AIG and GM: A tale of bonuses and greed.

On Sep 17th 2008, two days after allowing Lehman Brothers to spiral into a bankruptcy, USA nationalized insurance giant AIG. An AIG bankruptcy would have sent the worldwide financial industry into a precipitous tailspin and caused financial armageddon, coming just two days after the largest bankruptcy filing in US history. A year later in March 2009, with Obama just inaugurated, AIG announced bonuses of unto $218 Million involving specifically employees in its financial division, the main culprits behind its ignominious fall. AIG pleaded that those were 'retention bonuses' to retain talented people who were needed to set the house in order. Barack Obama, now President, exploded in anger "I've asked Treasury Secretary Timothy Geithner to use that leverage (US bailout) and pursue every legal avenue to block these bonuses and make the American taxpayers whole". Justifiable anger. Accurately expressed emotions of an outraged nation. Charles Krauthammer, being a columnist, went further and called for bringing out the "guillotine and Madame Defarge". It is a rare cosmic event for Obama and Krauthammer to speak in unison and especially when Obama appears restrained in comparison.

Obama administration caused a flutter when it shredded 200 years of bankruptcy law to give UAW ownership of GM and Chrysler. If Obama had followed that bankruptcy model for AIG, AIG employees would not need that bonus but instead would be laughing their way to the bank. According to bankruptcy law bondholders are the primary recipient of money in a bankruptcy. Obama gifted GM to UAW and stiffed the bondholders. Same thing at Chrysler. Bond holders, banks like JP Morgan, recipients of TARP, were coerced into signing off.

In February 2012 GM (General Motors) reported record profits and declared bonuses $4000-$7000 to its 68,000 US employees. The President was grinning and proudly claimed credit for having saved "American car Industry", liberals danced in the streets (ok, not literally) about how workers and working families were saved by US government. The wrinkle in that story is GM still owes US taxpayers $25 billion. What is worse US taxpayer owns a third of GM shares. The GM shares bought by US treasury is languishing at $30, the shares need to touch $50 for break even. Not feasible any time soon.

AIG and Wall Street were bailed out of a rapidly spiraling, little foreseen, calamitous event. The much maligned $700 billion TARP (Troubled Asset Relief Program), contrary to popular idea, includes bailout of Detroit. Everyone decried how Goldman Sachs and JP Morgan were given $25 billion from TARP. Both companies were actually 'forced' and 'coerced' to take the money lest they make the non-borrowers look bad causing a different crises. Both have returned the money, with punitive interest, promptly. That GM and Chrysler were sliding towards bankruptcy was a writing on the wall for nearly 4 years. Unlike Wall Street that suffered (and inflicted) a domino effect Detroit was declining in front of the public in well foreseen course of events. Wall Street has repaid every penny and interest for TARP. FDIC and US treasury made record profits on Wall Street bailouts. Detroit bailout is yet to make money for the taxpayer.

New York Times (not Wall Street Journal) in its editorial scolding Romney for discrediting Detroit bailout, conceded that Detroit's troubles were caused by outrageous labor contracts. UAW negotiated its most recent contract stipulating that GM should not be opening plants in low-cost Mexico. The American GM worker enjoying his bonus owes it to China and India for those profits. I guess selling to China is good but opening a factory in Mexico is not good.

UAW, with some justification, always deflected criticism of their generous benefits by saying "labor cost is a red herring, Japanese cars which cost more are selling more. So cost is not the factor. It's just that American cars are not liked by people due to reliability problems". UAW is also indignant that management continued to misjudge consumer requirements and produced gas guzzlers as gas prices climbed up. True.

UAW contracts, before the bankruptcy,  are fortified and in the name of protecting the worker make it impossible for factories to retool or close down. When a factory or an assembly line closes down UAW worker enjoys 100% pay and full benefits for more than a year, the benefits include $0 in pension contribution and a very generous healthcare plan. Under bankruptcy protection UAW negotiated and got 'sign on bonus' and contracted bonuses. I don't know if sign on bonuses exist in private sector anymore for any worker lesser than the top most spot.

