Indispensable?

I hereby declare that I will run any financial institution willing to have me into the ground for a mere $250,000. C'mon! It's a bargain! Why pay some smartass guy you probably don't even like $500,000 base pay plus millions more in retention bonuses to screw things up six ways from Sunday when I will do it for a fraction of the cost?

It is unlikely that the AIG transactions are something only the geniuses that ran the company into the ground can understand. There are a bunch of problems though. One of them is that the winding down is not (yet?) a post-mortem exercise, i.e. anybody coming in must have a flying start and even then a minimum amount of cooperation from the old crew is required to get oriented as quickly as possible. It also wouldn't surprise me at all that if there is any grain of truth to the claim that the insider knowledge of the perpetrators is required, it is because they haven't properly documented what they were doing. When the AIG problem became acute in September 2008 and the first taxpayer money had to be injected, the Fed most likely did not have the people needed to take over any significant part of the winding down process. However, if ever possible it should have brought in at least some outside people, so that somebody would have looked the AIG employees over the shoulder what they were doing. Maybe these outsiders would not immediately have been able to understand every detail. But we are now in March 2009. After six months any half ways intelligent outsider probably would have a reasonably good grasp of the AIG operations. It is almost for sure that in the case of AIG the child has already fallen into the well, but in principle the regulatory framework that needs to be drawn up as a consequence of this disaster should include some things like setting up an institution outside of the banking industry (in academia or within the realms of the Fed or the government) that trains a bunch of people and provides them with the multi-disciplinary knowledge required to understand the derivatives-writing business and how the models that are being used work. In normal times these people should do oversight and in case of an emergency like AIG they should be sent in to supervise the winding down process. Any institution that then wants to trade in derivatives, in particular in CDS's, whether based on a sophisticated theoretical model or not should, be required to do two things: 1. Pay a fee to participate in the financing of this outside institution 2. Open up their practices to inspection by the experts of the outside institution Beyond a certain size of the bank or insurer, the inspections of business practices must include revealing what theoretical models, if any, are being used. This may need to be done under confidentiality, but if a bank or an insurer is not prepared to disclose these models, they either have to drop their use or they need to split into smaller units. There needs to be an absolute firewall between the outside institution and the banking/insurance industry. At least in the direction from the outside institution to the banking/insurance industry, so that the industry can not undermine the institution by hiring away the experts. This means that the experts will need to be paid salaries commensurate with what the banking/insurance industry pays its own experts. If there is a danger that the taxpayer is on the hook for the consequences of what the derivative guys are doing, the public needs to be able to police their activities. And the cops must be armed at least at par with the guys they are supposed to police. The industry won't like this of course, but in light of the disaster they have caused, overcoming their resistance should not be a problem if the political will is there. And complaining about the fees should be a non-starter after the bonuses fiasco. PS: Anonymous at 3:30 is right - to reveal possible actions of fraud and prevent tunneling in AIG, it would be a good idea to provide strong incentives to whistleblowers.

Kevin, I'm hoping you'll comment on the James Galbraith article in the Washington Monthly the other day (http://www.washingtonmonthly.com/features/2009/0903.galbraith.html - "No Return to Normal"). He seems to offer the clearest vision of the way forward, while echoing many of the complaints that we hear from both right and left about bailing out the banks. The Bernanke/Geithner/Paulson/Bush/Obama strategy of bailing out the big financial players is fundamentally flawed, though probably preferable to the do nothing approach favored by many influential critics. The emphasis should be on restoring household solvency, not on encouraging the financial system to make more loans. On this, I agree with many of the conservative critics. I'm sick of bailouts because they just seem designed to get us back to where we were a few years ago, with unsustainable levels of consumer debt in relation to income...

Personally, I believe we should go gitmo on their ass for a weekend, and let them know there's plenty more where that came from.

Indeed, because EXTORTION IS ILLEGAL. Even when practiced by Masters of the Universe.

I suggest a more humane version of the Guantanamo model for AIG malefactors. Round them all up as suspects, place them in cages, and question them as the need arises or just for yucks. Feed them, provide them with medical care, and give special treats to those who volunteer useful information and rat on their colleagues. Don't let them touch anything within AIG ever again, and monitor their communications: They can convey their wishes and instructions through more trustworthy parties who are accountable to the taxpayers.

"We can't solve problems by using the same kind of thinking we used when we created them." ---A. Einstein I take this man's wisdom slightly more serious that some financial-whiz-MBA playing with a spreadsheet. WE NEED NEW THINKING NOW!

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