The Lesson of AIG

The man-made recession, which continues, did not, apparently, cause the collapse of civilization as we know it, but if we do not take this opportunity to learn how better to manage big institutions, the next time may be worse. Or, perhaps civilization as we know it, based on a capitalist rampage, should undergo planned obsolescence.

The lesson of AIG’s collapse and purchase by the Government, using taxpayer funds definitely not intended for that risky purpose, at a minimum is this: some of our society’s institutions have in fact become too big to fail, without unacceptable collateral damage, and should thus be managed under intense public scrutiny to minimize such potential collateral damage. Whether or not the AIGs fail is a private concern; how they fail is the business of the Government and the People.

It seems fairly obvious that AIG decision-makers were running their company in a manner irresponsible to their shareholders, their customers, and society [Sorkin, 376-411]. This statement is based not just on their business decisions but, more, on their lack of understanding of their own business: despite the billions they maneuvered, they evidently did not know their own numbers, like a private individual who borrows from all his friends and spends every penny he gets without ever figuring out how much income he has, how much he is spending, or how much he owes. Such an individual will end up in jail; the penalty for executives in organizations too big to fail should be much more severe. A number of specific questions about the degree to which AIG decision-makers were held responsible for this failure of duty follow:

1. To what degree were AIG’s CEO and, perhaps more importantly, its previous CEO (for the one at the time of its collapse—Willumstad--had not been in the position long enough to have cleaned house) a) made to explain AIG’s failure and b) made to pay personally via fines that, after the fact, amounted to a removal of incentive for others to behave with such irresponsibility?
2. Were the decision-makers just below the CEO criticized by AIG’s own controller (David Herzog) [Sorkin, 410] fired, fined, and debriefed for the public record?
3. Where is the official evaluation of how the business practices of AIG went so wrong and what we as a Government and a Society should do to ensure transparency for such institutions in the future?

For their clients who held AIG paper (e.g., insurance policies), for their investors who hoped for a profit, and for the millions of innocent victims who would suffer from AIG failure, AIG had a minimal responsibility at least to understand its own balance sheet. The Government had a more profound duty since its primary (and grossly failed) responsibility in the years from the gutting of Glass-Steagall under Clinton until the Bush Recession was to society, not to the rich. The Government, specifically the regulatory agencies and Congress (which sent the financial institutions the message that “anything goes” and sent regulators the message that befriending the fat cats they were supposed to be regulating was OK), betrayed the interests of the U.S. public in favor of rich and generous institutions.

American society needs to think deeply about how to minimize such corruption. The first step surely is for Americans to wake up and educate themselves so they can differentiate between corrupt politicians who support the elite rather than the public interest, for it is unclear how to punish the politicians responsible for creating the anti-regulatory environment in which the recession was cultivated except by voting them into the ash heap of history. A second step would be to pass an amendment to the Constitution clearly defining “person” as referring only to “people,” not groups, institutions, or companies. A third step would be to prohibit three things that present clear conflicts of interest:

1.      electoral contributions by financial institutions;

2.      the revolving door through which the billionaire financial elite flows from Wall Street to Washington (where it passes legislation favorable to Wall Street) and then back to Wall Street, where they earn further billions with yet further safety from being held responsible;

3.      lobbying by financial institutions (which should be allowed only public statements of what they favor, not private lobbying of politicians).

Further Reading:

·        Impact of Government controls on AIG salaries

·        Brief review of the post-bailout continuation of Government favoritism for AIG, despite years of scandalous and criminal (for which a huge fine had been assessed even before the recession) behavior, at the expense of the public

·        Outspoken review of AIG

·        As of July 2011, AIG problems continue…

Create a Supreme Foreign Policy Court

The establishment of a Supreme Foreign Policy Court independent of elected officials and empowered to comment publicly on the conduct of U.S. foreign policy might enhance the quality of U.S. national security.

When a former chairman of the Senate Select Committee on Intelligence wonders why the Government is "covering up" the nature of Saudi Arabia's connection to 9/ll, citizens must wonder "What is going on?" Exactly who is "the Government" such that it would exclude the Chairman of the Senate Select Committee on Intelligence on the key intelligence issue of this century?