UAW, because GM is under Chapter 11, conceded something unheard of in Labor movement in USA. UAW conceded that new workers would be paid a different, lower, salary. A two tiered structure. When Metropolitan Transit worker in NYC struck work in the busiest shopping season of the year in 2005, a week before Christmas, their leader Roger Toussaint declared haughtily, "we will not sell the unborn" and caused millions of dollars in losses to NYC businesses. UAW was forced to concede all this ONLY because under chapter 11 they cannot strike. UAW threatened Ford with a strike because Ford, which did not need a bailout, did not have Chapter 11 protection.

A justifiable question on AIG bonuses was "if these guys are so intelligent that we need to pay retention bonuses to keep them how come they caused this mayhem?" Sure.As much as AIG employees were deemed incompetent to receive bonuses I've not seen GM employees being asked that question. Do GM employees deserve their bonus any more AIG employees deserved theirs? Were is the President asking for his Secretary to block the bonuses and pursue every legal avenue to make the tax payer whole.

Time magazine ran a cover story on the turnaround of Chrysler. The hero of the story was the CEO, not UAW. The whole story, by left leaning Time, was effusive about Sergio Marchionne of Fiat. Fiat CEO refused to put a penny of his own and forced Obama to pay everything. Marchionne lent only his legendary name and skill. This a wonderful moment lost by UAW to make good on their boast that they are the pillars behind the companies. I'd have loved to watch UAW run Chrysler without these high priced and hated CEO's. After all does not UAW shout from rooftops about how CEO's are greedy and how its the worker who is the productive unit. Time covers story is a lesson in how individuals and CEO's matter. UAW is just muscle.

Yes GM made profits but at what cost. Aside from direct bailout the Obama administration's clumsy and useless "cash for clunkers" cost is not counted. Edmunds.com CEO (popular website for car prices) lambasted the administration for throwing money. Again, it was done with the 'noble' intention of helping workers. Never mind that that money is taxpayer money, also paid by many hardworking workers. A friend dumped an old Nissan van and bought a Lexus with that taxpayer money. No sensible consumer was going to sign on a loan for a car worth $25,000 just because he/she gets $2000 for a banged up car. Obama administration scolded Edmunds.com CEO for telling the truth.

Everyday the President decries the billions of dollars in subsidy to the gas industry. Little does he talk of how his stooge the EPA tweaks mileage rules to favor the Detroit three. The President continues to plough money into hybrid vehicles. Does a buyer of a $25,000 vehicle need tax payer money? GM's volt is yet to sell like the hot cakes it is made out to be. Also too much is made of GM's profits. GM earned its profits from sales mostly in Asia. Also the tsunami in Japan completely threw out Toyota and Honda's supply lines causing severe shortage. Any CEO worth his salt would put the cash that is raining now for a rainy day and not disburse them as 'bonuses'.

To top off the chutzpah GM recently paid millions to release an ad during Super Bowl half time starring Clint Eastwood lauding the bailout. The thinly veiled campaign ad for Obama drew a lot of scorn from republicans. Ford, trying to sell cars, recently aired a series of ads featuring real customers boasting that Ford did not take tax payer money and is turning out good cars. Obama administration shut that ad down.

Greed, it is liked to be believed, comes wearing a pin stripe suit sipping expensive wines. No, greed is as much blue collar as it is white collar. Greed can come in overalls too. Man is greedy. Greed fuels and destroys man. The art is knowing when the fueling power slides into becoming destructive. Wall Street greed has been decried and punished by lawsuits and regulations. Union greed is commended and celebrated.

Inside Job: A Hollywood Analysis Of The Financial Crises.

The financial crises wrecked trillions in share holder wealth, brought the largest economy of the world to its knees, caused a global crises of proportions unseen since the Great Depression, rendered millions unemployed, devastated the pensions of many and so much misery. At the epicenter of this mega quake, runs the easiest narrative, are a bunch of CEO's in a small street on an island. You have Wall Street CEO's as villains, working class unemployed, law breakers, whistle blowers, arrogant government agencies, economists peddling philosophies conducive to lining their pockets and if with all these elements one could not cook a cocktail that begets Oscar what is Hollywood worth? So we got 'Inside Job', Oscar winner for documentary in 2010.

