Saturday, May 2, 2009

Obama the Ordinary

I was hoping for better, I really was. I thought it would really be great to have a President whose native tongue was English. This guy was really a thinker. And thinking’s good, right?

But then some guys at AIG Financial Products got retention payments. Retention payments are no big deal. They’re standard fare at imploding companies, a way to keep the people who can manage either a turnaround or an orderly disassembly when their careers would be better served elsewhere. These were not the guys who “caused the mess.” They were employed by the same division of the same company as the guys that caused the mess. But they didn’t cause the mess, and, under the Thirteenth Amendment, they had a right to volunteer their servitude to someone else should the opportunity arise. So AIG FP promised them extra money not to do that, because in the opinion of management that was the best thing to do for the shareholders, including, of course, Uncle Sam.

Many of the guys who were promised the retention payments stayed at the company in accordance with their promises, and AIG paid them their retention payments in accordance with its promises. And then all Hell broke loose.

First, the morons of in the mainstream media decided that by calling the retention payments “bonuses” and associating the recipients with the “guys who caused the mess,” they could sell tons of newspapers and ad time. They roared loudest about recipients who “weren’t even with the company any more,” referring, as it turned out, to those who had been laid off after fulfilling their retention commitments. It didn’t much matter that the payments weren’t bonuses or that the guys didn’t cause the mess. Facts don’t matter when there’s blood in the water.

After the press whipped up the torch and pitchfork crowd, the populist idiots we send to Congress these days piled on. The only hope for sanity was the smart new occupant of 1600 Pennsylvania Avenue. He’d pour some oil on the troubled waters, right? Well, not exactly:

"This is a corporation that finds itself in financial distress due to recklessness and greed…

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"

This outburst is especially disappointing in light of Obama’s snippy reply to the reporter who asked the President why it took him so long to get worked up about these payments when the press had been whining about them for days. “I like to know what I talk about before I speak,” said the opinion leader of the free world. Of course, we can’t always get what we want, and in this case Obama was apparently unable to find out what he was talking about before he found it necessary to speak about it. But his heart was surely in the right place. I guess. (It does seem odd that one would ask how an “outrage” could be justified. If something can be justified, it’s not an outrage – rhetorically, the trial seems to follow the hanging. But that’s how the media played it, too, so why not the President?)

Sadly, this bit of demagoguery was not Obama’s last. It seems that Chrysler’s senior creditors – you know, the ones who bargained for less risk in exchange for smaller returns for their investors – were not happy with the deal that the White House had put together to avert a messy bankruptcy. When these creditors refused to throw the pensioners and college endowments whose funds they manage under the bus, our very smart President reminded them of their patriotic duty:

"While many stakeholders made sacrifices and worked constructively, I have to tell you that some did not I don't stand with them. I stand with Chrysler's employees, families, and communities ... I don't stand with those who held out while everyone else was making sacrifices."

Given that I made no sacrifice, and Mr. Obama made no sacrifice, I’m not clear on who “everyone else” might be. Unions are renegotiating in light of their reduced bargaining power, and investors are suffering losses, but no one is making a sacrifice. The genius of our financial system is precisely that capital can be marshaled for an enterprise by allocating the risk among those with varying tolerance for it. The more risk, the more reward. But this concept, like the idea that you have to pay people extra to continue working for a national pariah, seems to have eluded our very smart President.

As did the notion that there’s nothing especially noble about “sacrificing” someone else’s money. Those who held out were fiduciaries for people who signed up for a kind of financing that minimizes risk. It’s not a fiduciary’s place to “sacrifice” those people’s interests. In some circles, that sort of nobility is called “breach of duty,” and earns one a no-expenses-paid trip to the courthouse. The President used to be a lawyer. He should know better.

There’s been a lot of talk on the right about Obama being a socialist. I doubt that he thinks of himself as one, but that’s really not enough to keep him from being one. Margaret Thacher observed that socialists make a mess of public finances because “[t]hey always run out of other people’s money.” That seems especially likely to happen when you don’t even know which money is other people’s money. If Obama does run out of other people’s money taking over companies and banks and engaging in massive public works, it may be fair to say in retrospect that he was a socialist. But it won’t matter what he was, only what he did. And so far, for a man of such promise and historic importance, what he’s doing strikes me as extraordinarily ordinary.


  1. I don't think it will come as a surprise to you, that I have a different take on much of what you said.

    I generally agree with your take on the AIG issue. However, on the Chrysler matter, we part. You give much too much credit to those poor fiduciaries "who bargained for less risk in exchange for smaller returns for their investors" The issue to me is whether or not it is better for the economic recovery of the country, for Chrysler to reorganize under the Bankruptcy laws, or outside of Bankruptcy. I think that it would have been better to do it outside of Bankruptcy. These investment banking fiducuaries, (many of whom are the recipients of federal bailout money which some feel could be characterized as a form of retention bonuses)gambled that they could squeeze more money out of the Government. I think they made a bad choice, and hope they will receive less in bankruptcy than was on the table in the day before filing

    As to your labeling Obama a Socialist-(in the words of Jerry Seinfeld- not that there is anything wrong with that), he is no more a Socialist than you are a Libertarian.

  2. Irwin -

    I don't see how "the issue" for a fiduciary can be whether it's better for someone other than the fiduciary's cestuis that Chrysler avoid bankruptcy. Are you really saying that a private fiduciary's first obligation is to "the economy"? (I'm wondering how any fiduciaries who caved - if there were any - are justifying that decision to their clients. "Well, we know it's your money, but we thought you should help out the economy.")

    I did not mean to express sympathy for the "poor" fiduciaries. I said simply that their legal and moral obligation is to their beneficiaries. Characterizing that legal principle as a plea for pity strikes me as a tad disingenuous. They are only "poor" in the sense that BHO chose to scapegoat them unfairly. We Jews know how that works, n'est-ce pas?

    I'm not clear on how the TARP figures into this. Did the hold-outs' underlying investors receive TARP money? It certainly shouldn't matter to me as a client of a TARP recipient's trust department that my bank got TARP money. Is that really supposed to alter how the trust department operates?

    But even for a TARP bank trading for its own account, wouldn't it be a misuse of government funds for the bank to turn around and give that money to the UAW VEBA? Is that going to increase their capital or give them funds to lend? The banks aren't allowed to repay the TARP money, but they can be compelled to give it to someone else? Really?

    If, as you say, it would have been best for the reorganization to occur outside of bankruptcy - the messy business of terminating franchisees suggests that bankruptcy was a necessary step anyway - then the solution would have been for the secured and senior creditors to be accorded the preferences they would have enjoyed in a bankruptcy. Instead, Obama chose to steal from the rich and give to the VEBA. You can supply the name for that, but if you come up with "socialism," I believe there would be something wrong with that.

    Thanks for the comment. I hope you will push harder on the legal basis for what you think the hold-outs should do, because I just cannot see how they had a choice.


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