Random Thoughts – Randocity!

73 AIG Execs get over $160 million in Bonus Payouts: Oversight?

Posted in bailout, bankruptcy, botch, corruption, economy, insurance, scam, scams by commorancy on March 18, 2009

Ok, so I know this story has been covered ad nauseaum in the press, but I also have some comments about this issue.  My question isn’t that they received these bonuses, it’s about the contracts they cling to that they MUST fulfill.

Contracts and Bonuses

As far as I know, unless AIG is just completely stupid at writing contracts, most bonuses written into contracts and, later, given to employees are issued based on performance.  That means, as long as you perform your duties properly, then the company will pay you at least part of the bonus.   And note that ‘properly’ could be intentionally left vague or it could be specifically defined through a set of criteria.    The criteria is the unknown factor in these employment contracts.  If it was intentionally left vague, though, even my argument still applies.  Further, to get paid the entire bonus, the employee and the company both have to perform in an outstanding way.  I don’t exactly consider bankruptcy outstanding.  Next in this debacle, why would you pay out 11 ex-employees?  Contracts usually terminate once employment ceases and this should include bonus clauses.  Again, stupidly written contract?  I don’t think so.  Clearly, there are flaws in AIG’s contract arguments.

Why would you pay out ANY performance bonuses to any executives in a company that came within millimeters of (and is still within) the brink of destruction?  Clearly, not one single executive performed properly.  Not one.  Based on the fact that the company is clearly bankrupt, that the government now owns an 80% stake in it and that it as been bailed out with Government (come Taxpayer) money, it is crystal clear that there is not one single executive in AIG who deserves a performance bonus.  Not one.

Check those contracts over

Since the government now owns an 80% stake in AIG, someone in the government needs to sequester their contracts and read them closely.  Seriously, why would checking the contracts over not have been the FIRST thing that was done when these bonuses were announced?  Someone needs to obtain a copy of each of these 73 employees’ contracts and read through the bonus section.  I cannot even fathom that AIG crafted the bonus contractual obligations as 100% payout no matter what happens.  If this is true, then AIG deserves to go out of business.  If they can’t even write employee contracts correctly, how can they POSSIBLY write insurance policies correctly?

AIG executives need to return the money

I am almost 98% sure that these bonuses were based on performance.   Someone would have to read their employment agreements to know for sure.. but, based on the assumption of a performance clause, these execs need to return this money.  AIG is clearly stepping beyond the bounds and this issue proves that the executives currently operating AIG need to be terminated.  Yes, every last one of them.  If nationalization is the key, then that’s what needs to happen.  Perhaps it needs temporary nationalization just long enough to clean house and then rehire the positions with executives who can actually run AIG properly.

If AIG did actually write employment contracts with mandatory bonus payouts, then this company is far beyond the help of a bailout.  This company has serious internal problems where the only resolution is termination of everyone involved.

Closing AIG and starting over…

 At this point, the only real hope is to force other solvent insurers to take exisiting insurance contracts away from AIG.   Move as many as possible.  For the ones that cannot be moved, force the closure of the contracts by a certain date.  For the credit default swaps, too bad.  These don’t need to be insured.  These are the things that cost AIG its livelyhood.  If another insurer is solvent enough and willing to take the risk to support the credit default swaps, those contracts can go there.

Once all of the insurance contracts have been moved, this company needs to be quietly wound down and closed so we can be done with AIG.  There have to be other insurance firms that can take the existing insurance contracts from AIG and honor them.  In fact, I’m quite sure there are plenty of other insurance groups that would be grateful to have the cash flow.  The American public needs to be done with AIG once and for all.

Bank executives still in power after meltdown

Posted in bailout, banking, bankruptcy, corruption, economy by commorancy on January 27, 2009

What’s wrong with corporate America?  This article discusses the exact reason why America’s corporations are and continue to be both problematic and emblematic of serious fundamental problems with free enterprise.

Free Enterprise

On the surface, this phrase embodies entrepreneur-ism, freedom to go into business and freedom to make money in the way you choose.   But, to each silver lining, there is also a dark cloud.  The dark cloud of free enterprise, then, is what’s rarely discussed but is always present in any business once it reaches a certain income level.  This black cloud tends to overreach any good that a company may do and, in many cases, stifles the business into oblivion through stupid decisions, inaction and through senior executive selfish actions.

Banks

We all know the story.  Banks doled out risky loans to individuals without checking credit histories and the whole banking industry nearly self-imploded.  But, what’s not widely known about this event is what happened to the bank’s senior executives.  The Associated Press did some research and found that the majority of the banks that doled out these risky loans, and nearly single-handedly killed the banking system, have the SAME senior exectives still in power today.  These are the same executives who presided over and actually ALLOWED their banks to issue (and continue to issue) risky loans until the meltdown.

As the banks continue to lay off thousands workers and, in some cases, shutter branches… incidentally, the layoffs likely include workers not responsible for the meltdown, the senior bank executives (CEO, CFO, CTO, etc) remain safely and comfortably employed (and likely making the same salary pre-meltdown). 

Car vs Bank Bailout

With the automotive industry bailout, very stringent conditions were placed on when and how these car companies could get and use the money.  Some of the conditions discussed even included ousting executives who couldn’t manage their businesses properly.  Not so with the banks.  There were no such executive conditions placed onto the bailout monies for the banks.  This leaves, in most cases, the same executives who presided over issuing of risky loans and the economic meltdown the task of trying to clean up this mess.  Can they?  Do we trust them?

Trust

Do we trust these executives to do the right thing?  That dark cloud I was speaking of, what is it? That dark cloud includes executive compensation, bonuses and other executive cash shuttling programs.  Once large companies get into the position of billions in revenue, the executives in power do not want to give up that cash cow no matter what.  Yet, here we are.  The banks (and their executives) have failed us and our economy and yet they remain in power?  Do we continue to trust that they know what they are doing?  Can they properly get not only their company, but our economy jump started?  Where is the accountability here?

Let’s hope that Congress wakes up to this issue and ultimately takes these bank executives to task for their inaction and inability to police their own companies during the meltdown times.  Surely, they can’t say, “We had no idea it would get that bad!”.  Sha-right.  The handwriting was on the wall when the risky loans began over 2 years ago.  Anyone in their right mind would know that handing out a loan to someone who hasn’t had their credit checked is a tremendous risk.  For executives to make that claim ensures they do not deserve to stay employed.

Shareholders: The other dark cloud

Once a company goes public, the shareholders become the ownership and power of the company… or so we are told.  So, whenever executives make decisions, it’s easy for them to claim it was ‘for the shareholders’.  That’s a catchall phrase to allow the executives to do things they ordinarily could not or should not do.  But, when is it good for the shareholders?  Who makes that decision?  Apparently, this decision is supposed to be the board of directors.  However, in many cases, the CEO is also the Board Chairman.  But, again, part of that same dark cloud.  The board of directors are supposed to steer the company into the right direction.  Again, when large sums of income become involved, people’s eyes get glazed over by $ signs.

When something is done for the good of the shareholders, you can pretty well guarantee they mean there is money involved (either obtaining, but usually spending it).  When and how that money is used is anyone’s guess.  The accounting books are supposed to tell the tale, but we know how that goes with all of the recent accounting scandals.

Corporate executives

Why is it then ok for these corporate executives to preside over and allow detrimental business practices, yet they continue to remain employed?  Why do they get reprieve from the unemployment line?  When are we supposed to hold executives accountable for their actions (or inactions) that lead to dire negative consequences?  These are questions that must be answered.

Does this imply more governmental regulation over corporations?  Perhaps.  It does imply that free enterprise is broken at a fundamental level.  It also implies that something must be done to fix it.  Whether that’s more regulation over businesses or more accountability, I don’t know.  Perhaps we just need stiffer laws that define corporate practices so that executives can be brought up on charges when these situations occur.  If there are legal statutes that prevent such problematic operations, then perhaps executives will think twice about their roles within large dollar companies.  After all, high dollar salaries shouldn’t come with little oversight and no strings attached.

It’s official, Obama is our 44th President

Posted in bailout, banking, bankruptcy, economy, presidential administration by commorancy on January 21, 2009

… and there’s definitely a lot of work to be done.  The state of the country is in severe economic disrepair, no thanks to our former president, George W. Bush.  President Obama definitely has his work cut out for him.

