Film Review: The Warning – PBS / Frontline Documentary
Rated: 4/5 stars.
PBS’ The Warning Documentary
The Warning is a PBS documentary discussing a warning from Brooksley Born, an attorney and a former Commodity Futures Trading Commission (CFTC) chairperson. She explained that derivatives were extremely risky insurance vehicles and sent a warning that these vehicles needed regulation during her tenure as CFTC chairperson, but her warnings went unheeded. She resigned in 1999 from the CFTC position after legislation was passed preventing her agency from regulating derivatives.
Vision of this Documentary
While I would like to rate The Warning higher, its take is pretty much tunnel vision on the derivatives markets. While the derivatives markets did melt down and did, to a large degree, spur the meltdown onward, the meltdown was not started because of derivatives. The derivative meltdown was a casualty of and was exacerbated by the sub-prime mortgage meltdown. Had the mortgage industry bubble not burst, the derivatives market might have gone unchecked for many more years. The warning was and should have been about placing regulations onto mortgage lending practices. The mortgage lending industry is the industry that failed and sent the economy into a tailspin, let’s make that perfectly clear. The derivatives (insurance) market, which speculated on the mortgage industry, single-handedly sent Wall Street into a tailspin (along with several large insurance companies like AIG).
Derivatives and the Mortgage Meltdown
Anyone with half a brain in their head could see that using questionable lending vehicles like interest only loans for the first two years or adjustable rate mortgages were ticking time bombs. When the actual monthly payments came due years later after rates went up to where they should have been, people couldn’t afford pay. This was especially true when lenders were handing these loans to people who could barely afford the ‘introductory period’ payments. So, loans came due, people defaulted and the rest is history. The derivatives (insurance policies) that were issued also came due because of the en masse foreclosures. Insurance companies that issued derivative policies speculating people wouldn’t default en masse began to fail because their speculation was wrong. So then, these insurance companies couldn’t pay off on the insurance claims. So, when consumers defaulted, so did the insurance companies offering derivatives.
It wasn’t as if warnings weren’t being issued regarding the inevitable mortgage meltdown, it’s just that Brooksley Born (the focus of this film) was not one of the people issuing the mortgage warning. Her warning was strictly about the highly risky derivatives. More specifically, the black box non-transparent nature of them. The danger, of course, is that derivatives can be placed on any speculative and risky investment as insurance. The reason derivatives need to be regulated is to prevent companies the size of AIG from making stupid decisions about such risky vehicles. However, from a consumer perspective, banks should never have gotten into the position of issuing such risky mortgages like water to people who couldn’t afford them. This was the single mistake that led to where we are today and that mistake has nothing to do with derivatives and everything to do with Government and the Federal Reserve making stupid decisions.
Overall, the movie is worth watching, but also understand its information’s place in the larger meltdown that was at work in our economy.
73 AIG Execs get over $160 million in Bonus Payouts: Oversight?
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.
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