Monday, March 30, 2009

Ward's Word of the Day: Oligarchy

In America, we learn early in school about the great work accomplished by our Founding Fathers - the work of carving out a democracy in America. In the 18th century, we broke away from the British monarchy and forged a new country in an unspoiled, nearly empty continent. A few forward thinking and brave men created a vibrant democracy, where liberty and the pursuit of happiness were guaranteed by the one (white) man/one vote principle (which evolved over the years to add minorities and women to the roster of the enfranchised.)

Now, in the 21st century, it is being suggested that vibrant the democracy we read about in our schoolbooks has been overturned by an oligarchy.

One of the definitions the Merriam Webster dictionary offers for oligarchy is "a government in which a small group exercises control for selfish or corrupt reasons."

The May issue of The Atlantic carries a story called "The Coup" by Simon Johnson that defines our government in such terms. Simon, a former chief economist of the International Monetary Fund (IMF), feels that "the finance industry has effectively captured our government – a state of affairs that typically describes emerging markets, and is at the center of many emerging market crises."

In the economic work he's engaged in over the years, Johnson has observed that, "...inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt."

Which sounds depressingly familiar to the situation that a certain first world, global powerhouse finds itself in today - teetering on top of a towering mountain of debt hand-built by financial industry experts. The act of shaping the mountain of debt was highly profitable for a time; but as always with debt, the collector has come to call and there is no money for him to collect.

Enter the government.

Which, according to Johnson, seems to be following the traditional practices of emerging-market governments that find the principle businesses in their country beset with debt:

"Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government."

In 21st century America, it seems as though finance has replaced journalism as "the fourth estate." Their needs became the nation's needs. The policies that favored the financial community became the nation's policies. A Reagan-era focus on deregulation created a well-fed financial community. They could trade, loan, innovate at will.

There was no one guarding the gate. Both the Republican and Democratic leaders bowed deeply to the new leaders of the free world.

And with no one guarding the gate, our financial leadership went mad for money. Johnson notes:

"From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man)."

There is a well worn pathway that runs from Wall Street to Washington. Hank Paulson was a Goldman Sachs man. Robert Rubin went from Goldman Sachs to Washington to Citigroup. They are not alone in moving from Wall Street to Washington with ease.

Is it any wonder that the financial policies of Washington seem to favor the people who screwed up? They're all brothers, fellow Ivy Leaguers, followers of the creed that "you eat what you kill."

And when they killed the economy, the government made sure they remained very well-fed.

Friday, March 27, 2009

The First Thing We Do....

My father was a lawyer; for a great many years I assumed I would become a lawyer; for whatever reason, when it came time to apply to law school, I had decided against being a lawyer.

Thus I became a writer instead of a lawyer. But even writers need lawyers sometimes. And when I had some questions about some potential copyright/trademark issues, I asked - you guessed it - a lawyer.

The information supplied by the lawyer, in response to my questions, made me decide against pursuing the trademark/copyright issues at this particular point in time. So imagine my surprise when I was billed nearly $300 by the lawyer for the act of answering my questions about a potential trademark job.

I had no idea that asking the questions needed to figure out if I needed a lawyer could cost so much.

Today, I find humor in Shakespeare. ;-)

Wednesday, March 25, 2009

Welcome to the Club, Jake!

Jake DeSantis, an EVP at AIG, sent an email to AIG's CEO that somehow got routed to the NY Times op-ed page.

And thus we all learned today that Jake has quit his post over at AIG, angry that his boss, CEO Ed Liddy, did not speak up loudly enough before Congress for Jake and his bonus-deserving colleagues.

I appreciate his perspective. He cogently sums up the rage so many are feeling at the way AIG did business. He worked hard for his money and can't understand where it all went.

But he seems unable to understand that most Americans feel the same way - the retirees, the college students, the people whose hard-earned money has - POOF - vanished into the black hole on Wall Street.

Unlike the firms propped up by Washington, the people on "Main Street" have no one handing them $750,000 in federally funded bonuses. So I'll bet that his very public resignation letter will not spark a ton of sympathy outside of Wall Street.

And the kicker - he doesn't even need the money. He's promising "to donate [his] entire post-tax retention payment to those suffering from the global economic downturn."

