Wednesday, March 18, 2009

Enough about AIG ...

... and the bonuses. Let's pin blame where it's really due.

The AIG bonuses that are causing so much angst were contractual obligations to a group of people that AIG needed to effect an orderly closing of the business that had resulted in all those losses. Those people were going to be out of a job after the completion of that process and it was a matter of negotiation. It is disappointing that senior US officials including the President seem so willing to ignore what contractual and legally binding obligations exist in the interest of cheap political brownie points.

Also, I went back to Greenspan's book "The Age of Turbulence" and again (admittedly with the benefit of hindsight) read the bits about the build up of liquidity in the 1990s - including the chapter titled "Irrational Exuberance". He says the reason he was not in favour of raising interest rates at the time was inflation not having increased, likely due to productivity improving. He also talks about watching an unprecedented stock market boom develop and seemed almost bemused. Here's what was happening Mr. G - investors were searching for yield, couldn't find it in conventional opportunities and went down a more risky equity and high yield driven route that as we now see included Madoff, Stanford Financial etc.

Pity that the US Federal Reserve and Government and legislature (along with other governments and regulators) don't feel the need to reassure the world's investors about what they've learnt from the crisis ...

No comments: