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Opinions and views from expert CFOZone members.

Tag >> AIG
Jul 15

The value of tying exec comp to debt

Posted by Karen1 in pensionsexecutive compensationcompensationAIG


For years, the prevailing wisdom has held that executive compensation should be tied to a firm's equity. That way, the theory goes, management's goals are aligned with shareholders' interests.  

This thinking is fine if you're a shareholder. However, what about bondholders? "If you're compensated only with equity, you're not worried about creditors losing money," points out Alex Edmans, a professor of finance at Wharton who has researched executive compensation. He also is the author of a recent study, "Inside Debt." 

Jul 06

It's not such a wonderful life

Posted by Karen1 in Glass Steagall ActFederal ReserveFederal Deposit Insurance Corp.BankingAIG

In his new book, "Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking," author Laurence Kotlikoff outlines his view of the drivers behind the financial mess and then offers up a solution with limited purpose banking.
 To be sure, the causes behind the ongoing financial crisis that Kotlikoff identifies are similar to what many other economists, journalists and regular Joes - especially on the web -  have identified: the largest financial institutions were able to take risks that went horribly wrong, and then get Uncle Sam to cover the cost - the classic "heads I win, tails you lose" scenario. Kotlikoff spares no words in his descriptions of the financial masterminds, (if they can be called that) behind the implosion. One example: "incredibly arrogant, irrationally overconfident and loaded to the gills with testosterone."
Turbo-charged banking and finance CEOs aren't the only ones that Kotlikoff rakes over the coals. He also points to the lack of effective regulation, calling the Office of Thrift Supervision, for instance, "comatose." In fact, its somnolence is the reason, he says, that AIG sought it as its regulatory body.
Similarly, the dismantling of Glass-Steagall allowed banks to move further afield from their original role as intermediaries who connect borrowers and savers. Instead, they could start gambling with others' money. Moreover, a lack of transparency when it came to banks' holdings meant no one (including the bankers) really knew what was on their balance sheets, nor were they able to grasp the risks involved.
Kotlikoff then compares the banking industry to mutual fund companies, which have weathered the meltdown pretty much intact. The reason for the difference? The mutual fund industry stuck to what it's been doing - connecting savers with others who can invest the money they're saving. It never started making bets with its own or others' money.
He also acknowledges that some of the financial reforms under consideration - such as allowing the Fed and FDIC greater authority to regulate non-bank financial institutions, and closer supervision of rating agencies - are a step in the right direction. In his view, however, they don't go far enough.
As a more effective solution, Kotlikoff advocates a move to limited purpose banking, which restricts financial institutions to acting only as intermediaries between borrowers and lenders, and savers and investors.
They would operate as pass-through mutual fund companies that would neither own assets nor borrow to invest, other than what might be necessary to obtain the equipment needed to run their businesses. Banks would sell a range of mutual funds - equity, private equity, REITs, etc - all of which would be held by third-party custodians and marked to market.
A single government agency would rate the funds, although investors could purchase additional private ratings, if they wished. In addition, demand deposits would be held in cash mutual funds, ensuring that banks would have reserves equal to 100 percent of deposits.
In another shift, investment bankers would be limited to a consulting role in transactions, while traders would be essentially electronic clearing systems, without the ability to acquire either assets or liabilities for themselves.  
The benefits of this approach? First, it eliminates the temptation for bankers and traders to risk such large sums of money that they threaten a country's financial system. It simplifies regulation. And, it can be implemented at little cost.  
In fact, this sort of shift already is underway. Mutual funds now hold 34 percent of all financial assets, up from 14 percent in 1980, Kotlikoff says. So, the market already is moving in this direction - albeit slowly.
Perhaps the biggest shortcoming of the idea is the political resources required to move in this direction. Many people, from those in the banking industry to government regulators seeking to protect their turf, have an incentive to maintain the status quo. It's hard to identify the elected officials who might be willing to take on either group in order to support ideas like those Kotlikoff describes in his book.  

We may all regret that inaction. In the book, Kotlikoff discusses Richard Fuld, former CEO of Lehman Brothers. Kotlikoff notes: "What I find interesting and alarming is his statement that, ‘What happened to Lehman Bros. could have happened to any firm on Wall Street.' If this is even half true, why would we consider maintaining the system as is?"
Jul 01

AIG vs. Goldman reveals the flaw in financial reform

Posted by Ron F in RiskRegulationGoldman SachsGAAPfinancial reform billfinancial market reformfinancial crisisFASBderivativescredit default swapsCongresscomplianceBanksbanking reformBankingbank failuresbailoutAIGAccounting

Ron F

The latest revelations  concerning the dispute between AIG and Goldman over collateral show how weak the new financial reform package really is.

After all, Goldman's demands for collateral from AIG as it was failing ended up costing taxpayers billions of dollars. Yet according to the testimony today during the crisis panel's latest hearings, the whole question hinged on what constituted fair value.

