Tuesday, March 17, 2009
I was booked up yesterday from 5 a.m. until 10 p.m., more or less, so I missed my opportunity to weigh in on the AIG bonus kerfuffle early. I did get to some blog posts late at night, and note that Tom Maguire is all over this like Chris Dodd on a "VIP" mortgage deal. See here, here, and here. But only click through the links if you are looking for something other than the populist rage boiling out of politicians, bloggers, and hack journalists.
That behind us, I have a few unrelated questions and observations about all of this. They are numbered not to signify importance or cognitive order, but so that you can refer to them when you lambaste me in the comments. No claims of originality here, by the way, just my idle musings, many of which may have been asked and answered elsewhere.
1. Why are we hearing about these bonuses now? Ed Liddy, the erstwhile Allstate CEO (and Sears CFO) who took over AIG at the government's request last fall (for $1 in compensation), is a smart guy. With the press and politicians complaining that sound banks are sending their top performers to meetings in Las Vegas he had to know that these bonuses would set off a firestorm. Why didn't he telegraph the issue months ago, perhaps even before the Obama administration took office? My speculation: The Obama administration, including the president or his political staff, has known about these bonuses for quite some time, and the letters from Liddy to the Treasury were requested by the government to provide cover. I further speculate that neither the Treasury nor Liddy wanted this issue to explode until after the bonuses were paid precisely because they could not afford for the people they need to unwind the losing trades to quit before their work is done.
2. As applied to AIG, the word "bailout" is losing its meaning. The common equity is destroyed, so the owners of the company -- the people normally bailed out in a bailout -- lost everything (as well they should have). Lots of people have lost their jobs. It is actually a company in a form of (orderly?) non-bankruptcy liquidation or receivorship. The countless billions pumped into AIG since the fall have gone right back out the door to pay creditors of AIG, many of which are big financial institutions that would have taken much larger losses (and needed more capital from some source, probably the government) if AIG had defaulted. From this perspective, AIG is nothing more than a conduit for the government to distribute money to financial institutions without making new investments in them. Whether that is a bug or a feature depends on whether you want the government to own much larger stakes in all these companies, but this much is difficult to refute: The "bailout" in question is not of AIG, but of the counterparties of AIG.
3. You cannot make people miserable and not pay them. You have to choose or they will quit and we will not have the skilled people we need to unwind this mess. So either torture, humiliate, and investigate the hundreds of people at AIG and other financial institutions -- none of whom actually created these problems -- who are struggling through all of this and grit your teeth and pay them, or leave them alone to toil in quiet ignominy and screw them out of most of their contracted compensation. For many people, one or the other will suffice, but not both.
4. Politicians and pundits have been tossing around the word "greed" as if it explained how we got into the financial crisis. It does not, unless it is applied to borrowers. Lenders did not degrade credit standards out of the goodness of their hearts or because they thought it would be more profitable. That has never happened in the history of capitalism and never will, which is why politicians have had to push for "easy" credit and debased currency (an ex post means of helping debtors) since the dawn of the Republic. Lenders lowered standards because they were in intense competition with each other. Banks cut pricing and lowered standards because borrowers demanded it and they had to accomodate those demands because all the good credits had already borrowed all the money they needed and more and still there was capital to invest. The salient feature of the late credit bubble was a massive shift in bargaining power from lenders to borrowers, all of whom pressed for lower pricing and looser covenants. It was borrowers who were "greedy," from real estate developers to private equity firms to hedge funds to consumers who bought houses and cars they could not afford. Politicians and journalists who say otherwise are being ignorant or disingenuous, even if predictable.
5. Why was there so much capital that needed to be invested? Because politicians and central bankers the world over responded to every relatively minor contraction in the last twenty-five years (the Crash of '87, the real estate/S&L bust of the early nineties, the Asian crisis of the late nineties, the post 9/11 recession, and so forth) with more easy money. At every turn our solution to economic discomfort has been to create even more credit rather than to deflate the smaller bubbles that built up. The result is that credit has been growing faster than the world's economy -- an inherently unsustainable condition -- for most of a quarter of a century. We are paying the price today for having made the political decision to avoid or mitigate recessions past with more credit. (For more on this, read George Cooper's crisp and accessible The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, which I recommend without reservation.)
