The AIG Bonuses Scandal

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Two points here: The public seems to be very much against bailing out the Big Three automakers. (Well, I guess technically Two of the Big Three - Ford is not asking for additional funds.) This is surprising in that GM and Chrysler are asking for a fraction of what the banks needed.

While it may be convenient to paint this as white collar vs. blue collar favoritism, the explanation may be even simpler than the one offered by DR. The collapse of GM and Chrysler will cost the US thousands of jobs and will definitely not be a good thing. However, that problem is small compared to what happens if AIG fails. We're talking about the collpase of the US, and by dint of that the world economy. To put it in the simplist terms, AIG is too big to fail. Chrysler and GM are not.

 

Yeah, that too.

 

I think part of it might also be due to the fact that most people don't have a clue why AIG is in trouble (or even what its collapse would mean), so they shrug their shoulders and say "well, if the government thinks AIG needs help, then I guess it must be true".

With the car manufacturers, though, people think they know what the trouble is - making cars nobody wants, overpaid employees, etc. Whether those are actually the reasons doesn't matter - people think they are (and in this case, they certainly are important factors). When people think they understand a situation, they're more likely to form opinions. And when they think the blame lies at the feet of the party in trouble, they're going to be more reluctant to support plans to help.

 

As I am not very informed about the situation of banking in the U.S.... why would AIG's failure mean the failure of the entire U.S.? Or rather, how on earth did anybody let a company get so large that its collapse would destroy a country?

 

I'm not saying we should let either fail. The GM failure would have a large ripple effect through the Midwest, and unemployment is already double digits in some of those states.

The point is that the expectation was there for the auto workers to give up pay and benefits all along, but the same was never there for any of the Wall Street company white collars, at least that I know of - not one.I know a few volumteered to take pay cuts but not as condition. In fact, not only were bonuses given out, but so were silly expenses, like the Citi Bank name on Yankee Stadium, which costs them 200 million dollars (and we really paid for). If GM had done that the White House would have choked on it.

Is it a matter of "doing it right this time?" It could be, but I would be surprised if that was the case.

Yeah, there weren't any of those on Wall Street....

 

It's not so much the failure of the U.S. as the failure of the U.S. and global banking system. And since money makes the world go 'round, that would be bad.

Here's a pretty good article that describes the problem.

You should read the whole article, but in a nutshell, AIG is a huge player in the insurance business. Part of what it started insuring was loans given out by banks, including those complicated sub-prime loans. With loans going bad, banks want to collect on their insurance. If they can't collect, banks could fail. At the very least, banks would have less money to lend out, so credit, as tight as it is now, would become even tighter. Furthermore, since AIG is an insurer, if they fail, it means that regular people might not be able to collect on claims under life insurance, house insurance, etc.; due to AIG size, this could put the entire insurance industry at risk.

Again, I've given a brief overview, but the article does a much better job.

No argument there, Chandos, but like I said - people think they understand the problems with the auto industry better than with the financial sector.

 

I inadvertently skipped a word. I meant to say:

We're talking about the collpase of the US economy, and by dint of that the world economy.

To expand upon Splunge's point, banks insure mortgages to protect against loss. It's not all that different from a life insurance policy. Basically, the bank pays an insurance company a small percentage of the value of a mortgage. If that mortgage "dies" (from the homeowner defaulting) the insurance company pays the bank the amount of money it lost out on from the mortgage going into default. The theory is that the number of mortgages that fail (just like the number of people who die) is small compared to the total number of policy holders.

AIG contributed to the collapse of the housing market by insuring properties by homeowners who were credit risks, and then selling off these as sound investment to investors the world over, including foreign banks. When the number of failed mortgages grossly exceeded what AIG had expected, it didn't have enough money to cover all the payments. There was a risk of both US and foreign banks literally running out of money, because they were not getting their insurance money. (As a slight aside, a decent chunk of the bailout money - several billion dollars - was effectively paid out to foreign banks. The US government didn't pay foreign banks directly, but AIG had foreign investors, and some of the money they received was used to pay those debts.)

@CtR,

I think another issue at work is that the US auto industry is fundamentally flawed in its current state. The US housing market will recover eventually, just on the basis that the population of the US is growing, and people need to live somewhere. The housing market can eventually become profitable again.

The auto industry, on the other hand, will not recover. As it's currently set up, its operating costs exceed revenue, and that isn't going to change with the current compensation plan in place. Its pension plans aren't all that different from Social Security - people are living a lot longer now, and are staying on pension for a greater amount of time.

Bailouts hope to accomplish two things: fix the current problem and try to prevent the same from happening again. The banking and insurance industry can prevent the same from happening again by better lending practices (that likely will have to be enforced by legislation). The auto industry has to reduce operating costs. It makes sense for the adiministration to bail out the banks if they can resolve the underlying causes as well. Throwing money at them, and then regulating lending practices accomplishes that. Bailing out the auto industry does not make sense unless you can fix the underlying causes. Throwing money at them will not cause them to start operating in the black again, and telling a company what to pay its workers and what it can offer in pensions is not something that the government is likely to legislate.

 

That's because the American car buyer has been completely psyhco the last 10 years. When times are good they demand huge gas-guzzling SUVs and pickups; several months later they are screaming for sub compact econo models that get 1000 miles to the gallon. Did you know that in 2006 they sold over 71000 Hummers? Even as expensive as they are to purchase and maintain? Really I've seen little old ladies stumbling out of them at the corner grocery store. Now they are going out of business.

You can't craft a long range business model when your product is dependent upon the price of gas. Even Honda and Toyota are hurting. But do you think the Japanese would let Honda or Toyota go under? No way. They protect their large industries.

I'm not letting the American auto industry off the hook, because they share a large part of the blame. They played the short-term market to the hilt and got burned. All this really goes back to the heart of what Obama is saying about having the coherent energy and healthcare policies that will add some clarity to long range planning. If we remove healthcare costs from American companies, they will compete better with foreign companies that don't have that burden. A coherent energy policy will give direction towards what our real energy goals should be, rather than going back to the Arabs every year and begging for more cheap oil (which they are running out of anyway).

 

Economy vehicles never go out of popularity completely, as some people simply cannot afford more expensive cars. Maintenance costs aside, I think H2s start around $60K, which not a lot of people can afford. Also, 71,000 Hummers isn't really that much. That still puts them in pretty much a niche market. Toyota sold over a quarter of a million Camrys in 2006. Granted Camry was the top selling US vehicle, so maybe that's not a great comparison, but it shows that more people favor economy over gratuitous horsepower.

They are hurting, but not nearly as bad as the US auto industries. It's not like Toyota didn't sell gas guzzlers - check out the Toyota Tundra - but they were wise enough not to base their business model on it. They have the best selling car in the US for a few years running (ever since they passed off the Ford Taurus) - and it wasn't anything that got 10 mpg.

 

EGGS. ACT. LEE.

GM has no one to blame for their current situation but themselves. They built gas-guzzling beasts that no one needs and marketed them to trophy wives, soccer moms and macho meat-heads who've never heard the phrase "compensating for something," all while oil prices steadily rose and their competitors started taking fuel-efficiency seriously. Then when a gas crisis hits (which had been predicted for years) and we see $4/gallon gasoline, it's no surprise what happens next.

They also sacrificed quality and let their standards slip some time ago. American-made cars have a reputation for being less-than-the-best for a reason. There's only 1 car on the top 10 "Most Reliable" list that is American-made, and it's a Buick. You know who I blame for that? Rick Wagoner. People are complaining that he's being made into a sacrificial lamb by the Obama administration, but that to me is just BS. He was calling the shots and following his vision for the company - it's about time people at the top start paying for making bad decisions.

 

I disagree that GM should bear all the blame – I also blame the consumer who, as Chandos points out, has been psycho. Yes, GM focused on vehicles that nobody needs, but they’re what people want. It’s part of the American “bigger is better” mentality, and automakers and consumers are equally at fault. You can’t blame GM (and other U.S. automakers) exclusively for this – heck, even foreign manufacturers were trying to cash in on the SUV/pickup insanity. However, I will concede that GM focused too much on the gas-guzzler market, and until recently didn't do as much as it could have to promote more fuel-effeicient cars.

 

While it was no surprise to you and me, obviously it was to those who bought into the last adminstration's policies (or lack of) and made those purchases believing that it was their god-given right to pump as much gas into those beasts as they felt like. Why would anyone believe gas would be cheaper under GWB?

Where are you, DR? How many Dodge Rams, Tahoe, Suburban, Ford S-Whatevers, do you see? While you are complaining about the quality of American made cars, you sure see a lot of these beasts on the road. So they can't be "all that bad" regarding quality.