Bush era over

Bush’s errors have left a legacy of  his lack of doing ‘the right thing’ for the country by extreme spending on an unnecessary ‘war’  and economic packages which helped only the rich.  During Bush’s reign, we have seen favoritism towards big business at the expense of everything else.  Yes, I understand certain business lobby groups are very powerful (read give lots of money away) in order to get the things they want.  Under Bush’s watch, he ushered in one of the worst recessions in this nation in years!  This happened strictly because he was not focusing on the economy as a whole and instead focused on being overly friendly to his big business buddies.  But, what’s more important, making those greedy businesses happy or making the country prosper as a whole?   Clearly, catering to big business is both short sighted and part of why we are where we are today.  Instead of making these businesses more money, they have, in fact, lost more money as a result of our down economy.  Short sighted.

Bush also presided over the monetary system that encouraged bad lending practices without reigning these institutions in.  He simply turned the other way and ignored it as though it didn’t exist (again, helping his buddies make more money).  Instead, he would firmly focus on the middle east and he thought that everything would be fine.  Well, everything isn’t fine and we’re paying that price now.  Again, short sighted.

Doing what’s right

The hard choice is to do the right thing for the citizens, the economy and the country as a whole, not what’s right for big business.  Clearly, if anything, this downturn has taught us what shouldn’t be done.  I believe these are the ‘hard choices’ that will face the Obama administration.  Choices that we have yet to see in action.  Choices that I’m not even sure Obama will face without falling into the same old traps.  That’s not necessarily the fault of anyone, it’s just the way lobby groups and our political system works.  Politicians tend to cave into these demands when they don’t see any risk.  But, that risk is often masked behind rhetoric and double-talk.

Clearly, lowering the fed interest rate 2-3 years ago to a single point spurred the home lending crisis.  It’s now starting again with the interest rate at a quarter of a point.  We are now facing the same exact housing bubble possibility that faced our country the first time around.  Can we avoid this bubble again?  Perhaps, perhaps not.  Perhaps it isn’t smart to be lowering this rate this low a second time.  It’s all about cause and effect and this effect has already been felt in a major way.  We don’t need to experience it again.

Tough Choices

There are a lot of tough choices that need to be made, and those choices will affect us every day.  For each tough choice to aid our economy, another problem will result.  Is there a choice that can be made to turn the economy around swiftly?  Doubtful.  Recessions come in cycles.  This recession came a bit earlier than expected… it’s usually an 11 year cycle and our last cycle was after the dotcom bubble burst in early 2000.

Clearly, Obama’s words are tough talk on bringing this country back.  When it comes down to it, can he really make and live up to these tough choices?  Will he be able to say no to businesses over the economy?

Blame the consumer

Because of the mortgage crisis, blame is had from all over for its origins, but one finger is always clearly and firmly pointed at the consumer.  While the consumer may have been partly to blame for accepting their bad loan, it was entirely the lending instituions’ fault for granting the loan in the first place.  If you hand money to a consumer, they’re going to take it.  It is the lender’s responsibility to make the proper and correct decision to give money out and to whom.  Yes, that also means that the lenders must take responsibility for their actions when giving money to people who should never have been given that money.  It’s also the lender’s responsibility for shuttling people into specialty loans that practically ensured failure.

Fixing the lending practices is one of the first hard choices that must be made.  Trying to loosen up credit again isn’t necessarily something that we need to be doing as an economy.  This is a hard choice, but it has to be made.  It’s one of those choices that has clear ramifications.  It means that credit will be limited to those with the best credit scores.  But, people who don’t have the money to pay off loans shouldn’t be given loans.

Another tough choice that must be made is to force lending institutions to go back to standard fixed rate loans.  We must prevent these poorly crafted specialty loans from ever being granted again, no matter how tempting they may appear or how much it may appear to help out the consumer.  Balloon, ARMS and introductory rate loans must become a thing of the past.

If there is one single thing to blame in this process, it’s these poorly crafted specialty loans.  These loans created the false impression that people could afford a loan that they couldn’t afford.  So, in 2 years, when the loan reset (which was clearly written into the terms), this reset ensured a loan failure.  Again, the consumer can be blamed here because it’s easy (and because they accepted the terms).  But, it’s really the lending instutition’s responsibility for lacking the foresight in seeing that these loan products were destined to fail.

Days ahead

From here, we will have to see where Obama and his administration takes us.  Obama speaks of tough choices, but I’m waiting until those words become action on his part.  It’s easy to speak them, it’s much tougher to follow through.  We defnitely need a ‘buck stops here’ President who is willing to lay down the hammer.   We no longer need, nor can our country afford, a president who caters to the rich.   We need a president who is willing to work to bring the country together as a whole rather than filling his own bank account.

Obama, we’re ready and waiting for you to put your tough talk into tough action.

America’s Recession: loans and scams

Posted in economy, fraud, scams by commorancy on December 16, 2008

Economic Downturn & The Fed

Unless you’ve been hiding in a cave, you’re probably aware that we’re going through a fairly deep recession. Recessions are cyclical, but in this case it probably could have been either avoided or lessened IF the banks and lenders had not been offering creative financing techniques. It also could likely have been avoided if our current pro-business govt. administration hadn’t chosen to look the other way while bad mortgages were being doled out. The problem with all of the creative financing is that it tended to lead some people into believing they could afford a mortgage they could not afford. When the loan reset after the promotional period, the realization quickly set in. Worse, the situation was compounded by property investors who sank huge amounts of loaned money into properties that would eventually become valued less than the loan.

It’s not as if the handwriting wasn’t on the wall several years ago when the fed dropped the rate to 1 percent. Now, we are back in this exact situation again with the fed dropping the rate to an unprecedented 1/2 percent. The feds are, again, trying to spur the economy like they did 2-3 years ago. But, this time, the banks don’t have money to lend. So, the 1/2 percent may not trickle down into the mortgage market like it did several years ago.

But, our economy is still likely being set up for yet another financial failure. The banks that do have money to lend are still advertising on the radio claiming extremely low interest rates.  The problem isn’t the rate, but the loan you’ll be getting. If it’s a standard fixed rate loan, that’s fine. But, it’s the fine print you need to read. Don’t get locked into an adjustable rate mortgage or a limited time interest only loan. Once these creative loans reset in a couple of years, you may end up deep under water.

The Fed, therefore, needs to be extra careful when cutting the rates this low again to avoid the same mortgage problems all over again.

Scams in a down economy

With the economy being so depressed, it’s also a good idea to watch your money closely. As money gets tighter and tighter, the scammers will come out of the woodwork (and they already are). I’ve already noticed a drastic increase in spam and phishing emails since the economy has taken a turn. It’s going to get worse before it gets better.

There are many scams out there from the Nigerian 419 scam that claims to give you a ton of money only to rip you off of thousands of dollars before you realize it, to sending you what look like official invoices that only turn out to be scams in themselves. Don’t fall for them. The easiest way to avoid scams is to not give out any personal information to anyone who approaches you claiming to be from a legit company. This means, if you receive a call asking you to make a payment and they request for you to give a credit card over the phone, don’t. Make sure you know who this company is first and make sure you are a customer. Then, tell the company that you will call them back through their official channels and make a payment that way. As long as you are the person making the call to the official number, you should be safe. With incoming calls, you have no idea who is really calling you no matter what the CallerID says. Always, always call companies back from official numbers located on a trusted bill or from the back of your credit card.

TV advertisements that offer products or services usually employ people who are not paid very well. So, be wary when you give your credit card number out to TV commercial based purchases. Not only are some of these companies impossible to get refunds, your card number could be enrolled in a club or, worse, stolen by one of the telephone operators in an independent scam. You should always Google the product you are thinking of purchasing to 1) find out if you can find it cheaper online and 2) find out if people have had issues with either the product or the companies refund polices.

Get rich schemes are basically another form of scam. Yes, they do make someone rich… the person who created the scheme, but not you. Get rich schemes are usually designed to part you from your money. So, in a down economy, you should avoid get rich schemes (placing classified ads, setting up ecommerce sites that sell Amway products, or Multi Level Marketing – MLM schemes). Note that MLMs only make the top most people money. If you’re anywhere near the bottom, you will be parted from your money.