Release the hounds.
I believe AIG's role is as the key player in the CDS/MBS equation. Regardless of who invented these securities, AIG was front and center in selling them all over the world. It is, I believe,these sales reps who got the bonus money.
Let's remember why these securities were created; they were a necessary device to reduce counterparty risk in a huge quantity of mortgages that the government mandated to be made to deadbeats, which were then levered up 30 or 40:1.
Obama's outrage is misplaced. He should be outraged at B. Frank and C Dodd, et.al.
Wasn't the primary issue dogging AIG the CDS exposure? My complaint there is why did we have to actually invest capital at all, since the Treasury could merely have stepped into AIG's insurer role without actually investing capital. In that instance the US Treasury AAA rating would have been a satisfactory replacement for the AIG AAA rating, and the only actual capital inveted would have come only in those instances of actual need, instead of for collateral posting purposes. By the way, does AIG get the insurance payments back in those instances where the contracts eventually unwind without a need to draw on the insurance? Does Goldman or Barclays or whomever return the money AIG posted in cash if and when the contract party proves good for the underlying debt?
I suspect Obama & Co created the AIG bonus story as a distraction from their failings on fixing the banks and to fuel populist outrage that they hope to channel into support for their budget -- as they fanned the flames of the AIG bonus story over the weekend and into yesterday -- capped off by Obama's staged anger.
Obama & Co used fear to get the stimulus bill passed, but have realized that they can't scare the market down much more without it backfiring ... that's why some of Obama's minions are now saying nice things about economic fundamentals and how we should expect a 2010 recovery.
Obama & Co will now try to use outrage to get their agenda-laden budget passed. Look for this meme to develop: "The Republicans gave all this money to Wall Street, why not some for you."
Barney Frank has a subcommittee holding a hearing on AIG tomorrow. It could be interesting, especially if they get into the propriety of $150 billion going out the backdoor to banks like Goldman. Hank Paulson may have some explaining to do.
These bonuses are noise. The real question in my mind is whether this could have been resolved faster, better, cheaper in the long run if we had let Bear Stearns adn AIG go BK. We seem to have survived Lehman hitting the wall.
A question of interest is who received the bonuses? According to public records, there are 21 divisions within AIG. Were they all losers or was it just those involved with secondary mortgage market. Assuming there were some winners, shouldn't they be rewarded?
This feels like a co-ordinated campaign by Obama & Co.
Item 1: Barney Frank hearing tomorrow on AIG.
Item 2: Copied from an ABC News report: "The Service Employees International Union is planning nationwide protests Thursday outside major banking institutions, in an attempt to turn the populist anger at Wall Street into legislative action in Washington"
Item 3: From WaPo a couple of days ago ... "Obama Enlists Campaign Army In Budget Fight": President Obama will kick off an all-out grass-roots effort today urging Congress to pass his $3.55 trillion budget, activating the extensive campaign apparatus he built during his successful 2008 candidacy for the first time since taking office. The campaign ... will rely heavily on the 13 million-strong e-mail list put together during the campaign ... Aides familiar with the plan said it is an unprecedented attempt to transfer the grass-roots energy built during the presidential campaign into an effort to sway Congress ... Several people closely involved in this campaign's planning made it clear that they believe this is the moment Democrats have been waiting for since Obama's election -- the deployment of the volunteer army that helped catapult a freshman senator to the presidency.
I'd bet the message to Obama's campaign army is "The Republicans gave all this money to Wall Street, why not some for you." March on your representatives now to get the budget passed.
As I've been saying, Goebbels has nothing on Axelrod.
"Greed" is a blunt word, but seems applicable in the sense of origination-driven compensation.
Salespeople who are compensated for in-the-door business (that is, not tied to long term relationship profitability or even transactional soundness) are clearly part of the problem. Incentives should line up -- and longer-term goals should be considered.
"Greed" seems to be sound-bite shorthand for acting in short-term self interest (this quarter's numbers, this year's bonus) to the exclusion of all else.
I guess when compensation is your only motivation (how can you feel intrisically rewarded for a job well done when it has not been?), it really is all about the money.
Now if we could just convince the Clinton crooks, the bush crooks, and the OPEC leader crooks to apologige for treasonously taking money from our enemies and allowing thousands to die and tens of thousands to have legs and arms and faces blown off in a stupid war that could have been avoided by stratigic nuclear bombing of the islamic capitals of the world on September 12, 2001!!!
Fair and Middling: Most high level (professional) sales activity is compensated by commissions and/or attainment bonuses. 250K to 500K is not uncommon for top producers. Sometimes there is a small base salary.
Having been a straight commission sales person all of my life, I can tell you that, whatever deal I agreed to, I kept my end of the bargain. I would certainly not welcome slobbering Barney telling me that I couldn't have what I earned. Most of America and, apparently, all of our government doesn't know these things. But them look who we elected.
"Greed" seems to be sound-bite shorthand for acting in short-term self interest (this quarter's numbers, this year's bonus) to the exclusion of all else.
Could this also include passing insanely high spending bills and leaving the debt to future generations?
Back to the original posting, one interesting point Maguire makes is that the NY Insurance commissioner is curiously silent on the failure of the securites lending unit, which Maguire ascribes to the fact that his agency is the regulator-in-chief of that unit, and also that the investments that unit made with the proceeds of it's lending activities were in socially "good" sub-prime mortgages, that ummmm, turned out to be economically bad. A consistent theme in this whole AIG unwind is that the investments in sub-prime mortgages screwed the pooch. Congress is at fault for that, and greed in the AIG FP division was harnessed in pursuit of an explicit congressional policy.
Peter Wallison has another article in the Journal today, struggling mightily to draw the attention of American voters to the causes of our present problems (the malfeasance of Congress) and how the subject needs not to be changed to meaningless stuff like bonuses at AIG. It's on point with TH's original post, I think.
The easy explanation of the presidential verbal concentration on the AIG bonuses is quite simple. He needs something to distract us all from his trillion dollar stimulus plan, the upcoming three-trillion dollar budget, and his disastrous economic policies. His approval ratings are dropping, his disapproval ratings are rising, the markets react to his every economic speech with a dramatic plunge, his attack on the previous goat Rush Limbaugh did nothing but raise Rush’s audience and make Obama look petty.
If he wanted a rational target, he could have focused on Chris Dodd, who made sure there was language in the stimulus bill ensuring the AIG bonuses would not be affected. Or any one of dozens of regulators and legislators who let this disaster occur. The problem is they are mostly Democrats.
With AIG he gets a perfect goat. The company is almost totally dependent on a solid stream of cash from the Government, so they will stay shut up. The executives who received the bonuses are (at present) fairly anonymous, and will not speak up to defend themselves, lest they draw individual fire. And in the event these bonuses are un-given, they can sue and win double due to the fact these bonuses are a contractual obligation (and that little Constitutional “no ex post facto laws” should stop any attempt to make these bonuses retroactively illegal) So the “Two Minutes Hate” Obama is dishing out right now (and being echoed thru every news channel I see) is working pretty good for him. Until the people tire of this enemy, and he needs to feed them another victim. And another. I certainly hope I’m not on that list anywhere.
AIG and the other big banks and insurance companies need to be split up like AT&T was years ago. These over weight monopolies need to be cut down to size. Any company that pays 10K or more dollar bonus or has any exec that exceeds 1 Million per year needs to be downsized NOW...... Regulate the money back into the pockets of the hard working employee. Not these corporate BOZO's.
It is a good post. I feel a little muddled in part 4, though. If banks had a big surplus of capital to lend, why are you so sure it was greedy borrowers who made them lend it and not a profit motive?
Analogy: If I get an order of 500 extra fur coats, I'm going to start making fur coats easier to get. Sure you can blame the buyers who put coats on layaway that they couldn't afford, but the real blame is on me for allowing layaway when I didn't before. I thought I'd make more money by selling 100 coats on layaway if 80 people pay than by keeping my old "no-layaway" rule and selling 0.
4. Banks cut pricing and lowered standards because borrowers demanded it and they had to accomodate those demands because all the good credits had already borrowed all the money they needed and more and still there was capital to invest. The salient feature of the late credit bubble was a massive shift in bargaining power from lenders to borrowers, all of whom pressed for lower pricing and looser covenants. It was borrowers who were "greedy," from real estate developers to private equity firms to hedge funds to consumers who bought houses and cars they could not afford.
1. Since the Stimulus bill contained language limiting retention bonuses to companies getting TARP money but also grandfathering in such contracts signed prior to Feb 2009, everyone in Congress and the Administration should have known these bonuses were an issue at least generally. Since AIG paid the first installment on the 2008 retention bonuses in December ($55 Million to AIGFP) someone in Treasury should have known the bonuses existed for AIG specifically.
I can understand that Geithner and Liddy wanted to keep quiet about these until after they were paid - I figure they were probably hoping to stay under the radar generally. Now that the news is out though, I really wish someone in the Administration had the guts to stop acting all “not on my watch”, straight out admit we need to pay these bonuses, and explain why.
3. Too late. The AIG employees have been pilloried in public; they have to live in constant worry that the government will find some way to take back the money they just got; they have to know the government will do everything in its power to deny them the approximately $161 Million in contracted retention bonuses promised at the end of the 2009 work year; and they’re getting death threats. As I said in my post on this, if I worked for AIG I’d cash my bonus check and move far, far away. So if the US needs AIGFP to keep running so it can conduit and unwind, and AIGFP in turn needs the retention bonus employees in order to do that, the politicians who are going to be responsible for driving the employees to quit better know how to unwind those bespoke transactions Liddy is so concerned about.
A question of interest is who received the bonuses?
The $165 Million figure being bandied about refers to retention (not sales, not performance) bonuses for the employees of AIGFP. Apparently there are other bonuses in the works but the focus is on this number because AIGFP is widely seen as the division that destroyed the world. It’s not clear how fair this is and even if it is fair it looks like the guy who got them into this mess is gone from AIGFP. Maguire’s “Book of the Dead” post goes into this.
"Lenders did not degrade credit standards ... because they thought it would be more profitable. That has never happened in the history of capitalism and never will..."
Umm. Penn Square Bank.
Reckless lending in times of apparent prosperity is a tradition. Banks make immediate money by writing loans. Greedy lenders see immediate profits and ignore long-term risks.
That is why regulators should enforce lending restrictions, rather than attack them - as the CRA and related policies did.
AIG's Not Very Transparent List of Counterparties
It's good that AIG has released a list of its counterparties. But if it really believes in "the importance of upholding a high degree of transparency with respect to the use of public funds", this is a very odd way of releasing the information.
If you're not already familiar with the intricacies of AIG's operations, it's very easy to just start adding up the numbers in the various appendices, coming up with a kind of bailout league table: Goldman Got $12.9 billion! Barclays got $8.5 billion! But in fact it's much more complicated than that.
There are four appendices in all. Before we get to them, it's worth reading a bit of Gretchen Morgenson today:
Even A.I.G.'s own independent directors haven't been told which of the counterparties were paid...
Such secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.'s counterparties whole on losses that have not happened yet?
What Morgenson is talking about here is the second of the four appendices: the payments made by the company known as "Maiden Lane III".
After banks insured their assets against default, AIG essentially used Maiden Lane III to take those assets onto its own books, thereby allowing it to cancel out the insurance contracts. The big winners here are SocGen and Goldman Sachs -- and it's worth noting that unlike the first appendix, where the counterparties are helpfully listed in order of size, in the second appendix there seems to be no particular order at all, and the two biggest recipients of government money are hidden in the middle of the list.
In any event, so many of the counterparties on this list had hedged their AIG exposure that it's massively oversimplifying matters to conclude that even the banks with the biggest exposures on the second appendix are the ones which effectively got the biggest government bailout.