Here's the letter, in its entirety:
DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Monday, March 23, 2009

Rarefied Air – Clouded Judgement....

"Straddling the top of the world, one foot in China and the other in Nepal, I cleared the ice from my oxygen mask, hunched a shoulder against the wind, and stared absently down at the vastness of Tibet. I understood on some dim, detached level that the sweep of earth beneath my feet was a spectacular sight. I'd been fantasizing about this moment, and the release of emotion that would accompany it, for many months. But now that I was finally here, actually standing on the summit of Mount Everest, I just couldn't summon the energy to care."

Thus begins Jonathon Krakauer's best seller, Into Thin Air. The thrill of achieving a lifetime goal - to stand on the rooftop of the world – is dramatically diminished by the overwhelming fatigue and lack of oxygen one finds at such a height.

Sometimes I think that Washington, D.C. is like Everest. People arrive there and soon find themselves disoriented, out of touch, talking the nonsense that comes from the oxygen deprivation found in the rarefied atmosphere of the capital.

I'm firmly bound to earth, living as I do in the Midwest. And as someone who lived in Chicago for 20 years, when I see a Goldman Sachs guy like Hank Paulson implement a plan to spread the taxpayers' wealth out in ways that enrich the Goldman Sachs guys and other Wall Street peers, I smell a smell I don't much like. Something rotten. Like a rat.

When Tim Geithner talks about eliminating toxic assets from the economy, I simply have no idea what he's talking about. What I hear him say is that the banks - who loaded up their balance sheets with poison, apparently, when it was profitable to do so – now have the opportunity to unload the poison onto the taxpayers and private investors who knowingly would purchase toxic assets.

With this latest plan, apparently the feds are creating a market for toxicity that doesn't now exist. And me - in my Midwestern frame of mind - wonder who are the private sector purchasers brave enough to wade into this pool of sludge? How will investors profit on something that has crippled the banks?

What return can we get from investing in poison?

And when really smart people in government say they don't believe people outside of Washington are talking about the AIG bonuses these days, I wonder what the hell are they breathing, drinking, eating, swallowing in that foggy bottom town by the Potomoc.

People ARE talking about AIG bonuses, just as they talked about the Merrill Lynch bonuses. Pretty much everyone I talk to outside of the Beltway and Wall Street all thought a "bonus" was a reward for excellence. And they HEARD elected officials say that they'd worked hard to ensure this money didn't go to enrich the executives who screwed up.

But now they SEE millions and billions of dollars paid out as bonuses to people whose performance took the economy to the brink. They see enrichment of the few at a great cost to many. Yes, the dollar amount of the bonuses is not even a drop in the trillion dollar bailout bucket we're using to fix the problem.

We all know that.

But it's the principle of it all that has incited the "populist outrage."

When AIG contracts that uphold the payment of astronomical bonuses to a few terrible business executives are determined to be impossible to break, but the union contracts used to protect auto workers must be renegotiated before the disbursement of TARP funds, all of us sitting around our kitchen tables brooding about our future realize that Obama was wrong back in 2004, when he reminded us that there aren't blue states or red states - that we all lived in the one beautifully unified United States of America.

The simple truth, however, is that we don't live in THE United States of America. It's not ONE COUNTRY, indivisible, with liberty and justice for all. The United States of America today is a house divided. There are two states in our country today - not 50 - and they're not divided by the bright, primary colors of red and blue.

The two states of America are the privileged power elite - and the rest of us. The rarified air in Washington enables our leaders to prattle on and pretend that they want to protect the rest of us. But their actions seem contrary to their words. They seem impaired by the lack of oxygen one finds on the top of the world.

Friday, March 20, 2009

Holes in TARP - Getting Bigger....

Execs at "too-big-too-fail" AIG got fat bonuses this week, despite the fact that their company has in reality failed and would be out of business were it not for a massive infusion of federal (tax) money.

And people on Wall Street and in Washington seem caught off-guard by the populist outrage spawned by these bonuses. The legal obligation claimed by Tim Geithner to use tax dollars to pay large sums of money to failed execs has apparently enraged large numbers of people who live outside of NY and the Beltway. They simply do not understand why, at a time when the economy is in the toilet and millions of people have lost their jobs, the people who played a role in the collapse of the economy are being rewarded with millions of dollars in bonuses.