Craigslist and even eBay are a haven for scammers. Be careful when you work with people selling or renting things. Never buy or rent anything sight unseen and never give money out as a ‘deposit’ or to ‘hold’ something unless you truly trust the individual. Chances are, if the person you are thinking of doing business is presently outside of the US, you should immediately stop the transaction unless you know for sure that what they are selling/renting is legit.

If you are selling a car or renting out an apartment, watch out for scams here too. There are some people who are outside of the US who will claim to give you an excessive sum of money in the form of a check. They may even send you what looks like an official check.. the problem is that it will bounce causing you fees and other associated problems (and may let them get access to your account number). Don’t cash any checks like this.

The bottom line is that in this weak economy, you should be extra careful with your money as there are lots of desperate unemployed people willing to do anything to make a buck (or a thousand). Always make sure to do your homework before buying anything or giving out personal information to someone you don’t know. If you suspect a scam, you should alert your bank or credit card company immediately.

Car Maker Bailout

Posted in bailout, bankruptcy, economy, tanking by commorancy on December 11, 2008

Because I’ve already discussed my views on bailouts, I’ve debated about creating a post on this topic.   So, I will keep this one short and sweet.

No no no!  No bailout for car makers.  We do not need to be footing any more bills for badly run companies.  If the car makers cannot get their act together on their own, what makes anyone think they’ll be able to succeed with an infusion of cash from the government?  The answer, they won’t. 

Worse, without any government oversight (and there has been little oversight of the bank bailouts), they’ll take the cash and run without actually becoming accountable for it.

Again, no no no.  No more bailouts.  Let these companies go through Chapter 11 and rework their own company’s finances on their own.

Does CitiGroup deserve a government umbrella?

Posted in bailout, banking, bankruptcy, economy, tanking by commorancy on November 24, 2008

 

CitiGroup Logo

I guess the broader question, does any large commercial business deserve to be bailed out?  Well, clearly Mom and Pop businesses fail every day.  Yet, the government does nothing.  Why do large conglomerates deserve special treatment? 

The short answer is that there is some magical threshold where there are too many people who would lose their jobs as a result of the failure combined with possible economic ramifications.  But, still, does that warrant a bailout?  No.

If a business cannot run itself in a fiscally appropriate manner (large or small) it deserves to fail and go away.  If any of your family is employed by CitiGroup or any financial company caught up in the turmoil of the financial sector crisis, I feel for you.  But, that doesn’t mean that the company deserves to continue to exist if they cannot maintain profitability even in the toughest of times.  Fiscal responsibility starts at the top of the company and trickles down to even the most bottom level employee.

What does this mean?  It means, don’t request a new computer every year.  Don’t ask for Herman Miller chairs and the most expensive ergonomic keyboard simply because you can.  If the item is considered ergonomic, the company is almost obligated to make sure you get it.  Buying all of these expensive amenities for your desk makes you fiscally irresponsible to the company if you don’t really need it (and, in most cases, you don’t).  But, that’s not to say that this is responsible for CitiGroup’s problems.  

Who knows where the money hemmorage is going inside these companies.  But, clearly, it’s not going back into the business.  Again, I ask, why do these companies deserved to be bailed out?  What makes them special?  I have no sympathy for large companies that can’t properly manage themselves.  Neither should the government.  Spending all of this money to prop up these badly run organizations is clearly counter to free enterprise. 

In Free Enterprise you have to take the good with the bad.  That means, when business is good, you profit.  When it’s bad, you bankrupt and close.   There needs to be no governmental cushion here to soften the fall.

Does CitiGroup or any other badly run business deserve an umbrella?  What do you think?

State of the economy

Posted in banking, bankruptcy, economy, tanking by commorancy on October 1, 2008

Unless you’ve been hiding in a cave, you’re probably well aware of the issues facing the banking and finance sectors of the economy. Here are my thoughts on this.

What started it all?

Clearly, this whole debacle started when the feds lowered the interest rate to 1% and the mortgage firms saw a field day.  One only had to listen to the radio for about 5 minutes to hear a commercial for some bank advertising stupendous mortgage rates.  During this period, this became known as the housing bubble.  This sector was primarily propping up the economy even when consumer spending in other areas was lackluster.