First, "Inside Job" does get it right on several issues. They present an accurate, albeit simplified, picture of the securitization process of mortgages. Wall Street drinking high on mathematical wizardry and exotic products, that bewildered even the veterans of the trade, went high on adrenaline and certainly became reckless in pursuit of profits and outsize bonuses. The incestuous ratings agency world which rated many of these exotic products as AAA (like a government bond). Ivy League economists on the board of companies and doing consulting for Hedge funds promoted "de-regulation" as mantra in classrooms and think tanks. Wall Street abounded in terms like Derivatives, dark pool trading, flash trading, SIV (Structured investment vehicles), CDO's (Collateralized Debt Obligations), CDS (Credit Default Swaps), OTC (Over the Counter), market makers and so much more.

Wall Street culture of focusing on quarterly reports, investor returns and of course the much maligned multi-million dollar bonuses were all factors in cooking this stew. Yes the Cassandra's like Brooksley Born who wanted to regulate the OTC and derivatives market in the late 90's were snubbed and silenced. When Raghuram Rajan presented a paper on the perils that awaited the financial industry he was roundly snubbed by his peers that included the high and mighty.

Harvard and Columbia economists consulted, for a fee, to hedge funds, were board members of companies like AIG etc. The voice over in the documentary wondered that its no surprise that these economists with forbidding credentials provided the intellectual mainstay for 'deregulation' and for incessantly promoting a "free market is the cure-all" approach. On this point I strongly agree with the criticism. Its pathetic to watch a Harvard economist grunt and grunt and grunt as to this glaring conflict of interest. He had no answer. Martin Feldstein, a Harvard economist and John Bates medal winner, was on the board of AIG, when asked how he felt about how AIG imploded thanks to exotic insurances that simply had no economic rationale, he just glares.

The ratings agencies are a law unto themselves given that only three are there (Standard and Poors, Moodys, Fitch). They routinely rated many of the complex investments as 'investment grade'. Ratings agencies are invited by investment banks and paid to rate the structured investment. This setup naturally presents a conflict of interest.

So far so good but then this is Hollywood. A case in point is Raghuram Rajan's appearance in the documentary. I've read Rajan's bestseller "Fault lines" that presents the financial crises as the result of a multiplicity of factors way beyond the simplistic narrative that is being peddled. Rajan faults a wide array of reasons and asserts that those reasons still exist, despite the gargantuan regulation that was steam rolled into congress. The documentary uses Rajan only to present as yet another Cassandra who was shunned. They fail to engage or present the other causes Rajan highlights. I guess that did not fit with the narrative of "CEO's are villains".

Barney Frank , democrat and powerful Chairman of 'House Financial Services Comittee', appears helpfully and upbraids Wall Street. Sure he is correct. But pray why no mention of his role in preventing overhaul of Fannie and Freddie, the GSE (Government sponsored enterprises). Fannie Mae and Freddie Mac, called Fannie and Freddie, were setup to bundle home loans and be the last stop in the mortgage market. Both were raided by, mostly democrat, politicians to further their own agendas of promoting home ownership amongst the poor. Rajan highlights how politicians used the mantra of owning a home, the 'American dream', and the GSE's as tools for social policy thus playing no small role in the financial crises. Weeks before Lehman was buried the GSE's were effectively nationalized. The documentary was  dishonestly and eerily silent on Fannie and Freddie and politicians. By the way one reason why any reform of GSE's was not done by democrats was because the President who proposed it was 'George W Bush'.

The documentary focuses, for several reels, on how wall street traders used escort women and frequented strip clubs. This, I found, is the most distasteful character assassination. Its takes a certain chutzpah for a Hollywood documentary to fault an entire industry for what a few indulge in. By the way the strip clubs are strictly legal entities to which anyone can go to.