And it is puzzling. We keep hearing that bonuses for performance are an integral part of how Wall Street does business. These struggling firms need to pay large sums of money to "the best and brightest" in order to retain them and they can't afford to lose these brilliant people who are so desperately needed to help unravel the mess they made.

The theory behind the bonuses, apparently, is that the bright minds at these firms will go elsewhere unless bonuses are paid, guaranteeing an even greater competitive disadvantage for these already crippled firms, threatening their frail existence even further.

Thus the holes in TARP. Hank Paulson, Treasury Secretary under Bush, devised a bailout that understood these issues. Crippled banks are at a competitive disadvantage. No question about it! So apparently, he shoved billions of dollars into the coffers of healthy banks - or so claim the leaders of some banks who've received billions in bailout funds (Northern Trust, as an example) - so that the TARP recipients wouldn't look completely sick in comparison.

And apparently, he understood how vitally important bonuses are to employees of these firms - because he did nothing to ensure TARP money didn't go to fund bonuses of execs at bankrupt firms.

(Making me wonder just how those legally obligated bonuses would have been paid if the feds hadn't handed over all those tax dollars to prop up these firms.)

And what we've come to understand, those of us who don't inhabit Wall Street, is that bonuses have nothing to do with performance. Performance has nothing to do with success. Good business practices are typically rewarded with profit.

But on Wall Street, bad business practices are propped up and rewarded with a big fat federally funded bailout. Under Paulson's TARP, devised to rescue the crippled financial industry, the feds must prop up mortally wounded banks - no matter what the cost, no matter what the logic, no matter what.

The people who don't get the concept behind TARP are the ones whose jobs are threatened by this economy - the people who don't even make $100,000 a year, so can't understand the pinch that comes from living on just half a mil income. Who don't remotely understand what one family can do with ten million bucks. Who don't see TARP as being anything but a blanket of bucks covering the already wealthy. They simply don't understand the argument that the economy would collapse if these firms weren't saved.

Because in their minds, facing layoffs and foreclosure and bankruptcy - without the comfort of a fluffy federally funded TARP at their disposal - the economy is already crippled - and the ones who broke its back are the ones now profiting most from the rescue.

All of which leaves me with a key question - how much can we afford to spend to prop up dead companies? And what do we get out of this bargain in return?

Tuesday, March 17, 2009

Lazarus Speaks! About AIG no less!

He was dead. He was worse than dead. He was ruined. Ruined by greed, by ego, by lust.

I'm referring to former Governor Eliot Spitzer, who resigned in disgrace after it was revealed he invested thousands of dollars on an industry - prostitution - that he had sought to shut down.

And now he's back - bringing us a message from the dead about the scandal known as AIG. In an op-ed piece appearing in Slate, Spitzer warns that the $165 million in bonuses paid to AIG execs is not what we should be protesting right now. His issue is with the fact that the recipients of TARP funded AIG payouts are the same banks who've capitalized nicely from TARP investments - the investments made by the government to protect those firms from the fact that AIG would not be able to make such payments.

It is a circular flow of money that is at first confusing. But if true, we've sent out nearly a trillion dollars so that firms like Goldman Sachs could get twice the money out of their AIG investment - from AIG - and from the feds.

As Spitzer sees it, "...the AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already."

And according to Spitzer, "the appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation."

In reading this, it is hard to say what is more absurd - the nicely orchestrated payment of billions of dollars from the government to banks and other companies who seem not to have urgently needed this money.

Or the fact that it's a dead man talking - a man who resigned in disgrace, filling us in on what he feels is a disgraceful alliance between the feds and the capitalists on Wall Street.

Friday, March 13, 2009

Identity Theft...Chicago Style

Big noise from Chicago - the biggest big-shouldered building in the city is undergoing a name change.

That's right - the Sears Tower will now be called the Willis Tower, named for the London-based insurance company that is taking over much of the space. With three towers named in honor of insurance companies (Aon, John Hancock and Willis), the hog-butcher to the world apparently has found its new millennial niche as an insurance broker.

The Sears Tower has been an icon in the city since it opened its doors in 1973. At that time, it was the World's Tallest Building - a fitting home for one of the world's largest retailers. It gave us something to brag about in those years of drought among our sports teams. We may not have had world champions in our midst, but we had the biggest damn building in the world.

For the last decade or so, the Sears Tower has had to be content to be known as the tallest building in North America. Asia went crazy in the '90s and tried building structures that touched the sky. So now Chicago's muscular tower is just the third tallest building on earth (though, if I understand correctly, it remains the world's tallest structure, if you count the height of its antennas.)

Now this indignity - its name - that of a Chicago-area retail giant - will be replaced by that of a foppish English insurance company. Once Sears Roebuck & Company stood tall and mighty in this land. But not lately. Certainly not since 1993, when it slunk to the low-rise buildings it now inhabits in the 'burbs. Like so many other city dwellers, it fled the urban for the suburban - trading its signature tower for a spacious campus in Hoffman Estates.

Of course, Chicagoans are not happy with the identity switch from Sears to Willis - even though Sears moved out of the building more than 15 years ago. We like our locals to remain here in name, if not in fact. Macy's is still, for some consumers, an unacceptable alternative since it erased the Marshall Field's identity from the retail universe.

And proud Chicagoans are sharing their feelings about this on Facebook. Today there are more almost 20,000 members of the "People Against the Sears Tower Name Change" group. They're asking people to go to a website - www.itsthesearstower.com - and sign a petition against Willis.

And that's just one of more than a dozen groups on Facebook devoted to protesting the Sears Tower name change.

Seems odd to care so deeply for the name of a building most people never visit. Contrast this with the outrage expressed on Facebook over the cost of living in Chicago - its 10.25 percent sales tax gives the city the highest sales tax in the nation.

The FB group "Food is Food, Damn It! End Chicago's Unfair Food Tax!" has 12 members.

And the "DALEY!: STOP WASTING MY F*#&ING MONEY ON YOUR CRONY BULLSHIT!" group has attracted 52 members.

In some cases, it seems as if we care more about the name of things than the things themselves....

Tuesday, March 10, 2009

Words Linger...The Memory Misleads....

Abe Lincoln's watch had a secret message - so said Jonathon Dillon, the immigrant watchmaker who claimed to have left it. He was working on the watch when Fort Sumter was attacked, the event that began the long, bloody Civil War.

According to a story in the Washington Post, Dillon told his family that he etched his name, the date of the attack and a message on the inside of the timepiece. Years later, in 1906 - forty years after he inscribed the message - Dillon told a NY Times reporter specifically what the message was:

"The first gun is fired. Slavery is dead. Thank God we have a President who at least will try."

The watch was donated by the Lincoln family to the Smithsonian, where it is occasionally put on exhibit but is generally considered to be a "minor artifact."

The family of the watchmaker recently uncovered evidence that the family legend may indeed be fact; the Smithsonian decided to find out for sure. Yesterday, the watch was opened...and a message from the past was revealed:

"Jonathan Dillon April 13-1861. Fort Sumpter [sic] was attacked by the rebels on the above date thank God we have a government."

So Jonathon Dillon was both right and wrong when he told people about the message he'd left in Lincoln's watch. The message was real - but Dillon's memory had changed the details. In memory, his details were more vivid, his predictions of the future quite firm - and accurate. In his memory, he believed his message made note of his faith in Lincoln and that it included his prediction of the end of slavery.

The actual message made note only of the moment and indicated Dillon's appreciation of the much broader "government" - instead of Lincoln himself.

Memory is elusive. It can paint such a vivid picture - but memory also embellishes, adds facts, details, names and faces that may not necessarily have been included in the moment we remember. Dillon remembered the message, but the details he remembered had been strengthened by the facts that followed.

Monday, March 2, 2009

Words Matter: Blago the Blabber lands Big Book Deal!

Will the sorry saga of the rot in Illinois never end? Impeached former governor Rod Blagojevich apparently has been given a six figure book deal to tell us just how he picked Roland Burris to represent Illinois in the Senate. I'm sure it's a safe bet that there will be poetry alongside of that political analysis - as Rod knows, we need more Kipling quoted in America!

According to the Tribune, Blago's babblings will also include a visit to the "dark side of politics."

And we all thought that Blago's helmet-head was just a bad hairdo! Apparently it's Darth Vader's mask all askew on top of Blago's big head.