Obsolete Certainty

It seems that AIG isn’t the only financial giant that is paying large executive bonuses after being bailed out by the U.S. Taxpayer.  Both Fannie Mae and Freddie Mac, the giant mortgage agencies, are reportedly set to pay over $210 million in bonuses over the next 18 months.

However, absent this time are the steady stream of the usual suspects denouncing the “obscene payments”. Apparently absent this time are the protests outside the homes of employees of Fan and Fred.  Interesting.

Apparently at least one Washington insider is upset.  Iowa Senator Charles Grassley is quoted as saying “It’s an insult that the bonuses were made with an infusion of cash from taxpayers. The elite in Washington and New York need to realize that bonuses for poor performance and at taxpayer expense do a lot of damage to public confidence.”

At least this time Grassley didn’t suggest that Fannie and Freddie executives go Japanese.

Congratulations fellow American taxpayer. We are going to write a check fo $165 million to fund executive bonuses at AIG. That is right! And not just any division of AIG, but the AIG financial products division that wrote all those toxic credit default swaps and other derivatives that threatened a financial doomsday.

Edward Libby, the government appointed head of AIG stated that “We cannot attract and retain the best and the brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of American taxpayers – if employees believe their compensation is subject to continued arbitrary adjustment by the U.S. Treasury.”

In otherwords, keep sending us money but don’t tell us how to spend it.

The press and the blogosphere are abuzz concerning reports that much of the AIG bailout money went to other banks and financial institutions.  But should that really be a big surprise?

The fact is the bailout of AIG was never about bailing out AIG. It was to prevent a much bigger systemic problem.  AIG was a counterparty on numerous credit default swaps. The failure of AIG as counterparty would have resulted in untold losses throughout the financial system.  Whether or not the AIG bailout was the right thing, that was the real reason.

The question we have to ask is who is responsible for allowing AIG to get where they were.

Alabama’s largest county is making preparations for bankruptcy. Jefferson County, stung by rising debt service from $3 billion in bonds has asked their lawyers to begin the process if negotiations with creditors do not succeed. Should the county take this route it would be the biggest municipal bankruptcy since Orange County, California in 1994.

The problems began when the county issued the debt to pay for mandated sewer system upgrades, much of which was issued in the form of auction rate securities.

Bill Gross, who manages the world’s biggest bond fund, estimates that the total write-downs related to the current mortgage mess will hit a trillion dollars.  Gross, manager of the Pacific Investment Management Company (often referred to as PIMCO) states that the total investment in “risky assets”, such as subprime and Alt-A mortgages, total $5 trillion. He estimates that 25 million U.S. homes are at risk for negative borrower equity.

Gross wrote that “The problem with writing off $1 trillion from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth.”

An interesting little piece by Matt Nesto on CNBC.com about the market capitalization of General Motors.  GM, which was once the biggest and baddest corporate creature on the planet, now has a market cap of only $7 billion dollars That is drastically down from a market cap of $56 billion in 2000.

To provide context to just how far the mighty have fallen, Matt compares the current GM cap to other U.S. companies.  For example, GM’s market cap is now just one half of that of Avon.  That’s right – Avon.  It is one fifth of the market cap of Ebay.  And it is 1/66 the size of Exxon.

Former Citigroup CEO Charles Prince, whose unemployment status is at least partially the result of the real estate crisis, is having trouble unloading a modest little home.  Prince has a five bedroom Tudor style home in Greenwich, Connecticut that has been on the market for six months. Unfortunately for Chuck, the mortgage crisis has put a bit of a chill on the housing market, even in the wealthy areas of the New York City metro area.

According to an article by Sharon Lynch in Bloomberg, Prince paid $4.48 million for the home in 2003 and currently has the property listed for $5.85 million (after a $300,000 price reduction). Of course something tells me that the paltry reduction will not be the last. According to the article, a Bloomberg survey indicates that home prices in Greenwich fell over 8% since the first quarter of last year and declines of as much as 25% are noted in the majority of upscale New York suburbs.

Welcome to our world Mr. Prince.