The US Congress is a bunch of overachievers. Just when you think they have done something so base, so despicable, that no future behavior could be worse, they meet the challenge and reset all standards of decency, finding new lows that were seemingly unimaginable. They are a dishonest Mafia. The Mafia at least admits to their criminality, suffering no illusions as to their good intentions. Congress however, acts like thugs, but maintains that they are cloaked in virtue.
The last time congress acted like the unruly mob they are was when they had the oil CEOs up to the hill for hearings. Remember $150 oil? Our exalted represenatives insulted and demeaned some of the finest, brightest, most accomplished men America has to offer. The reason? The oil companies were making money. Socialists don't understand that corporate profits are simply votes endorsing the products and services a company provides. Congress accused them of greed, price fixing, and speculative excess. Corporations make money because they give us what we want better than anyone else. They are not evil. They may be greedy, but capitalism channels that greed (albeit in an imperfect way) to the benefit of us all.
If there is one group to blame for the high price of oil, it is the congress itself. Their ban on offshore drilling, ban on drilling in Anwar and other federal lands, and the obstacles they put up preventing nuclear power plants from being built, all push the price of oil up. On the other hand, the oil companies efficient and cost effective exploration, joint ventures with foreign countries, and prudent long term planning, none of which can occur without profits, all push the price of oil down.
The faux outrage over the AIG bonuses is the latest example of congressional malfeasance. Bonuses were an integral part of the pay plan at AIG. The company agreed to pay bonuses to several employees in order to keep them there during a year when everyone knew that would be no profits, and thus no opportunity to earn more than a salary. They needed these people to unwind the disastrous positions in credit insurance which were on the books. Done properly, the losses could be minimized, but absent these promises of bonuses, many key employees would have left. Subsequently, when the company was teetering on the edge of bankruptcy, and the government decided to save it by injecting TARP funds (they said it was too big to fail, a debatable conclusion), the bonus issue was examined and found to be reasonable by some, but more important, legally binding by all.
Fast forward a couple of months and the public hears that bonuses were paid out of TARP money (taxpayer money) to the people who caused the mess to begin with. There may be some truth to that, but only some. The vast majority of money was paid to people who had no role in the decision to write credit insurance, the decision that sunk the company.
Credit insurance was a guarantee that many banks bought from AIG (Goldman, Merrill, Morgan Stanley etc.) so that they could be sure that the counter parties those banks were doing business with would not default on monies owed to them. The problem arose because AIG was able to classify the guarantee they issued as something other than insurance. If it were deemed insurance, they would have been overseen by insurance commissions, and forced to post reserves to guarantee they could and would pay their losses. This requirement would have limited the amount of insurance they could write. However, having circumvented the insurance classification, they could write unlimited amounts..and they did exactly that, exposing the company to catastrophic losses. Many banks that bought this insurance would likely have gone bankrupt if AIG were unable to pay, which certainly they couldn't have paid, absent the bailout. Were they too big to fail as Paulson and Bernake contended? Perhaps..but maybe not.
It is noteworthy that congress has not yet examined the internal failure at AIG that caused their collapse. The reason is that their Democratic ally Elliot Spitzer, and by implication the party itself, is complicit in it. Hank Greenberg is an exceptional man and a great American, who took a small insurance company 30 years ago and built it into the premier insurance company in the world. Greenberg was involved with all facets of the company. His reputation in both the insurance industry and business in general was that of an honest, no nonsense, hands on, rational, hard working, hard driving manager. He met every month with each division CFO and examined their investments, what they were underwriting, and most importantly the risks they incurred. For 30 years, his oversight kept the company growing and healthy.
About 4 years ago Elliot Spitzer was the ambitious Attorney General of New York. He thought nothing of abusing his power in order to help pave the road for himself to the Governor's mansion. His modus operandi was to find a petty crime in one division of a large company, and threaten the entire company with criminal charges (which would be a death knell even if the company were innocent), and thereby extort an admission of guilt and large financial settlement, getting even larger headlines for himself. He found a transaction between AIG and one of Berkshire Hathaway's insurance companies that he deemed to have no economic motive, claiming it was a sham, designed to give the appearance of enhanced creditworthiness for AIG, and thus allowing them to borrow at a cheaper rate. Spitzer went after the company with a vengeance. Warren Buffet was on the other side of the transaction (which was trivial in size anyway) but he was given a clean bill of health. Warren knows it pays to support Democrats, and as a result they support him. Greenberg however was forced out, banished from the company. Spitzer said he was going to pursue civil and criminal charges against Greenberg personally. Of course no criminal charges were ever filed, and the civil action was dismissed. The question is, would AIG have gone down the road to ruin if Greenberg hadn't been forced out? His replacement said he never knew what the division that caused the catastrophe was doing. It is hard to believe Greenberg wouldn't have know, and impossible to believe if he did know he wouldn't have stopped it. But Congress will never tell you that.
Now we have congress demonizing every employee who took a bonus, threatening to publicly disclose the names of anyone not giving the money back (if this isn't extortion what is?), passing new punitive taxes on all of them and in the process dragging under every other employee of a bank that took TARP money with the same tax (a clear constitutional violation), just so they can appeal to what they believe are the most base of voter sentiments.
Listening to the discussions by academics and business people about these bonuses is almost as frightening as congress. They say, "we need a better way of compensating employees. There is a disconnect between compensation and performance." No kidding. These talking heads just discovered 2 plus 2 is 4. For all time there has been a problem incentivising employees in a manner where their interests are aligned with the company/ shareholders interest. Managers have wrestled with this problem forever. A variety of ideas have been tried with varying degrees of success...none perfect, all with faults and often yielding undesired results, but managers do the best they can.
The US government is the largest employer in the US, and the least efficient. There are advantages to size, but efficiency is not one of them. Let's look at a sole proprietorship. The owner acts in his self interest of course. Does the person below him? Well, maybe. He certainly does more often than the person third down on the chain. He gets paid more, and is more under the direct eye of the owner. What happens is that as you get lower on the chain, and farther from the top, people are less caring, thoughtful, and skilled. Time does not allow me to go into the various theories here of how to get the best performance from people, but the problem is age old, and not likely to be solved any time soon. More to the point, congress is the last group in the world we want determining how to deal with this, or how to compensate people, but that seems exactly what they are hell bent on doing. God help us all.
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