The cited report about ex-Senator Bob Graham raises numerous broad questions of current concern, including:

• Is Saudi Arabia truly an "ally" of the U.S., or are we kidding ourselves? Distinguishing friends from foes is about as basic a requirement for responsible governance as one can imagine, and it is a task poorly executed by leaders who go for the short-term advantage.
• To what degree is the national security structure in the U.S. an institution in crisis, incapable of identifying key threats to U.S. national security? 

How would we know? Would confusion over who was really responsible for a terrorist attack on the U.S. constitute a wake-up call? Would you be even more concerned if such confusion still existed a decade later and extended to the level of an ex-chairman of the Select Senate Committee on Intelligence? Where is the line between the need to reform the national security "institution" and the need for an "orderly failure" of that institution? How would one go about safely managing the orderly failure...and, one hopes, replacement of such a critical government institution?

Going a bit deeper, if society determined that "orderly failure and replacement of the national security structure were called for, what exactly would need to be changed: the president alone, the access to information for the Congressional committees, or what? Given the performance of the U.S. national security decision-making process at the very top, perhaps these considerations are worth pursuing to lay out a process for shoring up the principle that the leaders of government are responsible to the people and do not have the right to design a foreign policy behind the backs of the American people that sacrifices national security for goals that may be dangerously short-term or focused on the interests of some elite special interest.

How to do this is obviously far beyond the scope of this post. The point is to launch a debate that would raise national consciousness about the issue. For starters, it may be worth considering that the issue of ensuring governmental responsibility to society was considered by the Founding Fathers in the domestic context, way back before the national security state was even a gleam in the eyes of our leaders. The Founding Fathers' answer was a Supreme Court independent of the electoral cycle. How about a Supreme Foreign Policy Court composed of national thinkers, with the majority required to be individuals who have never been elected to national office and are not otherwise employed in public service but with access to all foreign policy information and entitled to comment publicly on the quality of our leaders' decisions?

Designing the Orderly Failure of Large Institutions

Continuing the discussion of how to plan the compulsory failure of institutions that, believing themselves "too big to fail," are in fact too big for human society to afford.

If the wave of unemployment accompanying Washington’s post-recession care and feeding of guilty financial giants at the expense of American society did not make clear that Paulson’s concept of the “orderly failure of large financial institutions” was poorly implemented, then the wave of foreclosures did. While many Americans were clearly playing the (housing) market in full recognition that they were trying to benefit from a giant chain letter that would hurt only the last owner of their grossly inflated mortgage, thousands of other Americans unable to pay their mortgages because Wall Street irresponsibility had cost them their jobs had their homes taken by selfish banks who, once back in possession of the houses, could not find anything to do with them except let them rot. The Bush-Cheney-Paulson billionaire bailout, so uncritically supported by Obama, may have exemplified “orderly failure” for the billionaires, who kept the profits of their crimes, but was anything but “orderly” for the millions who suffered.

All that is of course rapidly becoming old, well-understood, and quickly-being-pushed-under-the-rug history. The whole U.S. financial and political elite-- from Wall Street, Washington, and many other places—was essentially complicit and has little interest in looking too closely at issues of responsibility. But for American society, not to mention the rest of the world, the issue, beyond punishing the guilty in the name of justice, is to determine exactly what a socially responsible process of orderly failure for a large institution would look like.

“Moral hazard” provides guidance. Institutions should be restructured and downsized (e.g., by preventing banks from playing the market with homeowners’ mortgages or savings accounts) to minimize socially harmful behavior and maximize socially beneficial behavior. Decision-makers at those institutions should be held personally responsible. Filling jails with brokers has little obvious value to society, but when a financier gets rich by inventing incomprehensible but obviously dangerous (because highly leveraged) financial “products,” the burden of proof should be on him to justify why all of his earnings should not be confiscated to compensate for “collateral damage.”