It's not nearly as simple as that -
"The salient feature of the late credit bubble was a massive shift in bargaining power from lenders to borrowers, all of whom pressed for lower pricing and looser covenants. It was borrowers who were “greedy,”..."
Have we forgotten the Governments CENTRAL Role in this meltdown?
The Great Work linked below will refresh your memories:
Doug Ross's Excellent Depiction of this list of Outrages:
This is the community agitator and ACORN attorney named Barack Obama, who sued Citibank in 1994; one of hundreds of nuisance lawsuits filed by ACORN and its affiliates to loosen mortgage underwriting standards.
These are the pay packages the Democrats awarded themselves, through undeserved bonuses, immense salaries and incentive payments, all based upon pushing huge numbers of subprime loans through Fannie Mae.
CEO Franklin Raines - $90,128,761
CEO Timothy Howard - $30,155,029
Chair Jamie Gorelick - $26,466,834
CEO Jim Johnson - $21,000,000
This is Fannie Mae's stock price, the collapse of which devastated the capital-to-asset ratios of banks and insurance companies like AIG (which held five billion dollars in Fannie Mae and Freddie Mac equities).
These are the total campaign contributions ("investments") Fannie Mae executives made to Democratic Senators Chris Dodd, Barack Obama and John Kerry in order to "fix" federal regulation.
This is a list of the attempts made by the Bush administration starting in 2001 to rein in the out-of-control spending frenzy by Fannie and Freddie.
This is one such hearing in 2004 (YouTube video available), wherein Republicans demanded additional oversight of Fannie Mae and Freddie Mac because of the GSEs' rampant accounting scandals, inadequate capital reserves, inappropriate bonuses and hundreds of billions in low-income, no documentation mortgages.
This is Maxine Waters (D-CA), complaining that there is no crisis at Fannie and Freddie; and that attempts to audit the GSEs simply disenfranchise the poor by preventing them from getting subprime mortgages.
This is Barney Frank (D-MA), claiming that Fannie Mae and Freddie Mac are fine and that oversight is not needed.
This is Chris Dodd (D-CT), the powerful member of the Senate Banking Committee, who threatened filibuster after filibuster over additional regulation of the mortgage market (while accepting funds and sweetheart mortgages from the very organizations he was supposed to be regulating).
These are the organizations that profited from subprime mortgages, sold to unqualified individuals -- even those without documentation of citizenship, income or assets -- knowing they could sell the loans to the GSEs. For example, Fannie even accepted a $700,000 mortgage application from a migrant with an annual income of $14,000.
This is President Clinton signing the Community Reinvestment Act (CRA), which forced banks to write low-income, zero documentation loans. These loans would then be purchased by Fannie and Freddie and securitized for sale to other financial institutions.
These are the Democrats who profited at every step of the mortgage meltdown while blaming George W. Bush for the crisis, and whose continued oversight of the financial system is a disgrace and a mortal danger.
One Big Ass Mistake, America!
Rich Rostrom -
Reckless lending in times of apparent prosperity is a tradition. Banks make immediate money by writing loans. Greedy lenders see immediate profits and ignore long-term risks.
It is true that at the end of every bad loan (or many bad loans) granted in times of easy money there is a lender who accepted lower creditworthiness standards in return for business. You can call that greed, or you can say it is a mistake in managing through an extremely competitive situation that only prevailed because government policies kept driving credit creation (and therefore credit supply, and therefore competition in the extending of credit). Capital needs to be lending. It might well pass through the hands of conservative investors who do nothing but put it in Treasury securities or short-term commercial paper. Eventually, though, it lands in the hands of an investor who is looking for a higher return. If too much of that happens, there is too much credit chasing too few worthy investments. That is a systemic problem.
