that things are not business as usual. If the car companies want money, and they want to be saved, it can’t be business as usual any more.


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AIG Outrage A Smokescreen?

It’s hard to miss the outrage that the American people have with the financial institution AIG. Once it became public that bailout money was going to be used to pay hefty bonuses to some of the same people that got AIG in their financial mess, you could almost hear the yelling coming from every household in America. And the shouting is getting pretty loud from Washington D.C. But some of the same politicians and government agencies who are crying foul with AIG also allowed the situation to happen by not properly designing and controlling the way bailout money was used, or monitoring our financial institutions before the crisis. In my opinion, these people allowed the whole situation to happen. I primarily blame the SEC, The Fed, and the Treasury, but our elected officials also had blinders on as well. Now, are these same people trying to deflect the American people away from their own incompetence by focusing on the issue with the bonuses? Here is an excellent editorial on the matter from the Wall Street Journal that will make you think.


The Real AIG Outrage

MARCH 17, 2009

President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.

Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.

The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.

Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.

But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it "a false statement" to say that his agency couldn't regulate the London office.

And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit.

That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.

Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.

Current AIG CEO Ed Liddy was picked by the government in 2008 and didn't create the mess, and he shouldn't be blamed for honoring the firm's lawful bonus contracts. However, it is on Mr. Liddy's watch that AIG has lately been conducting a campaign to stoke fears of "systemic risk." To mute Congressional objections to taxpayer cash infusions, AIG's lobbying materials suggest that taxpayers need to continue subsidizing the insurance giant to avoid economic ruin.

Among the more dubious claims is that AIG policyholders won't be able to purchase the coverage they need. The sweeteners AIG has been offering to retain customers tell a different story. Moreover, getting back to those infamous bonuses, AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both.


The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.





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Who Regulates the Regulators?

With hearings going on right now by the House Government Oversight and Reform Committee to review the recent financial crisis, something is becoming very clear to me.

The regulators haven’t been regulating. And it seems like none of them – Alan Greenspan and his successors, the banks and financial institutions, etc. – didn’t see the financial collapse coming. Some financial people and regulators made comments before the implosion that things were going to go bad, but they did nothing to alert the right people or to take corrective action. A perfect example of the attitude could be found at Standard & Poors, as evidenced by an email from 2006 (yes, 2006) that stated “Let’s hope we are all wealthy and retired by the time this house of cards falters.” So, even in 2006, some knew that the country’s financial framework was shaky at best.

It seems that the regulators have been derelict in their own duties. Was it their own greed? Was it that they were just terrified what would happen if they blew the whistle? Was it incompetence? Laziness? Indifference? Fear?

The more the hearings continue, the more I realize that there isn’t anyone minding the store. Sure, we have regulators, but it appears that their role was nothing more than to be window dressing.

The first thing that comes to mind is that we may need some “grand, all-knowing, all seeing overseer” who is in charge of all these financial processes and will take care to make sure they all are doing their jobs. But wait, what happens if the “grand, all-knowing, all seeing overseer” doesn’t do their job? And why must we add more government and more bureaucracy just because some people aren’t doing the jobs they are supposed to be doing?

We need to first look at those government agencies that are in charge right now and assess the level of competence of the people at the top, and clean house and bring in new blood, starting with the Fed and the Treasury. While the SEC is not the apparent cause of the stock market’s recent collapse – the collapse being an after-effect of the financial crisis – it does seem that some trading methods and practices need to be reviewed and possibly eliminated or re-tooled. Tight controls need to be put in place for hedge funds, which operate as if this is the Wild West. And companies like Standard & Poors or Moody’s that evaluate and rate stocks need to be audited themselves and if evidence that they ignored signs of trouble in the housing market and/or with financial companies and they did not reflect it in their ratings, they should be charged with fraud and face stiff fines. And, since it appears that these places profited from the housing market as long as they continued to rate companies favorably I think there was definitely too many conflicts of interest that go unchecked in the financial markets.

I admit, I don’t know the answer to the problem. I suppose that a “grand, all-knowing, all seeing overseer” would help, but I would prefer that these agencies just do the job they are paid to do. Is that too much to ask? But where does it end? The buck must stop someplace. Whatever the government decides to do, the American people should ask for complete transparency in everything these people are doing, and even the smallest tidbit of information on what these people do should be made public. I am sure there are millions and millions of Americans who would be more than happy to help keep an eye on the country’s financial health and would be quick to blow the whistle if anything improper is discovered. Count me in!




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