GUEST WRITER ANDREW SHELDRICK WEIGHS IN ON MY "Toxic leadership Out on Highway 61" essay.

Andrew responded to my recent post with a slightly different perspective. I thought it would be great if he posted it as an essay on Law of the Bad Premise, as it was fact filled with insightful opinion. He kindly agreed. (If others wish to do so on this or other topics, please feel free to do so---I do reserve the right to "play editor"---but anyone who has enough interest to write such an essay will certainly have pretty free leeway!)

Here is Andrews's response complete and unabridged.

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Enjoyed your latest essays, and wanted to weigh in on the issue of "toxic leadership". 

I agree that it is toxic, though for different reasons.  I don't believe for a moment that Obama is a socialist and is using the AIG mess as a justification for curbing executive comp and bonuses.  In fact I don't believe Obama has any ideological predisposition one way or the other on that or any issue - he is simply a self-serving politician who above all needs to feel "popular" with the electorate.  He is currently wasting the taxpayer's money gallivanting around the county on his private 747 making what are essentially campaign speeches, posing for cable TV photo ops and weighing in on his selections for the NCAA  tournament.  Now, we are told, he will "make history" - to quote MSNBC - by being the first sitting President to appear in a late night TV talk show.  A kinder and gentler forum than "Meet the Press", no doubt.  Clearly, he doesn't feel any need to be at his desk working to resolve the economic crisis he claims to have inherited.

Ironically, in the case of the AIG bonus fiasco, Obama's late arrival on the popular "outrage" bandwagon may well prove his undoing or at least the undoing of the hapless Mr. Geithner.  Obama and the ill-informed demagogues on the House Financial Services Committee have so contributed to the general sense of "outrage",  that a scapegoat will have to be found and made to fall on his sword.  Obama's protestations of support notwithstanding, all roads seem to lead to the Treasury Secretary.  As head of the Federal Reserve Bank of NY (the entity that actually pumped the first load of cash into AIG) Geithner should have known about the bonus program.  It was disclosed in AIG's SEC filings, and according to yeserday's committee testimony was discussed with officials of the Fed.  So either (1) he knew about it a lot earlier than last week, and has lied, or (2) was asleep at the switch while the original transaction was negotiated (under his watch at the Fed) and subsequent payments authorized (under his watch at Treasury).  Either way, Geithner has lost all credibility.

And then consider yesterday's interesting twist regarding the statutory provisions to cap exec comp payable by companies receiving Federal bail-out money.  As drafted, the Senate bill would have applied to all comp and bonuses paid after after the bill became law, including amounts payable under pre-existing agreements.  This would have barred the AIG bonuses that Obama and Geithner now profess to be so incensed about.   During the Committee stage of the bill, the provision was amended to permit the payment of bonuses due under pre-existing agreements.  The Conference Committee Chairman initially stated categorically that he did not know who had amended the provision or why - a remarkable assertion he later "clarified" by explaining that the provision was changed at the behest of none other than Larry Summers and - yes - Timothy Geithner.   Just coincidental, of course, and nobody concerned knew it would affect the AIG bonuses.

Obama apparently hasn't figured out yet that when you lead the charge from behind, you can't always see who is in the line of fire.  I hope he is now looking for a suitable replacement for Geithner, preferably one who actually pays his taxes on time and inspires at least minimal confidence that he is up to the job.

This is really by way of a preface to my response to the question in the first sentence of your essay.  When I initially read about the AIG bonuses,  I was pretty angry.  But yesterday's testimony by Liddy was illuminating.  Clearly most of the Committee members had spent more time preparing their opening comments (stressing how "outraged" they and their constituents are by the whole thing) than in attempting to understand what the whole thing is really about.  Liddy was treated with a appalling lack of courtesy and respect, especially given the fact that he agreed to take the AIG job without compensation, and barely given the opportunity to answer the questions.  However, the one fact I learned, which most of the Committee apparently ignored, is that although the people who received bonuses were from the Financial Products unit, which was the cause of AIG's demise, they were not involved with the credit default swap business, which was where the principal losses were incurred.  Those folks, according to Liddy, have left and got nothing.  The recipients of the bonuses were the other derivatives traders, who were offered retention packages to wind down their books of business in an orderly manner after AIG decided to close the financial products unit.  Given the complexity of the derivatives business, I accept Liddy's business judgment that it was in the best interests of the taxpayers to pay these people appropriate retention bonuses to avoid the exponentially greater losses that would have arisen had the business been liquidated in a disorderly manner.  The media and politicians have made much of the fact that certain people had left AIG before they received their bonuses and therefore didn't warrant "retention" payments - but apparently the truth of the matter is that they had already done what they had agreed to do under the agreements (wind down their portfolios) and thereafter had left the company having fulfilled their part of the bargain. 

Personally I think that Wall Street comp has become excessive by almost any standard, and bonuses frequently do not reflect the creation of genuine value added.  But that is not specifically an AIG problem.  What angers me more than the payment of the bonuses is the fact that the bail-out occurred at all.  It was made in haste, with little thought and even less oversight and, as we have now discovered, represented an indirect and concealed bailout to other financial institutions that equally did not deserve or warrant taxpayer intervention.  Bankruptcy would have been a better resolution, and it is probable that a bankruptcy court would have approved some form of performance bonus plan - albeit of a lesser amount.

Now our elected officials will spend several more weeks grandstanding about how we can recoup the money, and the race is on to see who can come up with the most punitive solution.   The proposal to make AIG pay it back (another Geithner brainchild) is laughable - the taxpayer owns 86% of AIG.  If it can go without the $164 million Geithner wants them to repay then they shouldn't be getting it in the first place.  As to Barney Frank's proposal that the Congress bring some form of shareholder derivative action against the bonus recipients, someone needs to point out to him that the Federal Reserve Bank of NY is the entity that provided the funds and is therefore the "shareholder", and that we still have a concept of separation of powers.  Given the bank's prior knowledge of the bonus program, there is zero likelihood of these amounts being recouped.  (Frank also claims that AIG failed to disclose to the Committee that the information to which the Committee was entitled to as a "shareholder"; again, someone needs to explain to him that the principal manner in which public companies make disclosure to their shareholders under U.S. law is through SEC filings, which AIG made but nobody on the Committee apparently read.)

However, what angers me most of all is that neither Obama, Geithner, Gibbs or anyone else in the Administration or Congress has the guts to try to explain to the electorate what actually happened and to accept responsibility accordingly.  The day Obama does that, he really will be "making history", but for now we will have to settle for his 15 minutes with Jay Leno.   I can't wait.