The current crisis was compounded by the housing bubble and collapse. Historically, pools of home mortgages properly structured were considered extremely safe investments. When too much capital demanded more safe investments, lenders in intense competition with each other talked themselves into lowering standards. This was especially easy to do because they were getting political and legal pressure to do this to expand home ownership rates. Yes, a lot of that came from the left but President Bush also used to brag about the rate of home ownership in his speeches. You might be able to split hairs find people who were "concerned" about Fannie and Freddie, but nobody wanted to take away the punch bowl and let the air out of the bubble back in 2004, 2005, or even 2006 (when it probably would have been too late). That is the job of central bankers because they do not have to get votes, but in recent years central bankers have forgotten their mission, which is to defend the currency and prevent too little or too much credit creation.
Why did central bankers fail to let the air out of this bubble? Because in recent experience inflation had been the indicator for excessive borrowing. That did not happen this time. Why? First, in the last 15 years or so, the global shift of basic manufacturing to China so massively cut the cost of making things that the prices of "stuff" kept falling in real terms. Basic consumer goods fell in price, so the consumer price index fell in price. Second, all that extra money had to go somewhere, and people plowed it into financial assets. So, we did see inflation -- in stocks, housing, real estate, rare coins, art, fine wine in restaurants, and eventually in commodities -- but only at the last did it flow through the CPI, the signal the Fed and other central bankers use as their early warning system.
The above links to a fascinating New York Times article, dated September 30, 1999 (I'm unsure of whether this has been recalled in the States at all).
Pay close attention to paragraphs 7 & 8.
I agree that Bush pandered to the liberals with home ownership - however it would take a remarkable politician (and still will!) to refuse the voting public easy prosperity whilst fighting against a tide of economic populism.
As for bonuses at AIG - executive remuneration within a private firm is the sole concern of two parties; the purchaser and seller of labour.
The problem clearly rests on the fact that the firm is now a 'public' company (although the prols always enjoy a little tall poppy syndrome). Despite this, you're talking about private contracts previously entered into.
People need to stop bitching and moaning about others who have been more successful than themselves - this crisis has its roots not in greed but in envy.
As for AIG itself, the moral hazard promoted as a 'solution' in the US over the last couple of years leaves one option - continue with these awkward government/business partnerships fastened together at the last minute with ambiguous aims and methods (the Big 3 auto manufacturers will survive and 'become independent'? - Very funny...)
Instead of letting people who made bad decisions lose money and move on (pretty much everybody), we have to slowly grate over a few hundred executives who mean nothing in the long run, were merely providing for their families, and worked bloody hard.
I believe it is simply rude to speculate about how much of these AIG bonuses is being kicked back to Dodd, Frank, Obama's representatives in Chicago, Emanuel or any other of our brave Democrat politicians!
Barney was splitting hairs:
Conspicuously absent from Frank's list of targets: a legislator who received contributions from Fannie and Freddie executives, whose lover was a senior executive at Fannie, and who resisted attempts to reign them in from the reckless policies.
A-Hole hairs, that is.
"C’mon, he writes housing and banking laws and his boyfriend is a top exec at a firm that stands to gain from those laws?"
the aide told FOX News.
"No media ever takes note?
Imagine what would happen if Frank’s political affiliation was R instead of D?
Imagine what the media would say if [GOP former] Chairman [Mike] Oxley’s wife or
[GOP presidential nominee John] McCain’s wife was a top exec at Fannie for a decade while they wrote the nation’s housing and banking laws."
Frank’s office did not immediately respond to requests for comment.
Frank met Moses in 1987, the same year he became the first openly gay member of Congress.
"I am the only member of the congressional gay spouse caucus," Moses wrote in the Washington Post in 1991. "On Capitol Hill, Barney always introduces me as his lover."
How to get back the AIG bonuses
Washington Times -
Well, we have a simple solution to help make up the difference and help taxpayers get back some of the employees' supposed "ill-gotten" gains. AIG employees have given large donations to some of the very politicians who are screaming the loudest about the bonuses (see box below). Since these politicians got money from those employees, why don't they offer to turn their donations over to the government? If we are to be angry with these employees, why aren't we just as mad at the politicians who have taken their donations?
Two of the politicians screaming the loudest to tax the bonuses are Dodd and Schumer.
The two have gotten more money from AIG employees over their careers than anyone now in Washington.