In truth, society needs to understand its frailty and, more, appreciate how often failure is due not to natural constraints or normal human limitations but to egregious cheating on the part of the powerful, who regularly kill the social goose that lays the elite’s golden eggs. Paulson deserves credit for enunciating the highly counter-cultural concept of “orderly failure.” American society, as the global leader (no moral judgment here; I mean the phrase simply as honest recognition that the U.S. is the biggest elephant in the room), needs to take primary responsibility for developing not just the biggest war machine, the greediest financial district, and the most wasteful consumption society but also the global standard for institutional rejuvenation.

The U.S. has done it before. With the Marshall Plan, it transformed Nazi Germany and the Japan of military imperialist dictatorship into pillars of democracy. By its very establishment, the U.S. also transformed a West of kings into a West of republics. It then transformed itself from slave society to free society. Those were truly institutions “too big to fail.”

But those transformations were seen as unique. No user’s manual existed, nor were the respective situations perceived as members of a class, so no user’s manual was written despite the priceless lessons. Political science has failed us here. No busy government official will ever have time to study the crises and develop a generic process for smoothly cleaning the rot from failed institutions; that would be the responsibility of a new sub-field of political science, a field that would recognize theoretically the need for institutional renovation by force from the outside and that would recognize theoretically that the word “institution” comprises private and public institutions, companies and countries.

The process occurs every day. With the brilliant insight of Gorbachev that military force to maintain the existence of the rotten U.S.S.R. would be inappropriate, that empire was transformed, but of course via a decade of depression and crime—hardly an example of “orderly” failure. We await the first book to do a comparative analysis of the financial mess of Soviet communism and Wall Street capitalism…of the corruption of nomenklatura vs. the corruption of derivatives. A follow-on study could compare the corruption of Soviet industrial pollution vs. the corruption of Western Big Oil’s rape of the environment from Nigeria and Bolivia to the Gulf of Mexico. From such studies, done properly, would be derived a set of generic lessons of inestimable value for designing a well-functioning society.

While this task of assessing key crises of institutions failing from a social perspective even as they functioned brilliantly for the elite who benefited personally is likely to take a century to complete (and will require a profound understanding of how complex-adaptive systems operate in the social arena), we can usefully begin with a few obvious (once stated, albeit mostly ignored in current practice) principles:

• The principle that the larger an institution, the greater its responsibility to behave in accordance with the common good should be established in law;
• Rules for behavior should be known in advance;
• Rules should spell out personal responsibility for institutional elites and governmental regulators;
• The assumption should be that in egregious cases (e.g., breaking rules about leveraging, ignoring engineers’ warnings about installing good quality environmental protection equipment), decision-makers and their management chain will forfeit all personal earnings gained as a result of irresponsible decisions. Any claim that one deserves exemption (e.g., a golden parachute for a Wall Street CEO or denial of personal responsibility by an oil executive after a pollution spill) should have to be made publicly in court;
• Just as buildings have plans for getting people out in a fire, institutions should have plans for emergency downsizing.

And every American should realize that the need to grade the social acceptability of big institutions applies not just to brokerages and oil companies but to the United States as a whole…today. Americans are far more skilled at building huge institutions than in building socially beneficial institutions. More seriously, until disaster strikes, the assumption, deep in the culture, is typically made that big is better...rather than more dangerous. In fact, national downsizing of a rather bizarre type is the constant refrain of a certain class of conservatives (not those who “conserve” but those who believe in freeing the rich to do the exact opposite by forcing “conservation” down the throats of the disadvantaged). These “conservatives”, more properly these “elitists,” want not conservation by society but conservation by government. This is at least a step in the direction of downsizing, but one informed less by the theory of how to make institutions perform better than by raw greed. Nevertheless, this concept of downsizing is worth keeping, so long as the focus is shifted from downsizing regulation of, to be frank, piracy, toward the downsizing of socially pernicious behavior. Mankind has been stumbling in this direction for millennia, though the decades since Reagan entered the White House have seen the U.S. move in the opposite direction.