In what could be the height of hypocrisy, Elliot Spitzer, who thinks of himself as crusader against Wall Street makes an appearance and bemoans how the courts would not be more aggressive in pursuing criminal cases against the CEO's. After all when billions are lost there HAS to be a crime behind it. The documentary time and again bemoans that no CEO is behind bars on a criminal charge and how often cases are settled by paying a penalty. As Spitzer fades into the background the documentary helpfully notes that he was made to step down for a simple infraction of law without mentioning what it was. Spitzer was bust in a prostitution raid. Spitzer had broken banking laws of structuring payments to high priced escort girls while he was Governor of New York. He had to step down because he was holding a political office and his position became politically untenable to hold. As Governor he had burnt his bridges with his opposition by his steam rolling, sometimes legally questionable, tactics. Today he is a high priced anchor on CNN. We call that an "American story of redemption".

That no bank CEO is behind bars is something the director cannot fathom or tolerate. Short of accusing the legal system as being in the pocket of Wall Street he indulges in casting aspersions as to why no criminal charges are filed against, for instance, Angelo Mozilo the CEO of Countrywide, the largest sub prime lender that went belly up. Then of course no vilification of Wall Street is complete without tarring Goldman Sachs.

Goldman Sachs was sued by the SEC in the most sham manner that smacked of witch hunting. The country was practically crying for the blood of Goldman Sachs. SEC sued Goldman over a fund that went bust costing investors of a hedge fund tens of millions. "Goldman bet against investment they sold", "Goldman structured the investment to fail so they could make money while their clients lost", etc etc screamed headlines. Even 'Wall Street Journal' did not do justice to explaining what is a very complex structure. I can understand populist magazine like 'Time' indulging in Goldman bashing. WSJ exists only to educate readers on finance. Its beyond the scope of this blog to explain why the case finally fell through. Goldman, as its CEO testified in congress, did NOTHING wrong. In fact many industry insiders bet that Goldman would walk away and that this was a politically motivated case by the SEC.

Compensation is another favorite stick to beat Wall Street CEO's. It does not matter that Tom Hanks, Tom Cruise, Julia Roberts, all A-listers, draw minimum $20 million per movie. Entertainers like David Letterman (philanderer too), Jay Leno etc sign contracts that are worth tens of millions of dollars. Sportspersons and Rock stars sign contracts with outlandish payments. Thats ok. When a Wall Street CEO who signs on papers that make him legally liable for billions of dollars gets a 50 million pay day its all hell break loose. Lets take this compensation question at depth.

It is a wall street tradition that a significant portion of compensation is called 'bonus'. From the lowly IT person to the highest echelons its the bonus that most eagerly look forward to. Financial industry is heavy on bonuses because its the financial industry and most importantly because the work load and tension is indeed not comparable to most other industry segments. Ask an IT person supporting a trading desk application. His/her job is far more tense than an equivalent job elsewhere and very saliently here when an application goes down the monetary quantification is immediate. So its no wonder that IT people prefer to work in banks. If its so for just IT people when we are talking about a trader who is bringing in business worth tens or hundreds of millions of dollars then its natural that they rake it in during bonus time. Also lets face not just New York City even New York state depend on those bonuses being spent. If comparisons are made with what unionized workers make versus traders that argument is not even worth having.

Golden parachutes are another pet stick to beat CEO's with. Stanley O' Neal, CEO of Merrill Lynch, departed Merrill with $160 million after helping sink a storied company. Shameful. Bob Nardelli departed Home Depot with $200 million after Home Depot stock languished for years. Despicable. But wait. Their successors were not so lucky. Wall Street, stung by the criticism and shareholder revolt, is re-drawing compensation provisions with 'claw back' clauses, significant portions of bonuses of CEO's are now given as deferred stocks contingent on performance. Conan O'brien, late night comedian, had his show canned for dismal ratings. He walked away with $30 million, no outcry only sympathy. Tom Cruise is still A-lister after his last movie plainly bombed. I am sure Matt Damon, the narrator in the documentary, would love to have his salary regulated by somebody sitting in DC.