Look, DR, I have a 10 year old Mitzu. You can't get more "Japanese" than a Mitsubishi, I would think; they built the Jap Zeros that bombed us at Pearl. The name was even banned after World War II. But look again - it was desinged in California and built in Illinois . It even has a Chyrsler engine in it. That's real "foreign" - if you live in South Africa, I suppose. How many other "foreign" cars are made right here in the USA?

 

That's true Splunge, but I'm sure there would be public demand for a lot of products that are harmful or socially irresponsible were they legal. Like LCD DVD players installed not for view from the back seat, but in the dashboard up front. People are dumb enough to buy those thinking " I can drive without getting distracted." Cell phones are bad enough; just imagine the carnage. That there was public demand for something doesn't necessarily mean it's a good idea to sell it. Also - GM and the hundreds of millions of dollars they spent marketing cars like the Hummer are certainly responsible for a great deal of that demand.

So while I agree the public and their ill-conceived materialistic demand is partly to blame, GM deserves the lion's share of it, for both feeding AND satisfying that demand.

EDIT: Just saw Chandos' post:

I don't think they're all bad, not at all. I drive a Chevy, myself, and I love Chevy cars and trucks. The car before that was a Pontiac. My point was American cars are no longer setting the standard for quality, and more discriminating car buyers - who value quality over loyalty to domestic car makers - are looking elsewhere. It's like with TV's - a Sony or Samsung are typically the top brands, but a Westinghouse will still accomplish the same function proficiently and will certainly have many satisfied customers who will remain loyal to Westinghouse because they bought one that they loved. Along those lines, many car buyers - like my father - wouldn't buy a Japanese car if their lives depended on it, Consumer Reports' quality tests be damned.

My overall point is - Toyota is the #1 car manufacturer in the world (and top selling car in the US) because they're doing it better than GM. They make superior cars with superior quality, and thus, sell and keep more satisfied customers than GM. This, combined with the fact that GM's current troubles could have been avoided had they gone a different route philosophically and strategically, is all the ammo I need to take aim at Rick Wagoner.

 

Oh, yes. They were a terribly run company, like many large US coporations. Problems in these companies don't come from the bottom up, but from the top down. In the end it will be the average auto worker who will get the shaft:

http://www.msnbc.msn.com/id/29962730/

 

Not to derail this thread and some might see this as US bashing but were they ever seen as this? I am no big car guy but everything I have ever heard is that one thing American cars have been famous for is their comparatively lousy quality. Had a boss who drove a Ford and he loved Ford but even he joked about who often and easily it broke down, he loved Ford despite its quality not because of it. Well, this is completely off-topic but my point was at least around here one thing American cars have never been famous was for setting the standard of quality. That would be ze Germans.

 

joaq, you're right - Ford has always had a bad rep and yes, they make crappy cars. But Ford is seperate from GM, which historically been held in much higher esteem. When I talk quality standards I guess I'm more referring to US market rankings, because in Europe German cars like BMW and Mercedes are considered your every-day cars (when I was in Germany a few years ago I marveled at all the creme-colored Mercedes I saw parked out front of the Airport...turns out, they were taxis. ), whereas here they're generally classified as luxury cars and take up a far smaller portion of our car population. VW usually fits in the space between common and luxury here, as they are neither cheap or spectacular in terms of customer satisfaction.

 

Well, of course the auto workers are the ultimate losers here. If you sell cars that not many people want, and your company goes out of business, then you're out of a job. I took the liberty of looking up the top selling cars from 2006-2008 and compiled a composite index. Top selling models for the last three years:

1. Toyota Camry
2. Honda Accord
3. Honda Civic
4. Toyota Corolla
5. Ford F-Series (Light Duty)
6. Nissan Altima
7. Chevy Silverado
8. Chevy Impala
9. Ford Focus
10. Chevy Cobalt

When foreign cars are 5 of the top 6, it's no wonder the US cars are hurting. Also take notice that there is nary a Chrysler on that list. As for quality, accoding to consumer reports, the top three are (in order): Toyota, Honda, and Hyundai. (Surprisingly, there aren't any Hyundais on the list either, although their sales did jump the last couple of years.)

 

Then what are your crap cars? (Please don't say GM, Ford and Chrysler )

(Incidentally, my bad impression was formed from Europeans I met on that trip who told me Mercedes weren't all that fancy, but I always found that strange, so I'm sure you're right. Maybe they were BMW fans. )