Sir Fred's house -another example of populist culture?

The news that Sir Fred Goodwin's house has come under attack draws my attention to this week's Newsweek whose theme is do populist outbursts like the one sparked by the AIG bonuses represent a threat to capitalism?

Next week's G20 in London is by all estimates going to see another attack on capitalism by protesters.Is this going to become a new trend.

In Newsweek,Michael Kazin professor of history at Georgetown University writes,with the AIG bonuses in mind that 70 years ago

Dorothea Lange traveled around rural America during the late 1930s, creating indelible images of the Great Depression. One day, she stopped outside a gas station and snapped a picture of a large sign. It read: THIS IS YOUR COUNTRY. DON'T LET THE BIG MEN TAKE IT AWAY FROM YOU. Seventy years later, citizens irate at the huge bonuses AIG paid out to top executives know just how that feels.

Why did Goldman Sachs take $12b?

The real AIG scandal is that the company's trading partners are getting fully paid rather than taking a haircut.

That is according to Eliot Spitzer writing at Slate magazine as he looks into the transfer of $12.9b from the ailing insurance brokers to Goldman Sachs.

The papyment he says brings up an important point.

why was Goldman wise to AIG's declining position two years ago, but nobody else appears to have known? There is always the operating premise that Goldman is better than the rest in the field, but where were the federal agencies that should have been taking a look at AIG's leverage situation and general financial health?

What really happened at AIG

There are certainly indications that the mismangement at the insurance broker AIG far exceeded anything on the scale of Sir Fred Goodwin and this from a credit trader makes that wholly apparent.

1.From comments made by AIG executives it appears that the company fundamentally misunderstood the nature of risks that it was underwriting. Those risks were

a) much more highly correlated than they assumed (due to the nature of bonds in CDO structures as well as the likely performance of super-senior tranches in event of impairment)

b) actually mark-to-market risk, not default risk which made AIG’s business much riskier than it thought. This is because long before super-senior tranches became impaired (the only risk AIG was worried about), AIG will have had to post more collateral than the cash it had on hand effectively guaranteeing its bankruptcy.

2.The logical consequence of the previous point is that buying protection from AIG on ABS CDO’s is horribly wrong-way (discussed below) or, to use an analogy, akin to buying deep out-of-the-money puts from a company on its own stock. In other words, that protection is worthless. The consequences of this point are that

a) internal risk management groups inside investment banks were massively short AIG to compensate for the wrong-wayness of this exposure and

b) investment banks who bought protection from AIG, while fully aware of the zero value of the protection they were buying, were continuing the charade only in order to continue originating CDOs.

ht-andrew sullivan

A familiar story across the Atlantic

What we can do the Americans can do better.

The front pages of the US papers today suggest that AIG are planning to pay out $165 million in bonuses to 400 employees in its financial products division.

According to the New York Times,

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

Whilst the LA Times says that if the the bonuses are not paid

financial products employees who are denied payments could quit and that AIG's losses -- the insurer took the deepest bath in red ink in American history last quarter, losing $61.7 billion -- could spiral enormously if the only people who understand the company's convoluted dealings are not around to "unwind" the damage they have caused.