Oh wait the bailouts. The much maligned "TARP" bailouts. Obama, as candidate, used to scream 'wall street is being bailed out while main street is languishing'. Here is a less known nugget on TARP. The US government was laughing its way to the bank when the banks that it loaned money (some like JP Morgan and Goldman were forced to take it) repaid with punitive interest in short order. Even the AIG bailout is turning out profitable. Often some smug politician would say that Goldman, apart from the $25 billion it was forced to take, benefited immensely from AIG bailout. The implication being that if AIG had sunk Goldman would have followed suit. Andrew Ross Sorkin, author of bestseller 'Too big to fail', in a column put a stop to that saying recently analyzed records showed that Goldman was indeed well covered for an AIG bankruptcy. But the urban myth persists that Goldman siphoned AIG bailout money and would have sunk otherwise. As a result of TARP money being repaid FDIC made record profits last year.

Now for some brief notes. Ask any American on the road which President they blame most for the crises the answer will be 'Bush'. But guess in whose presidency were banks de-regulated? Guess who was the President when Brooksley Born was silenced? Bill Clinton. While Born looks like a prophet in hindsight lets remember that hindsight is always 20/20. In the Clinton era America was drunk high on its economic fundamentals having buried communism. 'How high is high' used to be the mantra. During his impeachment Clinton was touring Russia. Clinton would call back home and ask "how is the Dow today". As long as the economy kept soaring he was untouchable. By the way Clinton did finally accept that he committed perjury. He was pardoned with a slap on his wrist by taking away his license to practice law. Talk about suing for crimes by CEO's!!!!

The documentary makes it sound as if Alan Greenspan and Larry Summers benefited from preventing regulation of derivatives as Born suggested. Alan Greenspan did not own a penny in stocks until he remitted office. Not even in blind trusts, such was his probity.. Regulation is at best a necessary evil and at worst a job killer. There is always a creative push and pull between the desire to regulate a commercial activity and the industry captains who profit from keeping it unregulated. Neither should become a run away truck. The dot com bust gave rise to Sarbanes Oxley and completely altered the landscape of the accounting industry. The current Dodd-Frank regulation will undergo several evolutionary changes and the financial industry will also change from within and without. Regulation is not a panacea for all ills. We can only regulate what we understand and what we know might come. Financial innovation is outstripping the ability of government agencies to understand and regulate.

I dont see a problem with economists advising hedge funds and promoting economic principles that they apply in the market. I'd have a problem if economist practiced capitalism in private life and taught socialism to students or vice versa. The association of economists is addressing better disclosure norms. Likewise this canard of Government Sachs, implying that the US government is run by Goldman Sachs personnel is stupidity. Who would I have as US treasury secretary, somebody who has experience running a billion dollar corporation or some academic who only dabbles in theories? Often the documentary succeeds in insinuating covertly. There is not a shred of evidence that anybody from Goldman Sachs profited from their decisions as government executives. Snide remark that Paulson profited from tax write offs when he had to sell his Goldman Sachs shares when he became US secretary of treasury is a cheap technique. Such sops are required to attract talent from outside corporate world and this is necessary because they HAVE to sell their stocks prior to taking over such positions. Who would have wanted Paulson's job in September 2008 when the world came crashing down? Lets thank the man for saving the world.

The ratings industry is undergoing a sea change. The fact that they are paid by companies asking for their products to be rated makes it appear an 'inside job'. Reality is more complicated. As much as terms like casino capitalism abound the US model of capitalism does have its redeeming features without which America would not be where its today.

I'd rather live in chaotic America than live in Ukraine as farmer when what I sow is decided in Moscow. Also I am still waiting to see a Hollywood documentary on how Unions ran down the car manufacturers, how Unions wrecked the state of California, how Unions and pension burdens are decimating countries. Would that not be some documentary to make????

Obama: Whiner in Chief.

