The Obama Administration rejected the plans submitted by Chrysler and GM as part of the conditions of receiving funding from the Bush Administration. These plans were viewed as unrealistic, which is an understatement for saying Chrysler is essentially bankrupt. The Administration, while willing to advance another two months of funding for GM and one month for Chrysler, mentioned that bankruptcy might be an option down the road.
The Obama Administration imposed conditions on the short term financing, as any financier with leverage can do.
GM’s Chairman, Rick Waggoner, had to resign as will most of GM’s Board of Directors. Those that rode the company down should not remain in office. That is a fundamental rule of capitalism, even when imposed by the government. Waggoner headed GM for a decade. Regardless of the handicaps facing GM, he simply did not get the job done.
Employees, suppliers, dealers, investors, Michigan, Ohio, Indiana, and Wisconsin are paying the price for GM’s market collapse.
So too should management.
That I understand.
What is inexplicable is that Robert Nardelli, who previously failed at Home Depot, should stay on at Chrysler. The explanation is that Nardelli represents new management, which came in from outside the industry – thus new blood and a new perspective.
Nardelli was the bean counter brought in by Cerberus, when it acquired 80% of Chrysler from Daimler Chrysler (side bar: I’m exalted having sold my Daimler Chrysler shares a year ago, even after paying capital gains taxes). He was initially unwilling to cut his salary in negotiations with the Bush Administration.
Cerberus will in theory “lose” its stake in Chrysler, but all is not as it seems.
In acquiring control of Chrysler, Cerberus spun off the highly profitable Chrysler Finance Company to itself, thereby earning a nice profit stream.
In addition, Cerberus took ownership of the Chrysler’s Auburn Hills Headquarters & Technology Center, which at 5.3 million square feet is second only in size to the Pentagon. It then recouped much of its cash investment by mortgaging the office complex, and then sticking Chrysler with the mortgage payments.
That was the hedge fund Cerberus hedging its investment.
How valuable an empty office outside Detroit will be remains to be seen.
The next step was to maximize Chrysler's cash flow, priming it for a resale to the public.
Nardelli immediately fulfilled that objective by eliminating not just existing product lines, but more critically by eliminating funding for future products. He stripped the Chrysler design cabinet bare. It has nothing new to offer the public in future years.
Chrysler thereby needs Fiat, Nissan, Peugeot, Honda, Toyota, VW, someone, anyone, to supply it with a small car line to build in America. All but Fiat have passed on Chrysler.
A condition of the Chrysler funding is that the company reach agreement with Fiat within 30 days, at which point the Obama Administration will advance another $6 billion.
Fiat will provide Chrysler with a small car product line, but no money, in exchange for 20% of Chrysler. In other words, Chrysler hopes to survive by building Fiats in the United States with taxpayer money.
If AMC Jeep’s earlier affiliation with Renault, and Chrysler’s with Daimler, not to mention Chrysler’s acquisitions of Rootes Motors and Simca, failed, why do they think affiliation with a weak Fiat will succeed?
Fiat did not have a reputation for high quality in its earlier forays in to the United States, the joke being that Fiat stood for “Fix it again, Tony.”
We have to hope that the Chrysler-Fiat merger will succeed, but the odds are better betting on one of the three Detroit casinos.
Monday, March 30, 2009
Friday, March 27, 2009
How GM Blew it With GMAC
April 3, 2006 is the Day the Music Died, the day GM agreed to sell 51% of GMAC to Cerberus, a hedge fund. The sale was completed in November 2006. For $14 billion spread over 3 years, it lost control of its future. GM’s fate was ordained.
Having previously sold off its non-automotive assets (Hertz, appliances, busses, locomotives, and heavy equipment), GMAC was the last crown jewel in the shrinking GM Empire. The thirst for capital was so great that GM ceded control of GMAC.
GMAC was not just a subsidiary of GM; it was the key to GM’s viability, more critical than Chevy, Cadillac, Buick, Pontiac, Saturn, Saab, Hummer, Adam Opel, Vauxhall, or Holden. These divisions would be worthless without GMAC to finance GM’s dealers and retail customers while GMAC earned a consistent profit. GMAC was a license to make money.
GM’s desperate management forgot how critical GMAC was. Oldsmobile was expendable, but GMAC was not.
The rising GM founded GMAC in 1919 as a captive finance company to facilitate the sale of GM products. Credit was essentially non-existent then for individuals; the consumer finance industry did not exist. Banks did not deal with individual consumers.
GMAC would finance wholesale sales to dealers (“floor financing”) and then the retail sales and leases to consumers. The plan was brilliant. GMAC would borrow funds using GM’s capital strength and low interest rates, and then lend the borrowed funds at higher rates to dealers and consumers. The steady, almost risk free profit would come from the spread on the borrowed funds.
By 2006 GM’s credit rating had shrunk to junk bond status, substantially raising the borrowing costs of GMAC and cutting into its profits. Even so, GMAC earned $2.8 billion in 2005.
In good times and bad times GMAC had the funds to finance the sale of GM products. GMAC was always there to facilitate sales and keep the assembly lines rolling.
Without GMAC, GM would not have become the world’s largest corporation. Without GMAC, GM would have collapsed decades earlier.
Good times or bad times, popular or unpopular models, high quality or poor quality vehicles, high or low mpg vehicles, GMAC financed the sales and leases of GM products.
