Right Wing Nut House

I am beginning to wonder if liberals have an extra side of the brain instead of just the right and left sides that normal people are born with.

Otherwise, I can’t for the life of me figure out how some on the left believe that AIG is “blackmailing” the government to give them their bonuses. It takes some superior convoluted thinking to arrive at that conclusion and I want to congratulate Jane Hamsher for achieving a level of stupidity I didn’t think possible - until I remembered some of her other “Great Moments in Blogging” that set a standard for shockingly bad taste and dripping hypocrisy.

Hamsher riffs off of this thoughtful but flawed piece by Andrew Sorkin that defends the bonuses by pointing out that these were “retention bonuses” designed to keep the people who created the mess at AIG on board so they can help unravel their extraordinarily complex handiwork:

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Not that any of this takes the bite out of paying these bonuses. For better or worse — in this case, worse — someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

Now we can debate why A.I.G. felt it necessary to guarantee seven executives at least $3 million apiece when the economy was clearly on shaky ground. Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg. But another possible explanation is that A.I.G. knew it needed to keep its people.

That is the explanation offered by Edward M. Liddy, who was installed as A.I.G.’s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.)

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

A distasteful but perfectly legitimate point of view. As Sorkin points out, you can argue the merits of giving bonuses but taking into account the reason given by Liddy must be part of the debate.

Hamsher rejects this argument in favor of a conspiratorial view of history:

Let’s look at the implications of what Sorkin is saying. The markets have seized up for various reasons, but ultimately due to the fact that people have no confidence in the entire system. There were huge conflicts of interests when agencies like Moody’s and S&P were paid by issuers to rate structured securities backed by subprime mortgages. They handed out AAA ratings like they were Pez, and because certain firms could only put their money in such “investment grade debt,” facilitated the spread of the subprime cancer that riddled the entire system. It’s just one example of why nobody trusts anything right now. There’s no confidence that if you put money into something, you’re able to assess that what you’re investing in has real value, and isn’t just another ponzi scheme designed by crooks to enrich themselves.

So what Sorkin is saying is that we should just admit, in a very public way, that we have no ability to regulate the system. That if someone commits fraud and theft on such a massive scale, there’s nothing we can do but pay everyone off or they will use their knowledge to steal even more money. He’s saying that there is no authority, no viable regulation, no legal structure that can right this mess. All we can do is keep writing checks, pay off the blackmailers and hope that if we let them continue to get rich they won’t make matters worse.

Geithner seems to share that assumption, namely that there is nothing wrong with this system that piles of money won’t fix. That if you keep shoveling cash into it, some day things will get better. He has not addressed the crisis of public trust, the critical lack of faith that everyone — both inside and out of the financial industry — is gripped with right now. He wants to pay the very bankers who created this mess in order to buy up “toxic assets,” which the public views as just another way for him to funnel billions to his Wall Street pals. As if the systemic problems that led to this crisis will just go away and the same thing won’t happen all over again.

People are outraged at the injustice of paying out billions in bonuses to AIG bankers, but they’re also irate (and freaked out) about what it says about those in charge — that they are so much a part of the fabric of the problem that they’re incapable of seeing what it is, much less solving it. Paying off blackmail notes from architects of the fall is a great way to make things worse.

I included Hamsher’s thumbnail sketch of what went wrong because it is instructive of how the populist left views Wall Street and big business in general. The sub-prime mess had many fathers and may have been driven by a frenzy to get customer’s signatures on mortgage contracts (this piece is a pretty fair explanation of the practice) but the financial instruments that have caused the world wide meltdown were designed to spread the risk contained in those mortgages. As traders jiggered the contracts, slicing the risky instruments into smaller and smaller pieces, they created a monster that no one - least of all the traders - could control. Ultimately, the ability of anyone to understand what these instruments were truly worth went beyond our understanding.

Is this criminal activity, as Hamsher suggests? More like uncontrolled hyperbole from the writer. Every trade made was perfectly legal under current law. Is it “reckless” as President Obama avers? No doubt. But is the fix for the government to regulate risk? No matter how much we end up paying out to solve this crisis, if Wall Street is forced to answer to the government when it comes to grading risk on investments, we may as well just turn the whole shebang over to Washington. We may end up doing so anyway because the government has already determined that companies who didn’t recognize the risk inherent in these credit derivatives and other mortgage securities will not suffer the consequences of their stupidity/recklessness/greed. The market is not determining winners and losers, the government is.

Sorkin is not saying, as Hamsher accuses, that we can’t regulate “the system.” How the hysterical writer ever leapt to that erroneous conclusion is a mystery. All Sorkin is saying is that the justification for these bonuses may be the key to solving the AIG mess. Keeping the traders who created this pyramid of bad paper in place may be our only shot at unraveling their complex transactions without bringing the whole system down around our ears.

Unpalatable? Of course. In a perfect world, we would take these galoots and throw them out on the street, planting a dunce cap on their heads and preventing them from ever being in a position where they can risk the financial stability of the world again. But in the real world where most of us live, it becomes necessary to live with the situation we have and not play make believe by wishing it was different.

Of course we need regulation of the financial system and both Sorkin and Geithner are not saying we don’t. It is to Hamsher’s discredit that she has so misread (or deliberately misinterpreted) what Sorkin wrote that she then goes off the deep end and posits the notion that AIG employees are holding a gun to the government’s head trying to blackmail us into giving them their money. No one at AIG has even hinted at this which begs the question; why would Hamsher make this stuff up.