Recently Barack Obama shocked the commentariat when he went off script and whined "they talk about me like a dog". Barack Obama was elected with an affection unseen in a generation of Presidential elections. His inauguration, amidst a crippling recession, was historic. Millions watched his rise from obscurity, millions voted for him, the press drooled over him on inauguration day America felt its original sin, slavery, was cleansed. Coming for the inauguration Barack Obama came like Caesar. Rally after rally. Speech after speech inundated the airways. He rode into DC like a conquering hero. His political foes, some where veterans across generations, an ex-President were all left far behind in the dust licking their wounds. Republicans were in a state of stupor and were not even thinking about 2012. Obama's re-election looked an absolute certainty, completely inevitable. His electoral victory had redrawn the electoral map said pundits. Even Virginia, that hot bed of segregation politics, voted lustily for him. So did North Carolina. Republicans had nowhere to hide. What a difference two years makes.

Here is Barack Obama whining about how he is caricatured. In a comment that skated close to playing the race card, departing from prepared text, he thundered "they talk about me like a dog" (the comment is at 30th second mark). I came to US just before Bill Clinton got impeached and then I've been through the Bush years. Both Clinton and Bush, especially the latter, were treated no less harshly. Rallies with posters depicting Bush as Hitler are common. How many bumper stickers unkindly denied legitimacy to an elected President by saying "Selected NOT elected"? Bush's inauguration parade was cut short due to pelting of eggs. Bush was constant fodder for late night comedians and habitual haters of America. When I told a colleague that I bought Bush's book "Decision Points" the retort was "is it full of crayon drawings?".

When it comes to the parlous state of the economy Obama would repeat, even in sleep, "we inherited the worst recession since the great depression". At first the American public was kind to him and even indulged his "blame the previous regime" approach. After 2 years being tired and worn out they delivered an electoral "shellacking". When George Bush took office the country was sliding into a recession, the dot com bust, especially thanks to the loose monetary policies and deregulation of the Clinton era. I don't remember him whining in every speech about Clinton. Also what is pointedly different is that Obama was not hit by a surprise recession. The recession was well underway. Obama owes his re-election, in no small measure, to the weekend of September 15th 2008 when Lehman imploded. Bush and his economic team grappled with  an economic crises that had no precedent and practically rescued America from financial armageddon. Bush's conduct during the crises was absolutely non-partisan and above par. He had instructed his economic team to constantly communicate with both campaigns because one of them would inherit it.

Serious non-partisan economists agree that the seeds of the economic crises were sown with deregulations that started in the Clinton era, the refusal of Congress to reform Fannie and Freddie and finally recklessness at Wall Street. But Obama was only too happy to blame Bush. Bush later joked on Larry King "well he got more than a few votes thanks  to me".

In fact the most gut wrenching decisions to deal with the financial crises were all taken during Bush's tenure and HE paid the political price. Rescuing AIG, throwing a lifeline to the decrepit auto companies, moving Fannie and Freddie to conservatorship, designing TARP etc. Each cost Bush very politically, especially amongst conservatives.

9/11, the defining moment of Bush presidency was a complete surprise. Though much is made of the August CIA memo warning of an imminent attack, many in the center agree that any other President would have acted similar to George Bush. The prevailing laws of the country, the recession etc all played a role. Bush had no precedent to follow. He had to wrestle with the country's vaunted character that prized individual liberty with the demands of modern day terrorism. Compared to that, however flawed, today Homeland Security is a much better organization. After the election Bush had instructed his team to help Obama's transition team come up to speed on national security details and opened all access. Bush did not want Obama to come in blind like Bush came in after Clinton. Yet Obama would keep whining on that too.

Put in perspective Bush was delivered a surprise double whammy of recession and a terrorist attack. Barack Obama applied for a job knowing fully well what entails winning. At one point during the campaign (as per Bob Woodward) he said "I used to be afraid that I might lose this thing, now I am afraid I might win it". Look at corporate parallels. Whether its Vikram Pandit trying to turn around Citi or John Thain who averted a crisis by selling Merrill neither can go to their board of directors or stockholders, for 2 years and say "I inherited it".

