Thursday, March 19, 2009
Anyone who has watched "Law & Order" over the years, as I have, knows that the ending must feel right. The circumstances of the crime may be complex and the legal issues muddy, but in the end, most viewers are left feeling that some justice has been served.
The great American audience sees no justice in paying $165 million in bonuses to the AIG executives whose reckless conduct led to a $170 billion (so far) bailout of their company. There may be far more expensive outrages in the AIG story, but the bonuses hit the public's already aggravated injustice nerve. Reducing them would not do.
What truly rankles is the argument that AIG, now 80-percent owned by the taxpayer, has no choice but to cough up the money: The sacrosanct contract requires the bonus payments. Also, not paying them might prompt the "talent" to depart, leaving less experienced hands to fix the mess.
No "Law and Order" would end like that. Fortunately, other plots are available.
Brush aside the congressional theatrics about taxing the bonuses to their eyeballs. Let's talk jail time.
William Black, a law professor at the University of Missouri-Kansas City, envisions a federal investigation into AIG's past accounting, securities disclosures and executive-pay program. Black was the litigation director of the Federal Home Loan Bank Board and helped bag the "Keating Five" lawmakers during the savings-and-loan scandal in the late '80s and early '90s.
As the bottom was falling out of its derivatives trading, AIG was reporting healthy profits, he told me. That's not allowed. Meanwhile, the company created a short-term bonus system for its top execs.
The massive prior bonuses should be clawed back, he said, "and we do that by establishing that there is accounting fraud and by putting in intelligent, vigorous investigators."
Speaking of which, Goldman Sachs said that it had no material exposure to AIG, but we now learn that it has received $13 billion in AIG bailout money. "That's a felony to make a false disclosure," Black adds.
The solution is to split AIG's financial products unit off of the conventional insurance business and let it file for bankruptcy. Then we'll see what sort of payback is truly due the financiers who gambled on the housing market.
"The contract they (Goldman and others) made was that if you don't pay us because you're insolvent, we're simply a general creditor and we get only pennies on the dollar" in a bankruptcy, Black notes. "How come that contract isn't sacrosanct?"
Back to AIG. In addition to making extremely risky contracts and being leveraged to the hilt, the company failed to put in appropriate loss reserves should something go wrong. The reserves are required under Generally Accepted Accounting Principles (GAAP), according to Black. These are the rules accountants must follow in preparing financial statements.
"If you're publicly traded, the SEC rules require that you follow GAAP," he says. "If you don't follow GAAP, then it's securities fraud."
The excuse that the auditor gave the accounting a green light won't fly. Enron and the infamous Lincoln Savings & Loan had clean opinions, too.
The "buzz on Wall Street" is that the bonus-deprived AIG employees might leave, then "simply turn around and trade against AIG's book," writes Andrew Ross Sorkin in The New York Times Dealbook column. "Why not? They know how bad it is." (Trading against book involves using what is known about weaknesses in what a company owns to presumably short sell the stock.)
I asked Black about this scenario. He almost laughed. Using that inside information would be securities fraud, "and everyone that hires them would be frauds."
It's time that the Obama administration stopped issuing statements of shock as it coddles the Wall Street bankrupts. The public wants more than the bonus money back. It wants justice.
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