GMAC helped GM survive the Great Depression, and Cadillac, previously an also ran, rose to the top of the luxury car market while competitors, such as Pierce Arrow and Packard lacked the capital to compete. In 1979 when President Carter drove the prime rate to 19.5%, GMAC had funds available, albeit at 9.75%.
GM’s problems were compounded because it was seduced by the quick, easy, seemingly risk free profits in the subprime mortgage market. GMAC dove headfirst into the subprimes without looking.
GMAC wrote off billions from subprime mortgages last year, and was no longer able to finance its operations. It hemorrhaged $7.5 billion in 2007-2008.
Cerberus’s interests and those of GM are inconsistent. Cerberus’ primary goal is to earn a profit. GM’s is to sell GM vehicles.
Cerberus made a bad investment, and cut its losses by refusing to invest additional funds into GMAC. Cerberus looked to Washington for a bailout.
GMAC normally financed 45% of GM’s new vehicle sales and leases, but was down to 14% in October. GM was in the tank.
GMAC had no money to lend, and GM lost 45,000-50,000 sales monthly as willing buyers were unable to obtain financing. Cerberus raised the minimum credit score for GMAC financing to 700 and above, cutting off many of GM’s traditional customers as the recession set in.
GMAC’s response was to convert itself into a bank holding company in December and issued $5 billion in preferred stock to the Treasury Department for TARP funds, and received an additional $1 billion in loans.
Indicative of GMAC’s problems is that Cerberus appointed the prominent investor Ezra Merkin to be GMAC’s Chairman. Ezra may have been prominent, but shrewd he was not. His funds lost at least 2.4 billion in the Madoff scandal and he facilitated the investments of others into Madoff. The once proud, but now chastened, if not bankrupt Merkin, resigned from GMAC in January.
Madoff, Merkin and GMAC - How the mighty have followed!
Postscript
GMAC announced on May 5, 2009 that it lost an additional $675 million in the first quarter, of which $125 million came from (subprime) real estate loans. It has now lost money in 5 of the most recent 6 quarters.
Having previously sold off its non-automotive assets (Hertz, appliances, busses, locomotives, and heavy equipment), GMAC was the last crown jewel in the shrinking GM Empire. The thirst for capital was so great that GM ceded control of GMAC.
GMAC was not just a subsidiary of GM; it was the key to GM’s viability, more critical than Chevy, Cadillac, Buick, Pontiac, Saturn, Saab, Hummer, Adam Opel, Vauxhall, or Holden. These divisions would be worthless without GMAC to finance GM’s dealers and retail customers while GMAC earned a consistent profit. GMAC was a license to make money.
GM’s desperate management forgot how critical GMAC was. Oldsmobile was expendable, but GMAC was not.
The rising GM founded GMAC in 1919 as a captive finance company to facilitate the sale of GM products. Credit was essentially non-existent then for individuals; the consumer finance industry did not exist. Banks did not deal with individual consumers.
GMAC would finance wholesale sales to dealers (“floor financing”) and then the retail sales and leases to consumers. The plan was brilliant. GMAC would borrow funds using GM’s capital strength and low interest rates, and then lend the borrowed funds at higher rates to dealers and consumers. The steady, almost risk free profit would come from the spread on the borrowed funds.
By 2006 GM’s credit rating had shrunk to junk bond status, substantially raising the borrowing costs of GMAC and cutting into its profits. Even so, GMAC earned $2.8 billion in 2005.
In good times and bad times GMAC had the funds to finance the sale of GM products. GMAC was always there to facilitate sales and keep the assembly lines rolling.
Without GMAC, GM would not have become the world’s largest corporation. Without GMAC, GM would have collapsed decades earlier.
Good times or bad times, popular or unpopular models, high quality or poor quality vehicles, high or low mpg vehicles, GMAC financed the sales and leases of GM products.
GMAC helped GM survive the Great Depression, and Cadillac, previously an also ran, rose to the top of the luxury car market while competitors, such as Pierce Arrow and Packard lacked the capital to compete. In 1979 when President Carter drove the prime rate to 19.5%, GMAC had funds available, albeit at 9.75%.
GM’s problems were compounded because it was seduced by the quick, easy, seemingly risk free profits in the subprime mortgage market. GMAC dove headfirst into the subprimes without looking.
GMAC wrote off billions from subprime mortgages last year, and was no longer able to finance its operations. It hemorrhaged $7.5 billion in 2007-2008.
Cerberus’s interests and those of GM are inconsistent. Cerberus’ primary goal is to earn a profit. GM’s is to sell GM vehicles.
Cerberus made a bad investment, and cut its losses by refusing to invest additional funds into GMAC. Cerberus looked to Washington for a bailout.
GMAC normally financed 45% of GM’s new vehicle sales and leases, but was down to 14% in October. GM was in the tank.
GMAC had no money to lend, and GM lost 45,000-50,000 sales monthly as willing buyers were unable to obtain financing. Cerberus raised the minimum credit score for GMAC financing to 700 and above, cutting off many of GM’s traditional customers as the recession set in.
GMAC’s response was to convert itself into a bank holding company in December and issued $5 billion in preferred stock to the Treasury Department for TARP funds, and received an additional $1 billion in loans.
Indicative of GMAC’s problems is that Cerberus appointed the prominent investor Ezra Merkin to be GMAC’s Chairman. Ezra may have been prominent, but shrewd he was not. His funds lost at least 2.4 billion in the Madoff scandal and he facilitated the investments of others into Madoff. The once proud, but now chastened, if not bankrupt Merkin, resigned from GMAC in January.
Madoff, Merkin and GMAC - How the mighty have followed!
Postscript
GMAC announced on May 5, 2009 that it lost an additional $675 million in the first quarter, of which $125 million came from (subprime) real estate loans. It has now lost money in 5 of the most recent 6 quarters.
Tuesday, March 24, 2009
Waren Buffett, Russell Apparel, and Union Busting
We know that Warren Buffett believes we are undertaxed. We also know that the Oracle of Omaha has consistently spoken out against the excesses of Wall Street, but has strangely been silent on the role of the rating agencies in the recent housing bubble. Perhaps Buffett’s reticence is because his Berkshire Hathaway owns 20% of Moodys.
Now we learn that Warren Buffett, the capitalistic icon of the Democrats, is a union buster.
Berkshire’s subsidiary, Fruit of the Loom, acquired Russell Apparel, the sporting goods company, in 2006 for $607 million.
750 of the 1800 employees at Russell’s Choloma, Honduras plant voted to unionize in 2007. Russell responded by shuttering the plant for “economic reasons.” The company now claims to be saving $2 million annually by ending the lease on the facility. Russell denied anti-union animus played a role in the decision to close the plant.
What goes in Honduras does not stay in Honduras. Moises Elias a Bovado and Norma Estela Mejia Castellano, union leaders, are touring United States campuses, crying out about the Honduras closure.
College students are concerned about sweat shop operations in the apparel industry. Roughly two dozen colleges have responded to the union leaders by canceling their licensing agreements with Russell. Among the campuses dumping Russell are Columbia, Cornell, Georgetown, Harvard, Houston, Miami, Michigan, NYU, Penn, Purdue, Rutgers, Washington, and Wisconsin.
Buffett is notorious for buying value investments at a bargain. The Russell asset though is rapidly depreciating, consistently losing universities to Nike, founded by Phil Knight.
Buffett could learn from Knight, who has been a substantial contributor to the academic and athletics programs at his alma mater, the University of Oregon. Students voted in 2000 to boycott Nike on the Oregon campus. Phil Knight responded on April 17, 2000 by announcing that he was summarily cutting off his alma mater without another nickel. He cancelled a $30 million pledge to the University.
Nike is still featured at Oregon, and Knight has renewed his generosity to the Ducks.
Buffett, with an undergraduate degree from Nebraska, and an MBA from Columbia, has not been so generous to Columbia.
Now we learn that Warren Buffett, the capitalistic icon of the Democrats, is a union buster.
Berkshire’s subsidiary, Fruit of the Loom, acquired Russell Apparel, the sporting goods company, in 2006 for $607 million.
750 of the 1800 employees at Russell’s Choloma, Honduras plant voted to unionize in 2007. Russell responded by shuttering the plant for “economic reasons.” The company now claims to be saving $2 million annually by ending the lease on the facility. Russell denied anti-union animus played a role in the decision to close the plant.
What goes in Honduras does not stay in Honduras. Moises Elias a Bovado and Norma Estela Mejia Castellano, union leaders, are touring United States campuses, crying out about the Honduras closure.
College students are concerned about sweat shop operations in the apparel industry. Roughly two dozen colleges have responded to the union leaders by canceling their licensing agreements with Russell. Among the campuses dumping Russell are Columbia, Cornell, Georgetown, Harvard, Houston, Miami, Michigan, NYU, Penn, Purdue, Rutgers, Washington, and Wisconsin.
Buffett is notorious for buying value investments at a bargain. The Russell asset though is rapidly depreciating, consistently losing universities to Nike, founded by Phil Knight.
Buffett could learn from Knight, who has been a substantial contributor to the academic and athletics programs at his alma mater, the University of Oregon. Students voted in 2000 to boycott Nike on the Oregon campus. Phil Knight responded on April 17, 2000 by announcing that he was summarily cutting off his alma mater without another nickel. He cancelled a $30 million pledge to the University.
Nike is still featured at Oregon, and Knight has renewed his generosity to the Ducks.
Buffett, with an undergraduate degree from Nebraska, and an MBA from Columbia, has not been so generous to Columbia.
Sunday, March 22, 2009
President Obama Prefers the Tin Lizzie to the SUV
President Obama Prefers the Model T to the SUV
Last week between a town hall meeting in Costa Mesa and an appearance on Jay Leno, President Obama spoke at an Edison Electric Car plant. Forget the hybrid and the Prius, the President lauded the Model T.
He touted the Tin Lizzie: “The 1908 Model T – Think about this – The 1908 Model T earned better gas mileage than the typical SUV in 1908.” Yes, those were the days a century ago.
Henry Ford introduced the revolutionary, mass produced, 1200 pound Model T in 1908.
The fabled Tin Lizzie achieved a 10-25MPH gas mileage compared to the 18.7MPH of a typical SUV today.
Of course, the Model T lacked such amenities as doors, windows and a roof. Non-existent air conditioning, automatic transmissions, cruise control, and mufflers did not add any weight to the Model T. For exercise, you had to turn the crank to start the car. Charles Kettering didn’t invent the self-starter until 1912; power steering, power mirrors, power brakes and power outlets came much later. Needless to say, the Model T lacked cup holders, radios, 8-track, cassette, cd or dvd players, rearview or side mirrors, windshield wipers, defrosters or adjustable seats.
Gas mileage maybe good, but safety is another issue. Air bags, collapsible steering columns, seat belts, shoulder harnesses, child seats, head restraints, padded dashboards, laminated windshields, safety glass, brake lights, and even reflectors were unavailable to provide safety.
The internal combustion engine spewed out pure air pollution, lacking even rudimentary pollution control measures, much less catalytic converters.
The 4 cylinder engine was underpowered since Ford did not introduce the V-8 until a quarter century later. You might get the Model T up to a speed of 45MPH going downhill, listening to a litany of “Are we there yet?”
Soccer moms would be frustrated with the Model T since it lacked not only cargo space but also a trunk.
The best aspect of the Model T was Henry Ford’s famous option: “You may order the Model T in any color you want so long as it’s black.”
But think of the gas mileage. Give me the SUV any day!
Last week between a town hall meeting in Costa Mesa and an appearance on Jay Leno, President Obama spoke at an Edison Electric Car plant. Forget the hybrid and the Prius, the President lauded the Model T.
He touted the Tin Lizzie: “The 1908 Model T – Think about this – The 1908 Model T earned better gas mileage than the typical SUV in 1908.” Yes, those were the days a century ago.
Henry Ford introduced the revolutionary, mass produced, 1200 pound Model T in 1908.
The fabled Tin Lizzie achieved a 10-25MPH gas mileage compared to the 18.7MPH of a typical SUV today.
Of course, the Model T lacked such amenities as doors, windows and a roof. Non-existent air conditioning, automatic transmissions, cruise control, and mufflers did not add any weight to the Model T. For exercise, you had to turn the crank to start the car. Charles Kettering didn’t invent the self-starter until 1912; power steering, power mirrors, power brakes and power outlets came much later. Needless to say, the Model T lacked cup holders, radios, 8-track, cassette, cd or dvd players, rearview or side mirrors, windshield wipers, defrosters or adjustable seats.
Gas mileage maybe good, but safety is another issue. Air bags, collapsible steering columns, seat belts, shoulder harnesses, child seats, head restraints, padded dashboards, laminated windshields, safety glass, brake lights, and even reflectors were unavailable to provide safety.
The internal combustion engine spewed out pure air pollution, lacking even rudimentary pollution control measures, much less catalytic converters.
The 4 cylinder engine was underpowered since Ford did not introduce the V-8 until a quarter century later. You might get the Model T up to a speed of 45MPH going downhill, listening to a litany of “Are we there yet?”
Soccer moms would be frustrated with the Model T since it lacked not only cargo space but also a trunk.
The best aspect of the Model T was Henry Ford’s famous option: “You may order the Model T in any color you want so long as it’s black.”
But think of the gas mileage. Give me the SUV any day!
Friday, March 20, 2009
The Constitutionality of the Punitive AIG Taxation
The Punitive AIG Tax is Probably Constitutional
It may be punitive, egregious public policy, and unprincipled, but it’s constitutional. It may echo the old English practices of seizing personal and real property, practices which led to the Constitutional ban on bills of attainder, ex post facto laws and the impairment of contracts, but it’s constitutional.
Bills of attainder are those that penalize an individual or concern by name. Legislatures learned decades ago how to avoid this constitutional proscription by using a “generic” description to describe the offensive behavior rather than the “Name” of the offender.
For example, a tax of 90% on
1) Bonuses
2) of employees of companies receiving TARP funds of $5 billion or more
3) with family adjusted gross income of $250,00 or more
is not a bill of attainder because it applies generically to any specific individual, company or group fitting the description, whereas an express tax on "AIG employees" would be unconstitutional.
As for ex post facto laws, courts have long held that the constitutional bar on ex post facto laws applies only to criminal prosecutions. Since these taxes apply only in a civil context, they will not be unconstitutional ex post facto laws.
A trillion dollar ex post facto law has been in effect for almost three decades. It’s CERCLA (The Comprehensive Environmental Response, Compensation, and Liability Act), which imposed retroactive, joint and several, strict liability on owners and/or operators, past or present, generators, and transporters to hazardous waste sites. The contamination may have occurred a century ago, but the liability is today’s. Congress also did not provide many defenses to this liability. CERCLA liability can be draconian, but society has recognized the need to cleanup these toxic sites.
The Supreme Court has essentially ratified the concept that the power to tax is the power to destroy. The City of Seattle was competing decades ago with a private utility, Puget Sound Power & Light, for customers in Seattle. The city settled the conflict by imposing a gross receipts tax on Puget Power’s sales in Seattle, thereby giving the City an insurmountable cost advantage. The Supreme Court upheld the tax in 1954.
Fifteen years later the City of Pittsburgh imposed a 20% gross receipts tax on off-street parking receipts in Pittsburgh. It exempted though from the tax the municipally owned parking lots. Once again the City used the power of taxation to cripple a competitor. The Pennsylvania Supreme Court ruled the tax an unconstitutional takings.
The United States Supreme Court in 1974 upheld the tax. It held that the only question was if taxes raise revenues. If they do, then they are constitutional. Justice Powell in a concurring opinion, in dicta, opined that a point might exist when a tax became unconstitutional, but provided no guidance on that proposition.
The Court will not pass on the reasonableness of a tax that is within the power of Congress. A tax will not be unconstitutional even if it is so excessive as to render a business unprofitable or threaten its existence.
The bar against statutes impairing the obligation of contracts is similarly inapplicable. One of the first major steps taken by FDR during the New deal was to ban the private possession of gold, followed by signing on June 5, 1933 a Joint Resolution of Congress, which declared "gold clauses" unenforcible. About $100 billion in bonds in 1933 contained gold clauses, which pegged the repayment of the debt to the value of gold.
The Supreme Court in three 5:4 opinions on February 18, 1935 upheld the bans. So much for the sanctity of contracts.
Congress in the Stimulus Bill recognized bonuses issued prior to February 11, 2009.
However, the government is free to impose taxes. For example, California may collect royalties on oil production on lands the state has leased to oil companies. It may also, much to the surprise of the lessees, impose a severance tax on all oil production in the state, including state lease lands.
The retroactivity of newly imposed taxes is a wonderful phenomenon. Governor Clinton campaigned in 1992 on a plank of middle class tax cuts. After being sworn in on January 20, 1993 as President, he announced that the budget would require not tax cuts, but tax increases for all, retroactive to January 1, 1993. By an amazing coincidence, President Clinton’s wife, Hillary Rodham Clinton and her partners at the Rose Law Firm, cashed in their bonuses in late 1992, earlier than normal.
Congress is now trying to ride the wave of public outrage, which it could have averted had the members of Congress read the Stimulus Bill before voting on it.
It may be punitive, egregious public policy, and unprincipled, but it’s constitutional. It may echo the old English practices of seizing personal and real property, practices which led to the Constitutional ban on bills of attainder, ex post facto laws and the impairment of contracts, but it’s constitutional.
Bills of attainder are those that penalize an individual or concern by name. Legislatures learned decades ago how to avoid this constitutional proscription by using a “generic” description to describe the offensive behavior rather than the “Name” of the offender.
For example, a tax of 90% on
1) Bonuses
2) of employees of companies receiving TARP funds of $5 billion or more
3) with family adjusted gross income of $250,00 or more
is not a bill of attainder because it applies generically to any specific individual, company or group fitting the description, whereas an express tax on "AIG employees" would be unconstitutional.
As for ex post facto laws, courts have long held that the constitutional bar on ex post facto laws applies only to criminal prosecutions. Since these taxes apply only in a civil context, they will not be unconstitutional ex post facto laws.
A trillion dollar ex post facto law has been in effect for almost three decades. It’s CERCLA (The Comprehensive Environmental Response, Compensation, and Liability Act), which imposed retroactive, joint and several, strict liability on owners and/or operators, past or present, generators, and transporters to hazardous waste sites. The contamination may have occurred a century ago, but the liability is today’s. Congress also did not provide many defenses to this liability. CERCLA liability can be draconian, but society has recognized the need to cleanup these toxic sites.
The Supreme Court has essentially ratified the concept that the power to tax is the power to destroy. The City of Seattle was competing decades ago with a private utility, Puget Sound Power & Light, for customers in Seattle. The city settled the conflict by imposing a gross receipts tax on Puget Power’s sales in Seattle, thereby giving the City an insurmountable cost advantage. The Supreme Court upheld the tax in 1954.
Fifteen years later the City of Pittsburgh imposed a 20% gross receipts tax on off-street parking receipts in Pittsburgh. It exempted though from the tax the municipally owned parking lots. Once again the City used the power of taxation to cripple a competitor. The Pennsylvania Supreme Court ruled the tax an unconstitutional takings.
The United States Supreme Court in 1974 upheld the tax. It held that the only question was if taxes raise revenues. If they do, then they are constitutional. Justice Powell in a concurring opinion, in dicta, opined that a point might exist when a tax became unconstitutional, but provided no guidance on that proposition.
The Court will not pass on the reasonableness of a tax that is within the power of Congress. A tax will not be unconstitutional even if it is so excessive as to render a business unprofitable or threaten its existence.
The bar against statutes impairing the obligation of contracts is similarly inapplicable. One of the first major steps taken by FDR during the New deal was to ban the private possession of gold, followed by signing on June 5, 1933 a Joint Resolution of Congress, which declared "gold clauses" unenforcible. About $100 billion in bonds in 1933 contained gold clauses, which pegged the repayment of the debt to the value of gold.
The Supreme Court in three 5:4 opinions on February 18, 1935 upheld the bans. So much for the sanctity of contracts.
Congress in the Stimulus Bill recognized bonuses issued prior to February 11, 2009.
However, the government is free to impose taxes. For example, California may collect royalties on oil production on lands the state has leased to oil companies. It may also, much to the surprise of the lessees, impose a severance tax on all oil production in the state, including state lease lands.
The retroactivity of newly imposed taxes is a wonderful phenomenon. Governor Clinton campaigned in 1992 on a plank of middle class tax cuts. After being sworn in on January 20, 1993 as President, he announced that the budget would require not tax cuts, but tax increases for all, retroactive to January 1, 1993. By an amazing coincidence, President Clinton’s wife, Hillary Rodham Clinton and her partners at the Rose Law Firm, cashed in their bonuses in late 1992, earlier than normal.
Congress is now trying to ride the wave of public outrage, which it could have averted had the members of Congress read the Stimulus Bill before voting on it.
Tuesday, March 17, 2009
The Demagoguery of AIG
One year ago AIG announced its $135 million in retention bonuses, payable March 15, 2009. The bonuses, ranging from $1,000 to $6.5 million, were actually paid out last Friday. $55 billion had peviously been distributed in December without a peep. The Treasury Department and Federal Reserve Bank were aware of the bonuses last fall. These bonuses though ignited a firestorm in Washington, editorial pages, commentators, and blogs.
The outrage; the outrage; but not as will see the real outrage.
The normal suspects showed up, including the President, Senators Dodd, Reid and Schumer, Representatives Nancy Pelosi, Barney Frank and Elijah Cummings, and New York Attorney General Andrew Cuomo. For once, this Congress acted bipartisan in expressing its outrage. Indeed, Senator Mitch McConnell called the AIG situation an “outrage.” That was a temperate remark!
Senator Charles Grassley jumped on board saying the AIG people should follow the Japanese example and come before the American people, take that deep bow, apologize and then either resign or go commit suicide.
Senator Grassley may have been engaged in Senatorial hyperbole, but Senator Schumer of New York, in his inimical style, told the employees to give back the bonuses or “We will do it for you.” Is he from New York or Chicago?
Senator Snowe called the bonuses a “staggering insult to the American people,” although her vote for the Stimulus Bill apparently was not.
Congressman Frank was somewhat more creative. He would let the beneficiaries keep their bonuses, but at the cost of losing their jobs.
President Obama said these bonuses are an affront to the taxpayers, reckless and greedy. Yet, the $787 billion Stimulus Bill, packed with pork, is not an affront to the taxpayers. Nor is the $410 billion budget bill with roughly 9.000 earmarks.
Senator Dodd proposes taxing these bonuses at 98%. Senator Dodd, the same Senator Dodd who received the largest campaign contributions by AIG in 2008, in his Dodd Amendment to the Stimulus Bill, exempted bonuses contracted before February 11, 2009.
Ah, the hypocrisy and demagoguery. These threats, punitive taxation, and confiscation are the acts of third world dictators, such as Hugo Chavez, who do not believe in the rule of law.
President Obama instructed his Administration to “pursue every single legal avenue to block” the bonuses. His economic advisor, Lawrence Summers, an economist, and Treasury Secretary Geithner, know something the President, a constitutional law professor, apparently does not know. The United States Constitution protects the sanctity of contracts. They concluded over the weekend that AIG was legally obligated to pay the bonuses, as did outside counsel to AIG.
Summers stated on Face the Nation: “The government cannot just abrogate contracts.” We are “not a nation where contracts just get abrogated willy nilly.” He added “But you have to think of the consequences of breaking contracts for the overall system of law.”
The purpose of the retention bonuses was to keep the employees around for the upcoming year. Once you realize your position may be eliminated, you need an incentive to stay around. AIG needed these experts to clean up and unravel the complex financial instruments that essentially bankrupted AIG. $2.7 trillion in derivatives alone had to be unraveled. Andrew Cuomo reported that the contracts written in March 20008 guaranteed the employees 100% of their 2007 salary for 2008. Individual performance was not a factor in the contracts.
The financial instruments involved were 1) collateral to back up credit default swaps; 2) the purchase of collateralized debt instruments; and 3) payments to counterparties of a securities lending program.
The simple question is: How many members of Congress understand any of this?
Paying the bonuses is part of the cost of the bailout in lieu of bankruptcy, in which many of these employees would have been laid off without bonuses. The cost to the global financial system might have been greater than we are currently experiencing though.
AIG has received $173.3 billion in bailout funds from the United States – that is an outrage to the taxpayers. Even more outrageous is where these funds went, mostly foreign banks. They did not bail out AIG; through December 31, 2008 they bailed out:
Societe Generale 11.9 Billion
Goldman Sachs 12.9 Billion
Deutsche Bank 11.8 Billion
Barclays 8.5 Billion
Merrill Lynch 6.8 Billion
Bank of America 5.2 Billion
UBS 5.0 Billion
BNP Paribas 4.9 Billion
HSBC 3.5 Billion
Calyon 2.3 Billion
CitiGroup 2.3 Billion
Dresdner Kleinwort 2.2 Billion
Wachovia 1.5 Billion
ING 1.5 Billion
Morgan Stanley 1.2 Billion
Bank of Montreal 1.1 Billion
Deutsche Zentral-Genossenschaftsbank 1.0 Billion
Rabobank .8 Billion
DZ Bank .7 Billion
The Royal Bank of Scotland .7 Billion
AIG International .6 Billion
KFW .5 Billion
Credit Suisse .4 Billion
JP Morgan .4 Billion
Dresdner Bank AG .4 Billion
Banco Santander .3 Billion
Citadel .2 Billion
Danske .2 Billion
Paloma Securities .2 Billion
Reconstruction Finance Corp. .2 Billion
Landesbank Baden-Wuerttemberg .1 Billion
In other words, as soon as AIG received the government funds, it turned around and paid out $120 billion. 20 European banks received $58.8 billion.
Senator Snowe’s remarks that “I think it looks like we are simply laundering this money through AIG” seems right on.
Punitive steps by Congress and the President send a message to private investors in the financial industry – Stay Out! Do not get involved with the untrustworthy government in a bailout because it will neither respect contracts nor its own legislation. So much for any public-private partnership!
It also sends a message that the rule of law does not matter in America.
Indeed, Senator Robert Melendez has gotten into the act by asking Morgan Stanley to scrap $3 billion in retention bonuses for 6,500 brokers who might otherwise leave when the brokerage operations of Morgan Stanley and Citigroup are combined. The Senator in a letter to Treasury Secretary Geithner asked the Secretary to use “every legal means available” to stop the payouts.
Another outrage is that the current disgust with AIG can be traced back to March 15, 2005. That is the day when the then Attorney General of New York, Eliot Spitzer, forced Hank Greenberg out as Chair of AIG in an "accounting scandal,' which ultimately turned out to be much ado about nothing. Greenberg was the entrepreneur who, over 4 1/2 decades, built a tiny insurance company into one of the world's greatest. He kept tight control on risk. That ended with his departure.
The final, and most worrisome, outrage is how quickly the American public has been manipulated into a mob frenzy, which diverts attention from the roughly $100 billion paid out to banks and, as I write this piece, apparently to hedge funds.
The AIG disclosure of its transfers was made on Sunday. The employee bonuses were known many days sooner, but suddenly became the issue. Most of us were diverted from looking deeper at the bailout.
It can happen again.
The outrage; the outrage; but not as will see the real outrage.
The normal suspects showed up, including the President, Senators Dodd, Reid and Schumer, Representatives Nancy Pelosi, Barney Frank and Elijah Cummings, and New York Attorney General Andrew Cuomo. For once, this Congress acted bipartisan in expressing its outrage. Indeed, Senator Mitch McConnell called the AIG situation an “outrage.” That was a temperate remark!
Senator Charles Grassley jumped on board saying the AIG people should follow the Japanese example and come before the American people, take that deep bow, apologize and then either resign or go commit suicide.
Senator Grassley may have been engaged in Senatorial hyperbole, but Senator Schumer of New York, in his inimical style, told the employees to give back the bonuses or “We will do it for you.” Is he from New York or Chicago?
Senator Snowe called the bonuses a “staggering insult to the American people,” although her vote for the Stimulus Bill apparently was not.
Congressman Frank was somewhat more creative. He would let the beneficiaries keep their bonuses, but at the cost of losing their jobs.
President Obama said these bonuses are an affront to the taxpayers, reckless and greedy. Yet, the $787 billion Stimulus Bill, packed with pork, is not an affront to the taxpayers. Nor is the $410 billion budget bill with roughly 9.000 earmarks.
Senator Dodd proposes taxing these bonuses at 98%. Senator Dodd, the same Senator Dodd who received the largest campaign contributions by AIG in 2008, in his Dodd Amendment to the Stimulus Bill, exempted bonuses contracted before February 11, 2009.
Ah, the hypocrisy and demagoguery. These threats, punitive taxation, and confiscation are the acts of third world dictators, such as Hugo Chavez, who do not believe in the rule of law.
President Obama instructed his Administration to “pursue every single legal avenue to block” the bonuses. His economic advisor, Lawrence Summers, an economist, and Treasury Secretary Geithner, know something the President, a constitutional law professor, apparently does not know. The United States Constitution protects the sanctity of contracts. They concluded over the weekend that AIG was legally obligated to pay the bonuses, as did outside counsel to AIG.
Summers stated on Face the Nation: “The government cannot just abrogate contracts.” We are “not a nation where contracts just get abrogated willy nilly.” He added “But you have to think of the consequences of breaking contracts for the overall system of law.”
The purpose of the retention bonuses was to keep the employees around for the upcoming year. Once you realize your position may be eliminated, you need an incentive to stay around. AIG needed these experts to clean up and unravel the complex financial instruments that essentially bankrupted AIG. $2.7 trillion in derivatives alone had to be unraveled. Andrew Cuomo reported that the contracts written in March 20008 guaranteed the employees 100% of their 2007 salary for 2008. Individual performance was not a factor in the contracts.
The financial instruments involved were 1) collateral to back up credit default swaps; 2) the purchase of collateralized debt instruments; and 3) payments to counterparties of a securities lending program.
The simple question is: How many members of Congress understand any of this?
Paying the bonuses is part of the cost of the bailout in lieu of bankruptcy, in which many of these employees would have been laid off without bonuses. The cost to the global financial system might have been greater than we are currently experiencing though.
AIG has received $173.3 billion in bailout funds from the United States – that is an outrage to the taxpayers. Even more outrageous is where these funds went, mostly foreign banks. They did not bail out AIG; through December 31, 2008 they bailed out:
Societe Generale 11.9 Billion
Goldman Sachs 12.9 Billion
Deutsche Bank 11.8 Billion
Barclays 8.5 Billion
Merrill Lynch 6.8 Billion
Bank of America 5.2 Billion
UBS 5.0 Billion
BNP Paribas 4.9 Billion
HSBC 3.5 Billion
Calyon 2.3 Billion
CitiGroup 2.3 Billion
Dresdner Kleinwort 2.2 Billion
Wachovia 1.5 Billion
ING 1.5 Billion
Morgan Stanley 1.2 Billion
Bank of Montreal 1.1 Billion
Deutsche Zentral-Genossenschaftsbank 1.0 Billion
Rabobank .8 Billion
DZ Bank .7 Billion
The Royal Bank of Scotland .7 Billion
AIG International .6 Billion
KFW .5 Billion
Credit Suisse .4 Billion
JP Morgan .4 Billion
Dresdner Bank AG .4 Billion
Banco Santander .3 Billion
Citadel .2 Billion
Danske .2 Billion
Paloma Securities .2 Billion
Reconstruction Finance Corp. .2 Billion
Landesbank Baden-Wuerttemberg .1 Billion
In other words, as soon as AIG received the government funds, it turned around and paid out $120 billion. 20 European banks received $58.8 billion.
Senator Snowe’s remarks that “I think it looks like we are simply laundering this money through AIG” seems right on.
Punitive steps by Congress and the President send a message to private investors in the financial industry – Stay Out! Do not get involved with the untrustworthy government in a bailout because it will neither respect contracts nor its own legislation. So much for any public-private partnership!