A few days back James Carville, the raging Cajun who never minced words, gave a colorful advice on how Hillary can help Barack Obama find strength "http://www.newsy.com/videos/carville-not-sorry-for-ballsy-obama-joke/ "

By the way it used to be a trope that people hated America because of Bush. Tariq Ali, a supposed muslim scholar, was refused visa during the Bush years. Now that we have this miracle healer in White House Tariq Ali was given visa. How does Tariq repay Obama? By publishing a book that has a photo of Obama that depicts his face as a mask for Bush, the subtitle says "surrender at home, wars abroad". The blurb on the back flap rips into Obama as nothing but a purveyor of fatuous platitudes. Like I say we could have a poodle in the White House and there are millions who would hate it for being the POTUS.

A few thoughts on the Economic meltdown of 2008

Reading an article on Neel Kashkari in Washington Post today I felt compelled to write on this subject. Kashkari, of Indian origin, shot to prominence when he was tasked with overseeing $700 billion in TARP (Troubled Asset Recovery Program).


By now a linear storyline has emerged in the minds of the populace that a bunch of CEO's in wall street ran the vaunted American economy tanker aground thanks to unbridled 'greed'. The line from Oliver Stone's film "Wall Street" spoken by the character Gordon Gekko, "greed is good, greed works" became oft cited. Nobody cared that the actual line was "Greed, for lack of better word, works". Big difference. St Paul did not say "money is evil", he said "love for money is evil".


Is it even remotely possible for a clique of guys in pinstripe suits to bring a $14 trillion economy, the economy of the only super power, to its knees? When Congress dithered on passing a staggering $700 billion stimulus/bailout plan Ben Bernanke, Fed Charirman, Hank Paulson, Secy of Treasury, lobbied senators behind closed doors. Hearing what they said Sen. Chuck Schumer (D-NY) said "my jaw just dropped". The bottom line message delivered was "no time to play partisan politics, if the bailout does not pass Congress come Monday morning there will be NO American economy". Apocalypse would have looked like a picnic in comparison. When the economists at the Fed looked at the data staring out of their PC screens what they saw was akin to a patient whose blood stopped flowing. The credit markets were simply frozen. Nobody, absolutely nobody, was lending to another person or bank. Credit, the blood and oxygen of an economy, that too of the worlds largest and most powerful economy was simply in a stage of a coma. Banks did not know if the collaterals offered, complex structured securities, where worth anything to be lent against. Nobody believed the credit ratings anymore, credit rating agencies themselves were in a tail spin.

To attribute all of this to simple greed is too simplistic and self serving, especially when mouthed by politicians in the heat of a campaign.

Lets take a small slice of contrarian view. There is furore amongst the Afro-American community that foreclosures have hit them the hardest. Very true. What is conveniently glossed over, if not hidden, is that banks did not dupe them, or at least most of the time. Banks have been compelled by legislation to invest in under served communities, CRA (Communities Re-investment act). Most who applied lacked documentation for income, many would not qualify for loans under normal circumstances. When banks asked for proof's of income and proof of ability to pay etc they ran into rough weather, lawsuits alleging 'discrimination' sprouted, including one by a certain community organizer named "Barack Obama". I am not for a moment suggesting that this was the only reason for the crisis. I just want to shine a light on lesser known but vital components that helped create the mess.

From consumer to politician today everyone rails against banks for 'enticing' gullible consumers with fancy projections of how properties would appreciate and how such appreciation can be tapped into in the form of more loans to finance dreams of cars or just plain re-finance the home. Give me a break. American economy, the capitalist component is based on the premise of 'personal responsibility'. When a guy, family of 5 with 2 daughters in college and gross household income $90,000 buys a home with swimming pool at $500,000 what can one say. Irrespective of any fancy enticement or math wizardry of the house appreciating in double digits the guy is facing the immutable logic of what he can afford. That too when he took a interest only loan betting that when the house appreciates he will re-finance and THEN start paying measly principal, I call it plain "nuts". Yes, the American style of consumerism encourages risk taking. But risk and recklessness are not synonyms. When a well educated young working couple buy a home stretching a bit by 20K or 30K they have a decent chance of coming clean, that's calculated risk but what the guy did was sheer recklessness. CNN once featured a forlorn single mom in Florida lamenting about how she has to foreclose. The camera goes around the home and I saw a pretty swanky well kept home, the kitchen had a Wusthof knife set (retails at $750 at discount). This woman was a realtor too. She had bought a home way beyond her earnings and bought it on a 'interest only" pay option loan.