Jun 07

Prudential let down by its shareholders

Posted by nicklord in Tidjane ThiamPrudentialAIGAIA


The CEO and Chairman of UK's Prudential - Tidjane Thiam and Harvey McGrath - have faced heavy criticism for their failed bid for AIG's Asian insurance business, AIA. Most damning are the charges that they failed to properly communicate with shareholders about the deal, which at $35 billion was too high a price to pay. Furthermore, in the process of the failed bid they racked up some $675 million in fees to bankers and lawyers.

While some of these charges are fair, few people are actually discussing what role the shareholders had in this fiasco. These institutions must shoulder part of the blame, not just for scuppering the deal, but also in their short sighted attitude to their fiduciary duties.  Specifically, the deal collapsed because these institutions demanded that Prudential negotiate a 10 percent cut in the agreed price with the seller, namely the US government.

Apr 28

Why corporate users of derivatives should favor reform

Posted by Ron F in RiskRegulationGoldman Sachsfinancial crisisfailurederivativescredit-default swapcost of capitalcorporate treasurersCFObanking reformbailoutsAIGAccounting

Ron F

It's hard to see why CFOs who want to use derivatives to hedge risk would oppose efforts to improve the transparency and collateral backing swap trades. But according to this New York Times article, such opposition persists.

As we reported last week, however, proposals to require trading of standardized derivatives through exchanges or at least settle the transactions through central clearinghouses would require counterparties to post more collateral but mitigate, at minimum, any increase in cost through narrower spreads between bid and asked prices.

Apr 21

Goldman's other disclosure problem

Posted by Ron F in Wells NoticeSecurities and Exchange CommissionRegulationJP Morgan ChaseGoldman SachsGeneral Electricfinancial crisisfinanacial reportingcredit-default swapCongresscomplianceBanksbanking reformBankingBank of AmericaauditingauditAIG

Ron F

This is seriously speculative stuff on my part. But I wonder if the other shoe that Carl Levin says is about to drop on Goldman has to do with its failure to disclose the fact that it received a Wells Notice from the SEC last July about the Abacus deal.

Yes, the bank claims it was immaterial, just as it claims was its lack of disclosure of hedgie John Paulson's role in helping to design the CDO to go south so he could profit by shorting the deal was immaterial.

Apr 19

Goldman case another sign of need to curb naked swaps

Posted by Ron F in Securities and Exchange CommissionRiskRegulationGoldman Sachsderivativescredit-default swapCDSBanksbank failuresbailoutsAIG

Ron F

It seems as if Goldman Sachs' essential defense in the SEC's fraud case against the bank is that it did nothing differently than other banks typically do in failing to disclose to investors that a hedge fund that wanted to short the securities the bank sold helped design them.

But if the "everybody-does-it" line gets Goldman off the hook, then what does that say about Wall Street? Simon Johnson argues that it means that fraud is now its very basis.

Apr 09

How the heck is PwC still AIG’s auditor?

Posted by Going Concern in PricewaterhouseCoopersfinancial reportingcomplianceauditAIGAccounting

Going Concern

Submitted by Francine McKenna, republished from Going Concern, Accounting News for Accountants and CFOs.

The US Federal government has been propping up AIG with hundreds of billions of dollars and AIG has been, in turn, protecting its auditor, PricewaterhouseCoopers (PwC).

PwC continues to be AIG's auditor.

Unfortunately for all of them, former AIG Financial Products head, Joe Cassano, is off the reservation and worried more about his own scalp. After two years of negotiations with the Department of Justice, it looks like he won't be criminally prosecuted for hiding risks from investors or lying at a December 2007 investor conference.

Mar 23

US now subsidizing MetLife and Pru

Posted by Ron F in RiskPrudentialmortgage backed securitiesfinancial crisisFederal Reservederivativescredit-default swapbailoutsAIG

Ron F

While AIG's divestiture earlier this month of two life insurance subsidiaries was ballyhooed as a step toward ending the federal bailout of the failed company, lost in the headlines was the fact that the Federal Reserve was repaid with a significant amount of stock in the acquirers.

And one of those acquirers operates outside the purview of US regulation. Meanwhile, the Fed is still on the hook for the assets it took off of the two subsidiaries' books.

Mar 12

What's wrong with Chapter 11 for banks?

Posted by Ron F in Risk, Lehman Brothers, Goldman Sachsderivativescredit-default swapBanks, bankruptcy, banking reformbank failuresbailoutsAIG

Ron F

I have never understood why exactly bank regulators need new, so-called resolution authority for banks when there is something called Chapter 11, unless of course they don't plan to use it, in which case there's no reason to provide it to them other than to engage in the complete pretense that they do.

And neither evidently does this panel of bankruptcy and restructuring experts.

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