Part of the difficulty of making progress toward more socially responsible behavior by large public and private institutions lies in the lack of theoretical understanding of the concept of social responsibility for all large institutions. Society has no clear generic standard for the behavior of large institutions as a class. Seeing the generic issue rather than just the individual crises would facilitate asking questions in a way that would promote deeper understanding. How might one compare the harm to Iraqi society caused by the U.S. army during the occupation with the harm to U.S. society caused by the capricious approach of many banks to foreclosing on American homeowners? While this may seem at first glance to be an odd question, to ask it focuses attention on how to balance an emergency need to use force in a crisis vs. the long-range costs of force as the tool for conflict resolution. As technology improves, we gain the ability to approach closer and closer to the edge of chaos, a great achievement as long as we do not fall over the edge, but one that is becoming too dangerous without a deeper theoretical understanding of when institutions, including superpowers, become too big not to fail.

Too Big to Fail

Leaders throughout society indulge in the criminal hubris of considering their institutions too big to fail in great measure because society indulges them by failing to hold them responsible for their socially pernicious behavior. It's not just Wall Street billionaires.

The current, endless recession—perhaps not a “recession” at all but in fact a retrenchment to Third World Status for the world’s last superpower—may eventually come to be recognized as a blessing in disguise…if society draws the appropriate lessons. Already enough is understood about the human complicity in provoking this needless disaster to make studying the causes of the recession (if that is all it turns out to be) essential reading for anyone interested in the future course of American and, indeed, global capitalist society. The greed soaked in the belief that failure was impossible is a moral tale that applies to foreign policy, health care management, and the way we treat our poisoned environment as much as it does to economics.

Can the recession earn its keep by teaching us to do a more socially responsible job of managing all major social institutions and policy structures?

No lesson is more important than the idiocy of “too big to fail.” While Bush’s Treasury Secretary Hank Paulson (the Goldman Sachs fox guarding the nation’s financial henhouse) may appear, as the result of his bailout of billionaire buddies, the prime example of everything that is wrong with how the revolving door Wall Street-Washington elite runs the country for its private benefit, even he had evidently realized, before the bailouts back at least as far as June 2008 that “too big to fail” was a dangerous mirage. Indeed, he reportedly stated in a speech in Russia that:

we must improve the tools at our disposal for facilitating the orderly failure of a large, complex financial institution [Andrew Ross Sorkin, Too Big to Fail (New York: Penguin Books, 2009), 178.]

One could debate whether or not he took his own words seriously when the crunch came, shortly thereafter or whether American society is yet remotely close to digesting the import of those words, but the recession is a textbook case for the importance of doing so.

The recession is not, of course, by any means the only such case, as any good Reaganite or member of al Qua’ida would no doubt be quick to point out: both groups take credit for bringing down the Soviet superpower, an empire of both sufficiently colossal size and imperfections to match AIG or Bear Sterns or Merrill Lynch any day. Too big to fail in the glazed over eyes of Brezhnev, Chernenko, and Andropov, the sudden, pathetic collapse of the communist empire looks all too much like those of the above-mentioned capitalist empires. Historians can argue over the degree to which Reagan’s wild spending on Star Wars, bin Laden’s Afghan crusade, or internal rot deserves the credit for destroying the USSR. The bottom line is the hubris that leads to the belief that one is “too big to fail,” which brings us back to the future of a certain society that is characterized by $100 million golden parachutes for CEO’s judged to have failed; global-scale environmental catastrophes resulting in great measure from intentional avoidance of known preventive measures; health care designed as a lucrative business for the primary purpose of personal profit; and four-trillion-dollar wars to build political empires (to distinguish them from the previously cited hydrocarbon and health care empires).

If big is good—and to both the US and the old USSR it was so defined, then bigger is better. To that must be added just one little wrinkle that may differentiate the modern world from old empire-building projects (Imperial Russia, Rome, Spain’s colonization of South America, etc.). Today, on top of hubris, one has moral hazard. “Too big to fail” amounts to the bosses evading responsibility. Presidents who declare war on false pretenses, oil executives who despoil huge chunks of the earth after cost-cutting on blow-out preventers, financial magnates who gamble with other people’s money leveraged to the max, or heath care executives who refuse to give coverage to poor people precisely because they are sick may occasionally lose their jobs but do so without paying. Indeed, they walk away sneering and rich.

“Too big to fail” now means “too big to be held accountable,” and that is the Achilles’ heel of Western civilization.