Sen. Chuck Grassley, who, inspired by Japanese hari-kari, is calling for AIG employees to repent or commit suicide, is among the top 12 senators who have gotten money from AIG employees. Also on the list of top donation recipients from AIG employees is Rep. Carolyn Maloney, New York Democrat, who has also been calling for a 100 percent tax on bonuses.
I'm too late to this party, but would say your understanding of lending practices with respect to #4 is just... plain wrong. I can't really believe you do not understand the process of the securitization of these loans, or the role of mortgage brokers, or the impact conforming requirements and automated underwriting systems had on the way this lending was carried out, but it appears that way. Please keep an eye on the NAACP lawsuit.
Also, I think everyone is missing the point with the AIG bonuses. Companies have a responsibility to market themselves properly. I would not be against fair compensation to AIG execs, perhaps in the form of some salary or stock option, but whatever these failing companies do, they should not call it a "bonus"! They are under the public eye after all, and have a fiduciary responsibility to project a positive image.
What we haven't been told about these bonuses is what business divisions they're being paid to. Just because the whole company is bankrupt doesn't mean none if its divisions are making money, and if they are the employees therein do indeed deserve bonuses no matter what the state of the company as a whole is.
Nice post, but something big is missing.
5. Why was there so much capital that needed to be invested?
I believe that a major factor driving the bubbles (housing, commodities, emerging markets,..) is the demographic collapse of Europe and Japan coupled with the one-child policy in China. Consider that in the next 50 years Europe will have a percentage population decrease on par with the loss that occurred during the Black Death - except that the Black Death made Europe younger and fitter while the current demographic collapse will result in an older and more infirm continent (Japan included). So the pension plans in those countries know that they have to have big rates of return to fill in for the workers who won't be there to support the pensioners in the future, particularly with the generous and unsustainable benefits that have been promised. And the Chinese save close to 50% of their money, knowing that one "little emperor" cannot support four grandparents. This has generated vast sums, circulating the globe, all in search of profit, or better yet a Ponzi scheme where they can get out early. The form of the crisis in the US (toxic recycled debt coming from Freddie and Fannie that shattered a realistic valuation of credit) has to do with the political corruption of mostly (but not all) Democrats (Frank, Dodd, etc.), but the flood of money that made it possible is due to the self-inflicted demophage circulating through Europe, Japan, and China.
The imminent collapse of GM will be a taste of things to come. This large pension plan with a small, money-losing automotive department will leave a couple of million in the lurch when it goes belly-up. The rest of us will be asked to step into the breach, and the tea parties will really take off. If people think things are bad then, what will happen by 2050 when the disaster is too evident for the progressive internationalist elites to hide as hundreds of millions of pensioners have nothing to support them? Will European Greens become Soylent Greens?
Ramon basically beat me to it, but I also wonder about the demographic issue as an underlying cause of this mess.
Tigerhawk said, "The salient feature of the late credit bubble was a massive shift in bargaining power from lenders to borrowers, all of whom pressed for lower pricing and looser covenants."
With at least relatively fewer young people in developed countries to borrow from older people with financial assets, this would seem to be a fundamental issue of supply and demand. Ideally, interest rates would just gradually trend lower to balance things out (and you could argue that to some extent this has been happening), but the lenders have not been accepting this gracefully, and have been looking to maintain the higher returns of the past.
Everytime I read of the blowup of some financial instrument that started with low interest rates and then kicked in to high interest rates that could not be sustained, I see some financial intermediary trying to square the circle trying to sucker in a less well-heeled young person by emphasizing the low starter rates, while simultaneously suckering in a older lender by emphasizing the higher rates of the loan in the long term.
The feigned outrage over “bonuses” to AIG employees is like a three card monte game. The real purpose is distract the spectators while the card players confederates pick their pockets. AIG was a conduit for over $170 billion to its counter-parties like Goldman Sachs. The “bonuses” were 1/10th of 1% of that amount, and what is worse, 1/100th of 1% of the $1.5 trillion that Congress has appropriated since Jan 20. The spectators are the taxpayers. The three card monte players are the politicians.