Archive for the ‘Economy’ category

Obama “tightens” government’s belt by 0.5%

May 7, 2009

The president, criticized by Republicans for his excessive spending, cuts $17 billion from his $3.4 trillion budget.

by Michael Naragon

In the midst of the current economic slowdown, President Obama has gone through the budget line by line, looking for excess.  The result?  Taxpayers are now responsible for only $3.38 trillion.

“All across this country, Americans are responding to difficult economic times,” Obama said Thursday as he announced the savings, “by tightening their belts and making tough decisions about where they need to spend and where they need to save.”

“The question the American people are asking is whether Washington is prepared to act with the same sense of responsibility,” he said. “I believe we can and must do exactly that.”  For a family with a budget of $50,000, 0.5% is $250.

Obama praised his economic team for finding the pittance of cuts, warning that there were those in government who would love to spend that 0.5%.  However, the president stated that the government needs to be circumspect about its spending.

“$17 billion a year is not chump change by anyone’s accounting,” he proclaimed proudly.  Unfortunately, given the scope of the Obama budget, he has turned $17 billion into “chump change.”  We have reached a dark day in our nation’s history when a president can cut that amount from the budget and it’s virtually negligible.

Congress has already cut about $10 billion from the president’s budget, and they will surely return to their constituencies claiming their fiscal responsibility.  Obama himself held a fiscal responsibility summit with congressional leaders in February.  Apparently, the result of those discussions was a plan to spend trillions of dollars, test the poll numbers, then cut out a symbolic portion so that the American people would buy the illusion that the government was actually cutting back.

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What happened to the Madoff Billions?

April 12, 2009

News reports persist in wondering what happened to the $65 billion that Bernie Madoff took in with his investment scam. Is it hidden in the basement of a dark castle in Switzerland? Did he spend it on yachts and cheeseburgers?

It’s not a mystery. He was running a Ponzi scheme. A Ponzi scheme involves giving investors who withdraw money the money put in by other investors. The investments were supposed to be earning ten percent, but Madoff claims he never invested anything and hence never earned a dime on the money he was given. When someone withdrew an investment, or the purported earnings on the investment, he had to pay out money that was paid in by other investments. The scheme operates so long as the total withdrawals are less than the funds taken in. For Madoff, the payouts caught up.

Of course, Madoff also skimmed off enough to keep him in yachts and cheeseburgers for all those years, but even a $50 million penthouse doesn’t put much of a dent in $65 billion. Most of the money was paid out. It’s characteristic of a Ponzi scheme that those who manage to cash out early come away clean.

Theoretically, the government can go after those payouts and redistribute the money to the investors who were bilked. The principle is similar to that applied to stolen goods like a TV set. The buyer of a stolen television doesn’t get to keep it, it rightly goes back to the original owner. Madoff had no right to distribute money obtained fraudulently, and the recipients have no right to keep it.

So in theory all the payouts could be recovered, providing records of them can be found, and the money redistributed in proportion to what people paid in. That’s in theory. One problem is the statute of limitations. Madoff”s scheme has been running for a long time, so legal limits on recovery may have expired.

Another problem is that the payouts may well have been dispersed. Many of Madoff’s clients were charities. Suppose one of those charities withdrew their funds and gave it out for, say, tsunami relief. Or perhaps a university withdrew funds and used it to build a new library. As a practical matter, the distributions may not be possible to unwind.

Still, it is no doubt possible to unwind some of them and to provide some relief to the investors who now appear to have lost everything. The unwinding would take a battalion of lawyers and an army of tight-lipped accountants. Investors who withdrew funds will fight every effort to recover. I worry that the government will shy away from the task and instead substitute some simple approximate scheme in the interests of expedience. Unwinding the scam deserves a best effort. So far the efforts seem feeble. [1]

[1] “Bernard Madoff liquidator sets off in pursuit of beneficiaries as pawn shops report brisk trade”

Is the Outrage Over AIG Bonuses Justified?

March 30, 2009

Treasury Secretary Tim Geithner was interviewed by George Stephanopoulos on ABC’s This Week today. Last week, Edward Liddy, the CEO brought in to clean up the AIG mess explained the bonus situation clearly to Congress, although the facts of the matter had little effect on grandstanding by Congressional Democrats. Today, Geitner reiterated some of the basics. Bonuses were paid because there was a contractual requirement to do so. The only way the contracts could have been obviated would have been if AIG was in bankruptcy, which they were not. Geithner explained that they also had to pay obligations to European banks for the same reason. They were contractual obligations.

The first thought that comes to mind is “So why wasn’t AIG put into banksuptcy?'” We’ll leave that aside for now and focus on the bonuses. If it was a legal obligation, can we nonetheless agree that rewarding failure is at least unwise, and perhaps immoral?  Liddy’s testimony sheds light on that issue. AIG has about 115,000 employees. AIG failed. So does that mean that all 115,000 employees failed?  Even rabid Congressmen acknowledge that the failure was in the AIG Financial Products organization, so that the staff dealing with life  insurance and the like, the great bulk of the company, were not responsible.

AIG Financial Products had three types of operations. The operation that brought down the company was the one trading credit default swaps (CDS).  CDS are essentially insurance policies against the bankruptcy of other companies, like Goldman Sachs and Merill Lynch. The disaster came from buying a CDS for x dollars and selling it for more than x dollars. Each speculator in the train of sales thought they were covered by their previous purchase, but when one failed they all failed. So how many AIG employees were actively involved in trading CDS? According to Mr. Liddy, about 20.  Those employees are long gone, without bonuses, as well as the executives who were in charge of the operation in Financial Products, and the general management in AIG who should have been watching the store.

The bonuses were paid to staff in a different operation, one dealing with the trading of other derivatives. Derivatives are complex financial instruments requiring intense day-to-day management, typically including the hedging of foreign currencies. AIG had a portfolio of $1.6 trillion of such financial instruments. Libby judged that even if the bonuses were voided by some means, that the risk of losing $1.6 trillion by passing the trading off to new staff was too great. Better to pay the $165 million and have the experienced people wind down those operations gracefully. That has been happening.

CEO Liddy, the Federal Reserve, and the Treasury Department all understood the situation at every step, and all agreed it was the prudent approach. The facts do not sustain the torrents of moral outrage that have flowed from paying of the bonuses. Liddy expalined it clearly and accurately under oath in his testimony. He repeated it slowly five times for Democratic Congressmen having ideological armor that repels facts. More than a few Conservative pundits have, while understanding the importance of upholding contracts, built up a full head of steam on the outarge of rewarding failure. It is not justified.