Paulson was right on target with his 2008 comment, except that really he should have omitted the word “financial.” All of society needs tools to facilitate the orderly failure of institutions deemed fatally ill. Consider BP…or Libya. As for the world’s last superpower, perhaps the process of developing rules for its failure (something of course totally impossible) would educate American society, provoking us all to figure out ways to deleverage our overstretch and strengthen our social collateral before the bills come due.

War on Gaza

If the Gazans can be penalized by collective punishment, then it follows that anyone who joins a peace flotilla can also be punished for their impertinence. Let’s face it: these peace activists are embarrassing to the powers that be, and embarrassing the boss is the worst crime of all.

One and a half million destitute but, thanks to last year’s brave Gaza flotilla participants, not quite starving residents of the Gaza Ghetto are imprisoned still by Israel’s army, which guards the globe against the peril posed by these prisoners. For, despite its nuclear arms, nuclear-capable submarines, squadrons of F-16s, bunker-buster bombs, white phosphorus, and endless tanks, Israel fears the Gazans. And it should. Gazans represent a challenge for which Israel, in the end, has no answer: the fundamental demand of all humans for dignity. Admit that Gazans are humans with a right to dignity and much else follows, a chain of logic and moral reasoning that would lead directly to the collapse of the Israeli garrison state [possibly, though not necessarily, to the collapse of a reformed Israeli state], which is built on a policy of superior military force and the principle that Israelis have more rights than others. Washington, of course, understands this and thus has declared war on all who defend the right of Gazans to dignity.

One can only imagine, at this point, what manner of pressure and threat Washington has brought to bear against Greece and Turkey to force the respective administrations to defy their own populations and sign on to this war against Gaza. One boat blockaded on a legal pretext, another that withdrew at the last minute without obvious cause, a third with an axle that just happened to break itself. But the truth will eventually out, and we shall all learn what bribes were paid, what punishments were evaded by the kowtowing of Ankara and Athens. When the chickens of anti-American feeling come home to roost, Americans will of course profess to be clueless.

Montaigne, a few centuries back, had some blunt remarks that are informative in this context.

The confusion of order and measure of crimes is dangerous: Murtherers, Traitors and Tyrants, have too much gaine by it.

So, with Montaigne, one may ask:

• Exactly what does Washington have to gain by preserving the extreme right-wing Israeli policy of endless repression of the people of Gaza?
• Is it impossible to identify even the slightest room for compromise? 
• Would the world we know collapse with the slightest move toward the freedom of visitors to go to Gaza, to drop off a bit of food and medicine, to offer Gazans smiles and letters? 

Well, yes, in fact, the world we know probably would collapse. If Gazans deserve smiles and letters, then Rafah Gate should truly be opened. If Rafah Gate should truly be opened, then Gazans should be allowed to travel like all other humans. If Gazans were to be allowed out, then Gazans should be allowed to govern themselves. If Gazans were to be allowed to govern themselves, then they surely should be allowed to defend themselves. If Gazans were to be allowed to defend themselves, then the great Israeli army would have to be stuffed back inside of Israel and denied the right to march through its neighbors’ back yards whenever it so desired. If the Israeli army were to remain inside Israel, then disputes would have to be solved through compromise, i.e., changes in Israel’s expansionist policy, rather than through force. Gazans hold the key to the whole empire. As we all know, Israel never has a choice.

But keeping them locked up still raises some questions that will inevitably be answered, whether Washington and Tel Aviv hide their heads in the sands of occupied Palestine or not:

• How many votes is Washington by its repression of Gaza handing to the Muslim Brotherhood in Egypt’s upcoming election?
• How many potential supporters of democracy in the Mideast will instead join al Qua’ida?
• How much further will Greeks, already inflamed by their recession and European-American demands that they sacrifice, be irritated by this latest slap in the face?
• How much more will Erdogan’s moderate Islamic party be radicalized by Washington’s refusal to countenance any Turkish independence even on the most egregious regional issue of injustice?
• How much more American blood and treasure will be wasted defending repressive Mideast regimes standing tall on the ramparts of sand castles?