The contrast between the Obama and Bush administrations could not be clearer. The Bush administration, for all the noise about “lies,” announced its intentions plainly and defended them, sometimes ineptly. The Obama administration seems habitually, if 2 months of a pattern can be called a “habit,” to attempt to do all business behind a cloud of smoke, a cloud created by attacking American citizens. It’s an ugly pattern, and ominous.
The smoke screen this time is manufactured rage over AIG executives receiving contractually-demanded retention bonuses after having received federal bailout funds. And while some of the rage properly has been spilling over onto Treasury Secretary Timothy Geithner, who knew all about the bonuses but said nothing, and Sen. Chris Dodd (D, CT,) who slipped loopholes into bailout legislation that permitted the bonuses to be paid, the entire matter is still nothing but smoke to obscure what ought to be the real outrage: why did AIG receive almost $200 billion in federal funds in the first place?
The fact that $200 billion sounds like a small figure defines the times, doesn’t it? It’s an enormous sum (about 1½ times the annual budget requested to run the entire US Army in 2007). It’s so large that we actually filter it out. Americans can get outraged about a buck-fifty in ATM charges, and because outrage has its limits, the same energy undergirds outrage against a few hundred million in executive bonuses and a few hundred billion in federal subsidies. Outrage is outrage, and numbers are just numbers. But there really is a reason why we should be a thousand times more outraged by the waste of a thousand times more money — which is the proportion between the chump change being paid in bonuses (required by contract) and the sum being lent to AIG. And in fact, as I’ll argue later, we should not be outraged by bonuses at all.
AIG received its first round of government money in September 2008. AIG had been “insuring” derivatives trades by banks around the world against precisely what has happened — a loss of asset value underlying the derivatives, in this case the deflation of the housing bubble. Since the division of AIG providing the “insurance” was actually structured as a bank rather than an insurance company (hence the quote marks around the words with the root “to insure,”) AIG was forced by mark-to-market accounting rules to revalue its assets downward to reflect the falling value of housing, and further forced to obtain a huge amount of additional capital to meet reserve requirements. This occurred at the same time that AIG’s financial rating was downgraded by leading financial rating institutions, with the result that it was more difficult and expensive for AIG to obtain the additional funding. About to fold, AIG cried out to the Treasury Dept for help. They received an $85 billion loan from the Treasury, in exchange for 80% ownership by the government (without approval by the stockholders, I might add.) On Nov 10, the government raised the loan to $150 billion. On March 2, 2009, they added another $30 billion.
And the situation does not appear to be improving. Investors are suggesting that bankruptcy would serve them better, and certainly that would serve the American taxpayer better. But Goldman Sachs might have suffered, so here we are.
Even during the Bush administration, there was talk of a possible cover-up of favoritism within the Treasury Department to protect Goldman Sachs. Goldman was the source of Treasury Secretary Paulson, the father of the Grandmother of All Bailouts. There was a rumor, later debunked, that the President of Goldman Sachs, Lloyd Blankfein, was the only private citizen present in a special meeting at Treasury to discuss aid to AIG. Though debunked, it remains nonetheless true that Goldman Sachs was the largest beneficiary of AIG’s bailout. And favoritism might explain why the Treasury allowed Lehman Brothers to founder and sink beneath the waves, but sailed boldly to the rescue of AIG just a few days later.
Part of the outrage should be directed at the fact that enormous blocks of US funds, to be paid back by future Americans, have gone directly to large, foreign banks. Now, this part is not hidden or unexpected. The surface reason for rescuing AIG was that the failure of the large insurer would send ripples through the international banking community; for a lot of people, that phrase rolled off their tongues without them having considered precisely what it meant. What it meant was that international banks with holdings in mortgage-backed securities would not be compensated by AIG for the loss of the value of those securities, and would suffer, possibly fatally. So, when Treasury handed AIG a series of checks worth $173 billion, AIG proceeded to turn around and write checks to Goldman Sachs ($12.9 billion,) Societe Generale ($11.9 billion,) Deutsche Bank ($11.8 billion,) Barclays PLC ($8.5 billion,) and quite a few others. The US economy is shrinking, and lots of Americans are scrounging, but big, foreign banks are safe and sound. Your tax dollars at work.
I have nothing against foreign banks, and the world should be grateful that these banks are sound. However, I don’t imagine Congress would have approved foreign aid packages in those amounts to those recipients, nor do I think the people Congress is representing would have approved. It is not a proper use of US funds. AIG should have been permitted to fail.
More to the point, I don’t think the Obama administration is interested in directing outrage against foreign banks. Surely they could easily have done so, but they’ve been quiet about it. Quite the contrary; the Obama administration hates American exceptionalism, and is most likely eager in the extreme to hide the fact that the US government is paying to keep Deutsche Bank afloat.
The Obama administration is clearly interested, though, in directing outrage against American corporations. Why? Because rage against American corporations feeds the next steps in the Obama administration’s plans.
American liberals — Democrats, progressives, and some independents — deny that they are Marxists. It’s a fact that traditional American liberalism focuses on individual liberties, the sorts of liberties that have become the watchword of American conservatives like me (the roles have shifted.) However, American liberals have been deeply influenced by Marxism, much more than they are aware. It shows in a number of policies, but most directly it shows in their hatred of American business. The outcry against “big corporations” is nothing more or less than the Marxist denunciation of the bourgeoisie, translated onto the American landscape.
And in Marxist-like fashion, it’s remarkably easy to amplify this outcry in the public eye during a period when people are afraid for their jobs, simply by fanning into flame one of the basest of human evils — envy. It’s a stalwart soul that, while struggling daily with bills for basic things like heat and rent, let alone facing the possibility of layoffs, can resist envy when watching another man receive a single paycheck larger than the sum of his entire life’s paychecks. The best of us deflect that reaction only with difficulty. Couple that reaction with the fact that we resent the company having received a bailout in the first place, and with the fact that we perceive the company as having failed but not paid for its failure, and you have a demagogue’s dream. This is why the House is holding hearings on the bonuses, and why it’s calling for draconian taxes on them, and contemplating full takeovers. It’s why Rep. Barney Frank, himself one of the individuals most directly responsible for the collapse of the US economy, is calling for the AIG executives to be named publicly; imagine how long this issue can be stretched out over such a demand!
It’s also, plausibly, why Senator Dodd slipped the wording protecting bonuses into the bailout legislation in the first place, and why the administration pretended surprise at the announcement of it last weekend. This was a planned diversion, an orchestrated alarm designed to initiate the next stage in the administration’s rapid-fire assault on American capitalism.
And all of it serves to obscure the fact that the Bush administration, followed by the Obama administration, is funding major foreign banks with tax dollars to be collected from the next two generations of American taxpayers.
There is not a sound reason on earth why the compensation of executives should ever be the government’s business, nor any of ours, unless we are stockholders of the corporation. Compensation of executives is determined by a company’s Board of Directors, the individuals responsible for protecting the interests of the company’s stockholders. The salaries of executives are determined by a market where talent gets to negotiate its own worth. If an executive makes a huge sum, it’s because at some point in time the Board of Directors of the company employing that executive felt it was worth the expenditure of that sum of money to hire the talent necessary to run the company. The stockholders are the ones injured if the Chief Executive Officer of a corporation performs poorly; they’re the ones who should care the most, as they own the company. Consequently, the stockholders, represented by the Board of Directors, are the only ones who should be concerned if the CEO makes too much money. It’s their money, you see. And if any of us becomes jealous of the money the executive earns, that’s just too bad; if we want to earn that sort of money, we should work our way up the executive ladder to the place that our skill can command that sort of paycheck. The fact that most of us would never make it that high explains why their talent just might be worth that sort of money.
Even the provision of a large loan from the federal government does not make their compensation our business. The loan was not made in order to obtain federal control of the company; and to the extent that it was, the federal government stole the value of the company from the true stockholders, who were not consulted in the deal. If we are outraged about how our money is being spent, we should insist that the government provide no more such bailouts, not that executives not get paid what they are worth on the open market.
But whatever your feeling about executive compensation, the real enemy in this affair is the totalitarian impulse that deliberately diverts our attention from an encroaching government domination by encouraging hate toward other Americans. The White House has deliberately targeted radio show hosts, Republican legislators, and now American heads of American companies, as the targets for our rage, all to get us to accept increasing government domination of the US economy. Expect the pattern of character assassination to continue; it’s what they do best.
For further reading on the subject, consider spending a few minutes with Newt Gingrich’s explanation of how Treasury Secretary Timothy Geithner actually architected the bailout as President of New York’s Federal Reserve Bank. Whenever we pierce the smokescreen even a little, we’re told that the Obama administration inherited the mess; in Geithner’s case, it is not true. Even apart from Geithner, though, the Obama administration has not objected to the crisis, but rather reveled in it, and is determined not to let it go to waste.