It also sends a message that the rule of law does not matter in America.
Indeed, Senator Robert Melendez has gotten into the act by asking Morgan Stanley to scrap $3 billion in retention bonuses for 6,500 brokers who might otherwise leave when the brokerage operations of Morgan Stanley and Citigroup are combined. The Senator in a letter to Treasury Secretary Geithner asked the Secretary to use “every legal means available” to stop the payouts.
Another outrage is that the current disgust with AIG can be traced back to March 15, 2005. That is the day when the then Attorney General of New York, Eliot Spitzer, forced Hank Greenberg out as Chair of AIG in an "accounting scandal,' which ultimately turned out to be much ado about nothing. Greenberg was the entrepreneur who, over 4 1/2 decades, built a tiny insurance company into one of the world's greatest. He kept tight control on risk. That ended with his departure.
The final, and most worrisome, outrage is how quickly the American public has been manipulated into a mob frenzy, which diverts attention from the roughly $100 billion paid out to banks and, as I write this piece, apparently to hedge funds.
The AIG disclosure of its transfers was made on Sunday. The employee bonuses were known many days sooner, but suddenly became the issue. Most of us were diverted from looking deeper at the bailout.
It can happen again.
Sunday, March 15, 2009
March Madness: Random Questions
How can the tournament be legitimate without Kentucky?
Which traditional basketball power, Duke, Indiana, Kansas, Kentucky, North Carolina, or UCLA has a chance of going all the way?
Will injuries ruin UConn and North Carolina’s chances?
Has Memphis learnt to shoot free throws?
What ever became of George Mason?
Why do they talk about 64 teams, when it is really 65?
How come the Big Ten is still called the Big Ten?
Is this why the math section was removed from the LSAT?
Will the Big Ten be as embarrassing in basketball as in bowl games?
Quick, name the mascots of all 64/65 teams?
Why is Duke a 4 letter word, but UCLA is five? (Hint, put an “f” in front of UCLA)
Aside from Duke, Louisville, Memphis, and perhaps Purdue, how many of the conference tournament winners are cannon fodder (Akron, Alabama State, American, SUNY Binghamton, Cal State Northridge, Chattanooga, Cleveland State, East Tennessee State, Mississippi State, Morgan State, Northern Iowa, Portland State, Radford, Robert Morris, Siena, Temple, USC, Utah, Utah State, Virginia Commonwealth, Western Kentucky)?
How many schools with “State” in their name have won the title?
Will any Vegas casino be saved by sports betting on the Big Dance?
Is San Diego State paying for the past sins of Steve Fisher?
When, if ever, will Northwestern be in it?
Why does the Big Ten get seven teams?
When is the last time a Big Ten team won the NCAA?
Will Michigan make it out of the first round and help us repress football?
When the last whistle blows, does anyone care about the other three teams in the Final Four?
Who goes around screaming “We’re Number 2” or “We’re third in the nation,” much less “We are Number 4.”?
Why Arizona?
Why not the Galloping Gaels of Saint Mary’s?
Which Cinderella will be the next Gonzaga?
Is it better to be a 2 seed?
Does a bracketologist need a medical license?
Does any team really want to win this year?
Who will be the next coach to pull a Rick Neuheisel?
Will any of the teams have to forfeit their victories this season?
What will be the graduation rate of the championship team?
How many have a law school the basketball team can be proud of?
What about the UConn women’s team?
Beware the Ides of March!
Which traditional basketball power, Duke, Indiana, Kansas, Kentucky, North Carolina, or UCLA has a chance of going all the way?
Will injuries ruin UConn and North Carolina’s chances?
Has Memphis learnt to shoot free throws?
What ever became of George Mason?
Why do they talk about 64 teams, when it is really 65?
How come the Big Ten is still called the Big Ten?
Is this why the math section was removed from the LSAT?
Will the Big Ten be as embarrassing in basketball as in bowl games?
Quick, name the mascots of all 64/65 teams?
Why is Duke a 4 letter word, but UCLA is five? (Hint, put an “f” in front of UCLA)
Aside from Duke, Louisville, Memphis, and perhaps Purdue, how many of the conference tournament winners are cannon fodder (Akron, Alabama State, American, SUNY Binghamton, Cal State Northridge, Chattanooga, Cleveland State, East Tennessee State, Mississippi State, Morgan State, Northern Iowa, Portland State, Radford, Robert Morris, Siena, Temple, USC, Utah, Utah State, Virginia Commonwealth, Western Kentucky)?
How many schools with “State” in their name have won the title?
Will any Vegas casino be saved by sports betting on the Big Dance?
Is San Diego State paying for the past sins of Steve Fisher?
When, if ever, will Northwestern be in it?
Why does the Big Ten get seven teams?
When is the last time a Big Ten team won the NCAA?
Will Michigan make it out of the first round and help us repress football?
When the last whistle blows, does anyone care about the other three teams in the Final Four?
Who goes around screaming “We’re Number 2” or “We’re third in the nation,” much less “We are Number 4.”?
Why Arizona?
Why not the Galloping Gaels of Saint Mary’s?
Which Cinderella will be the next Gonzaga?
Is it better to be a 2 seed?
Does a bracketologist need a medical license?
Does any team really want to win this year?
Who will be the next coach to pull a Rick Neuheisel?
Will any of the teams have to forfeit their victories this season?
What will be the graduation rate of the championship team?
How many have a law school the basketball team can be proud of?
What about the UConn women’s team?
Beware the Ides of March!
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