Amongst the carnage blame can go around sufficiently to how Congressmen and senators sought to use the quasi-federal agencies of Fannie and Freddie to further their own political mileage with constituents. The easy money policies of Fed, under Alan Greenspan fuelled the housing crisis that finally brought America to its knees.

The derivatives market, short sellers, math wizards behind bundling of securities etc all had a role. To blame each and everyone with just greed and malicious intent bordering on calling them as just thieves is sheer stupidity. I've worked for one of the ratings agencies and I've my highest regard for that company as a corporate entity. Companies exist to maximise profits, to deny that is to deny them a reason to exist. Companies innovate to differentiate themselves. The innovations in capital markets were not done to swindle a gullible consumer. That they went awry and need to be reworked is part of being a resilient capital market. America will find its feet again.

CEO's have no joy in seeing their firms get obliterated in a tsunami of crisis. One could comment wryly that the hundreds of millions lost by Lehman CEO Richard Fuld really does not change his life style unlike the thousands who lost their jobs when Lehman went down. Agreed. But to characterise Fuld as some swindler is gross injustice. Thousands of Lehman employees have made a fortune working for Lehman. Also beyond a point its not only about money, imagine the humiliation that Fuld had to endure with jeering crowds carrying placards when he appeared for Congressional hearings. One can only imagine how his ego might have hurt. In the final moments of his company going under he pleaded with all and sundry to save his employees by buying Lehman.

Then there are the conspiracy theorists of how Goldman Sachs alumni control US government. Hank Paulson, ex-CEO of Goldman, had to forgo hundreds of millions in selling his Goldman stocks prior to joining Bush administration. Show me a politician who does that. John Thain who took over Merrill after Stan O'Neil was ousted was excoriated for spending $100,000 decorating his office while company was going down the tube. Note that the crisis which finally engulfed Merrill had nothing to do with John Thain. In fact Thain helped avert a catastrophic event by orchestrating the merger with Bank of America. Contrast that with how Barack Obama behaved. He too inherited a crisis, he too inherited deficits yet he had no problem in taking Air Force one and the presidential entourage to make good on his promise to Michelle for a date night in NYC if they won. Wow....Nero anybody.

Annus Mirabilis -- 2008

History is on the march in seven league boots. Long back when I used that term my English professor said "Aravindan, not many even know that phrase". Everybody in US and to some extent in the larger world were focusing on how history will be made on Nov 4th 2008. Will America elect a woman or an Afro-American. Hillary mounted a fantastic bid for the presidency. One might have divergent views on why she failed, how she failed, whether she was a victim etc but none can disagree she made history. Come Nov 4th America will make history without fail, we will elect either an Afro-American President or a woman V.P. The latter is decidedly less symbolic than the former only because the merits of a V.P. "election" are debatable, they just ride the coat-tails of a Presidential candidate. They can help and hurt a Presidential candidate. Sarah Palin has so far helped but all concede that McCain will have to do much more to win.

However the real history that is being made is on another front. America is practically recasting its economic world with far reaching consequences and more impact than any President can ever impact the history of the country. This will reshape American lives for decades to come. Every economic aspect of how we live, car loans, insurances, home loans, credit cards, how we are rated etc etc all will undergo radical change. Many changes will be for the good. Nobody, yet knows where and how these changes will lead. But it is all happening right now and right before us. We are witnessing history in the making.

George Bush, currently the most vilified and most unpopular President ever, has had an impact on American history for decades to come. Again, I am not going into the merits of the impact.

2008 will truly qualify to be called Annus Mirabilis.