Government regulation (or lack thereof)

First, this whole debacle would not have become an issue if the government had been properly regulating the banking industry. Unfortunately, this presidential administration has been so pro-business that they would let anything and everything slide to let businesses do whatever they want. Is government to blame? Yes, but only partly. The rest of the blame falls squarely on the businesses.

Does AIG and Lehman Brother’s deserve to fail? Most certainly they do. Badly run companies need to go away. If a company can’t do the proper things to ensure continued success, then they deserve to fail. Unfortunately, the government and the stock market don’t see it that way. Because AIG and Lehman propped up much of the banking industry with their services, letting these businesses fail is tantamount to pulling the rug out from under you while you’re walking. The issue here is… putting all your eggs in one basket. Drop the basket and.. you get the idea. Government LET banks basically put their eggs into one basket by allowing bank sector consolidations (this goes back to letting businesses do whatever they want to do). Instead of raising an issue when it should have been raised, the government just sat there and said nothing. So, instead of saying.. no, there must be several insurers to prevent ‘eggs in one basket’, the banks’ insurance policies were not policed and were primarily underwritten by AIG.

Lending Practices

The banks, brokers and mortgage firms are clearly to blame for beginning this debacle. If they had been practicing proper loan practices, this issue would not have occurred. Instead, they were not only handing out loans to anyone and everyone, they were handing out risky loans. Loans such as interest-only loans for the first two years or adjustable rate mortgages (ARMs) that would also reset in 2 years.

Then, we had the speculators buying two, three, four or more homes all with multiple loans given by these ever-so-gracious banks. It’s not as if the handwriting wasn’t on the wall. But, again, no one stepped in to put on the brakes.

So, the foreclosures started, homes got devalued, more foreclosures ensued, banks began losing their interest payments and gaining properties they couldn’t sell… Banks tried to collect on their insurance policies for a bad loan from AIG.  The payouts forced it to bubbled up to the top feeders who’s bottom lines got severely hit (like AIG and Lehman). Then, bankruptcy…

Bailout

So, that’s all hindsight.. what do we do now? The primary issue at this point is the bailout. Should it be allowed? Clearly, congress didn’t think so in the form that it was submitted. Personally, I’m torn. As a taxpayer, I don’t want to be forced to help bail out a company that isn’t run properly. If a company chooses to use policy holder premiums to buy executives parties, cars, yachts, summer and winter homes, vacations and everything else that can be thought of instead of banking that money in the case of insurance payout or to help fund rough times. then they need to go away.

On the other hand, I don’t really want the economy to go into the toilet. However, I think this issue is inevitable. The bailout is simply a bandaid. If the bailout does anything, it will just delay the economic issues until a few years out. Perhaps the bailout will smooth it out a little more than without it, but I don’t see the economy getting tremendously better with a bailout than without.

Tip of the iceberg

Worse, we are only seeing the tippy top of the iceberg. There’s way much more under water than we can’t see. How many other banks or financial institutions will fail before it’s all said and done? This is still unclear. There is also a trickledown here that just hasn’t completely trickled down yet. For example, local cities and municipalities will feel the crunch come property tax time. Now that so many homes are in foreclosure, the tax base is probably 75% of what it was… perhaps even less. Banks won’t pay the taxes on properties and the former owners won’t either. So, come 2009, and these municipalities will be struggling for budgets. This leaves police, fire and even education in the lurch again… and we haven’t even gotten there yet.

Stimulus Package given back

Since Bush has taken office, he’s given out two stimulus packages of around $500 each. That’s a total of $1000 to each person. However, if we are forced to bail out AIG, all of that stimulus will be wiped out and we, the taxpayer, will be forced to double that again (around $2-4k per person) to cover the bailout. We’re just going to give our stimulus package right back to the government and then also hand over additional cash.

So, where from here? The path is definitely not clear. But, the US certainly needs dramatic help both in government and in corporate businesses. How that’s supposed to happen, again, is not clear. But, we are certainly not on the path to success with skyrocketing deficit combined with financial debacles such as this. One thing is crystal clear, government needs to regulate corporations that cannot regulate themselves… and they need to regulate them BEFORE the issues become debacles.

%d bloggers like this: