Telling Tales Out of School

I stumbled across some pro-"tort reform" pablum from George Will - a pretty standard, "I read a book, accepted its allegations without question, and here's what it said"-type analysis typical of far too many columnists coming up on a deadline. The column opens with the usual array of anecdotes that's supposed to scream out for "reform":

Called to a Florida school that could not cope, police led the disorderly student away in handcuffs, all 40 pounds of her 5-year-old self. In a Solomonic compromise, schools in Broward County, Fla., banned running at recess. Long Beach, N.J., removed signs warning swimmers about riptides, although the oblivious tides continued. The warning label on a five-inch fishing lure with a three-pronged hook says "Harmful if swallowed"; the label on a letter opener says "Safety goggle recommended."

This sounds like pretty standard tort-reform propaganda - take anecdotes from around the nation (and, in the case of "funky warning labels" actually the world), strip them of context, provide no dates, and pretend that they're typical. It's what I've characterized as Readers Digest reasoning, as it's the "biased sample" approach many of that publication's columns have historically taken to convincing its audience of some great wrong that must be righted. I'll get to the school example later, as Will references a couple of others in his next paragraph.

• In a Solomonic compromise, schools in Broward County, Fla., banned running at recess - Apparently in 2005, Broward County posted signs around playground equipment stating "no running" but according to Safety Director Jerry Graziose, the Broward County official who ordered the signs, the issue was that "It's too tight around the equipment to be running."

  Had Will done his homework, he would be pointing out that the rule was short-lived, and Broward County's published rules do not have anything even slightly resembling a "no running at recess" rule for any grade level. (See, e.g., the 2007-2008 Playground Handbook (PDF).¹) But you know, that would involve checking the school district's website or picking up a phone and calling them - way too much work.

• Long Beach, N.J., removed signs warning swimmers about riptides - This was apparently recommended by their lawyer in 2004, based upon the theory that they did not have to warn of natural dangers and that providing an inadequate warning could create liability where none otherwise existed. There's no indication I can find that there was ever any actual litigation over the adequacy or inadequacies of the warnings. I can find no indication that this is a trend, or that it got much of any notice outside of the community of pro-tort reform propagandists.

• The warning label on a five-inch fishing lure with a three-pronged hook says "Harmful if swallowed"; the label on a letter opener says "Safety goggle recommended" - So what? Most likely, the guy assigned to making warning labels was sitting at a desk in China, had no clue about western law, and ended up writing a silly label - or copied one from another product because it was easy, or because he didn't understand enough English to compose his own (the author of the label didn't know enough English to pluralize "goggles"). If the suggestion is that lawyers made those labels necessary, quite the contrary - had the manufacturer consulted a lawyer, it would have been told that they were not.

  The fishing lure story appears to date back to 2004, when a story about it first appeared on a pro-tort reform propaganda website. Outside of pro-tort reform websites and credulous columns like Will's, I can't actually find evidence that these labels exist. They probably did exist at one time, but they're anomalies.

So a policy from 2004 in one New Jersey Township that may or may not still be in effect, a playground policy from a single school district in 2005 that appears long-abandoned, and a couple of wacky warning labels that date back many years, haven't been adopted by any products currently on the market, and can't be independently verified.... What an overwhelming case for "tort reform".

Will continues,

No official at the Florida school would put a restraining arm around the misbehaving child lest he or she be sued, as a young member of Teach for America was, for $20 million (the school settled for $90,000), because the teacher put a hand on the back of a turbulent seventh-grader to direct him to leave the classroom. Another teacher's career was ruined by accusations arising from her having positioned a child's fingers on a flute.

The first anecdote is true, dating back to 2006 - it may be that under the school's policies, no teacher could touch the child and thus nobody would do so. But that's not because of the law - it's because of rules imposed by school administrators. The first issue is legislative - when legislatures wish, they can authorize corporal punishment in schools, to the point of severe beatings, with none of the teachers or staff involved needing to be in any fear of being disciplined or sued. The second problem is that, when addressing this type of issue, school administrators tend to be lazy cowards. They implement policies that make it less likely that they will have to make decisions or deal with angry parents, then they blame fear of litigation for their own fecklessness. But one way or another, Will's again referring to a years-old example, an exceptional anecdote that in no way represents either common practice or a trend.

The "flute" story, I suspect to be fiction - or so far divorced from the facts as to amount to fiction. No details are provided, no names, no locations, so it's impossible to even attempt verification.

The remaining story, that of the Teach for America corps member who was sued for allegedly striking a student, caught my eye. Will is again going back quite a few years, to 2001. The TFA member, Joshua Kaplowitz, gives his version of events from his second grade classroom here:

The afternoon of June 13 started with the usual mixture of disorder and disrespect. This time, a boy named Raynard, a particularly difficult child, whom I had seen punch other students and throw things in the past, was repeating over and over, “I got to go to the bathroom. I need some water.” The rest of the class tittered as I told him in my sternest teacher voice that we would be having a class bathroom break once everyone was quiet and in his seat.

“I got to go to the bathroom. I need some water.”

Frustrated, I led him to the classroom door with my hand on the small of his back. I nudged him into the hall and closed the door. He would probably spend the remainder of the day roaming the halls with the rest of the troublemakers at Emery, but at least he would be out of sight, so I could get the rest of my class under control. I had given up on teaching for the rest of the day; my class was slated to watch a movie with Ms. Perkins’s first-graders across the hall.

Once Raynard left, I guided my students through a characteristically raucous bathroom break and filed them into Ms. Perkins’s room, where they lapsed into a rare TV-induced calm.

After 15 minutes, the school security guard appeared at the door and beckoned for me. My stomach hit the floor, as I guessed what this meant: yet another corporal-punishment charge. But this time was different. Chaos reigned in the main entranceway as police officers swarmed into the building. Raynard’s mother, I was told, had been in school for a meeting to place her son in a class for emotionally disturbed children. Raynard had told her that I had violently shoved him in the chest out the door of my classroom, injuring his head and back. His mother had dialed 911 and summoned the cops and the fire department. The police hustled me into the principal’s office, where I sat in bewilderment and desperately denied I had hurt Raynard in any way.

He ended up being charged with misdemeanor assault, and the school settled the lawsuit filed over the incident. A part of me wants to sympathize with Mr. Kaplowitz, but a larger part of me can't get past the self-serving, self-justifying tone of his essay. It's what psychologists call "external locus of responsibility" - everything that goes wrong is somebody else's fault - but his bad attitude toward teaching, his colleagues, his sponsoring organization, and his students oozes out of every word.² Could that have influenced the decision to settle?

What sort of witness testimony might have come up in a civil suit against Mr. Kaplowitz. Calling to the witness stand, Mr. Nick Ehrmann, a fellow TFA corps member who taught in a nearby classroom. Yes, things were difficult at the school:

We all faced incredible challenges throughout our first year - administrative turnover, lack of school discipline, and the resulting transfer of power to disruptive students who exploited this vacuum of administrative accountability. My classroom was frequently a stage for fistfights and tears. The difficulties that Josh describes were painfully real, and we all experienced them in similar degrees.

Despite the difficulties, which include frequent, false accusations of corporal punishment against teachers, and which appear quite extraordinary, Mr. Ehrmann found ways to work with his students and parents. Back to Mr. Ehrmann:

So why was Room 308, just two doors down, the scene of almost constant chaos?

I can’t pretend to know what happened inside those four walls. But I did witness moments that Josh does not mention in his article. I did witness Josh argue with and interrupt our principal during one of our first faculty meetings of the year. I did witness Josh berate a lone student in the hallway, his anger clearly uncontrolled. I did witness Josh place his hands upon this student’s shoulders and shove him against the wall while yelling in his face. Good intentions should not be an excuse for bad decisions.

Cross-examination, Mr. Kaplowitz?

Nick’s creativity is evidenced by the dramatic license with which he describes a hallway incident I omitted from my article - far more exciting in his retelling than in reality.

That's it? "Dramatic license"? The implication that there's more to the story? But no explanation of how Mr. Ehrmann's statement is inaccurate, misleading, or mischaracterizes a flagrant violation of the school's rules against corporal punishment?

Are you beginning to sense why the case settled?

Yet even as the lawsuit dragged on and the legal cloud over me caused me to lose a job opportunity I really wanted, I refused to entertain Raynard’s mother’s offers to settle the case by my paying her $200,000 - a demand that ultimately diminished to $40,000. The school system had no such scruples; it settled the mother’s tort claim in October 2002 for $75,000 (plus $15,000 from the teachers’ union’s insurance company—chump change compared with the cost of defending the litigation).

George Will says that translates into the case settling for $90K. But it sounds like, despite his scruples, Mr. Kaplowitz may have chipped in an additional $40K.

That was a long digression from Will's editorial, but it is illustrative of the problem. To hold the Kaplowitz story up as an example of a trend, or something that makes tort reform necessary, is absurd. Faced with unsympathetic facts, school administrators and teachers who were aware of Mr. Kapolowitz's difficulties with his classroom and students, and at least one known incident of inappropriate, angry physical contact with a student, it wasn't a good case to take to trial. And like every one of the stories in Will's parade of horribles, it occurred many years ago.

The sad part is, this is what you routinely get from tort reform advocates, and those like Will who choose to repeat their claims without care, thought, or investigation. If there's such a compelling case to be made for tort reform, why is it so hard to find a "tort reform advocate" who will approach the subject with so much as a whit of honesty?³
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1. Note to Broward County: "Helmit" is not an acceptable alternative spelling of "helmet".

2. The biggest problems Mr. Kaplowitz faced in the classroom appear to be that he was completely aware of what teaching actually involves, had no classroom management skills, and was placed in a "sink or swim" environment. His story's old, but it probably merits a more thorough and sympathetic examination in a future post.

3. Will's editorial continues with more "horribles", some of which are, well, judge for yourself:

In Indiana, a boy did what boys do: He went down a slide headfirst -- and broke his femur. The school district was sued for inadequate supervision. Because of fears of such liabilities, playgrounds all over America have been stripped of the equipment that made them fun.

So... how exactly can you break your leg by going down a slide head-first? Do you suspect that, if the story has any relation to the truth, Will's again leaving out some crucial facts and context? And where, exactly, can I find school playgrounds where they've removed the slides?

Prosecutorial Misconduct

Well, at least Alaska got a different Senator....

But there's a real story here, and not just about Ted Stevens. It's exceptional for a defendant to have the type of resources that Ted Stevens could muster against a U.S. Attorney's Office. But for the transition to the Obama Administration, I doubt that the Department of Justice would be admitting the extent and gravity of the misconduct or dropping the charges - just as before, it would be "all that matters is winning, full speed ahead".

There are a couple of things that make the Stevens case unusual. First, a U.S. Attorneys Office has such phenomenal resources, it's a bit surprising that the involved prosecutors felt the need to do this. Second, given the resources possessed by the defense, it's amazing that they thought they could get away with such extraordinary misconduct. I suspect, unfortunately, this is an example of rot that set in at the highest levels of the Bush Administration - rot beginning at the Oval Office - politicizing everything, focusing on results over means, throwing away any sense of obligation to observe ethical standards or even follow the law, putting loyalty above competence....

But the thing is, it's not particularly unusual for a police officer or prosecutor to decide that a defendant is guilty, and to "help along" the prosecution by playing games with the evidence, influencing witnesses, lying on the witness stand.... "He's guilty, right? So it's not really wrong to make sure he's convicted." In many cases the defense may have strong grounds to suspect misconduct, but won't be able to prove it. While some prosecutors have a very strong sense of ethics and commitment to doing justice, there are some whose primary goal is to get as many convictions as possible no matter what the facts. And there are some who have internalized the notion that everybody they prosecute is guilty - and obviously so - because they don't charge innocent people. When you're convinced you're advancing justice, it can become all too easy to turn a blind eye.

Stevens was convicted. You can say "He belongs in jail." You can attempt to justify the perversion of justice by the prosecutors and officers involved in the misconduct. But if you think he's guilty, think about this: It's that misconduct that is keeping him out of prison. That's not normally the way it works - normally, this type of misconduct is vastly more likely to land an innocent person in prison than to keep a guilty person out.

Put the glasses on! Put 'em on!

Apparently the head photographer for BusinessWeek was convinced by... perhaps Roddy Piper... to "put on the glasses," and has revealed who's really controlling the nation:

They Live!

Sacramental... Beer?

It's so hard to keep young people interested in religion these days. Got any ideas?

Legislation allowing underage Jews to drink beer during religious ceremonies has sparked widespread support in the Arkansas Legislature and puzzlement, even laughter, in the Jewish community.

The official explanation:

The bill’s sponsor, Rep. Dan Greenberg, R-Little Rock, says he drafted the bill on behalf of an Orthodox Jewish rabbi so that underage Arkansas Jewish youths would be able to drink at religious dinners and other events during the first nine days of the Jewish month of Av....

The legislation, primarily, would allow underage Jews to drink beer at post-circumcision celebrations on those rare occasions when a baby boy is born before the Ninth of Av, Ciment said.

Next up, hard liquor?

Some rabbis allow the havdalah to be performed with whiskey. Others accept rum.

And some, I'm sure, offer an open bar. Needless to say, there are some spoilsports out there:

“It’s possible to use grape juice. It’s possible to use milk,” said Jonathan D. Sarna, a professor of American Jewish history at Brandeis University near Boston.

“I am familiar with no Jewish law that requires drinking of beer at any time,” he said.

The bill's sponsor responds,

...I do think it’s quite important to make sure that state government never interferes with traditional religious practices.

(Yet for some reason I'm not holding my breath, waiting for his "religious freedom" bill to legalize polygamy and ritual sacrifice.)

So Is It "Really" Salary?

With due respect to the defense of oversized financial industry bonuses, unrelated to profit or performance, can industry insiders please make up their minds? Addressing Edward Liddy, disgruntled employee Jake DeSantis, states,

As of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.

But that was apparently contingent upon these special retention bonuses,

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.

The bonuses are thus characterized as "earnings".

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

Now, I have no reason to doubt that Mr. DeSantis is a good guy who works really hard, made lots of money for his company, had no direct hand in the collapse of his division, and... well, I can't go so far as assuming that he didn't know "what the right hand was doing", down in the corner office, but let's leave that alone for now.

The editorial suggests that Mr. DeSantis agreed to work for $1/year in salary because he knew he was going to be paid about $3-4 million in bonuses for the year. (I'm guessing, based upon his description of the accelerated bonus schedule and the amount he received in this "balance of the payments".) If the bonus truly is a form of salary, Mr. DeSantis should have no complaint - he agreed to a $1 salary. If the bonus is not a form of salary, and was payable without regard to performance, let's stop pretending it was "earnings". Please - pick one door or the other, but not both. (Yes, it's okay to say something like, "The bonuses were really part of my salary, so I actually agreed to cut my salary by about 10-20% when I accepted the $1 deal." Granted, it doesn't sound as good.)

Don't Blame Joe the Plumber

Blame Joe the Electrician!

None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Seriously, though, if the plumber watches the electrician use speaker wire for a 220 volt outlet, and doesn't tell the foreman....

A brief AIGFP playlist:

• Blame it on the Rain - Milli Vanilli. Because it was their producers' fault, right?

• A Little Respect - Erasure.

• She Works Hard For The Money - Donna Summer.

• Fire Water Burn - The Boodhound Gang.

• If I Had a Million Dollars - The Barenaked Ladies. No, wait, that's not supposed to be here.

• Take This Job and Shove It - the Johnny Paycheck version, of course.

Is Universality the Key to Affordability

Health insurance companies appear to believe so.

The health insurance industry offered Tuesday for the first time to curb its controversial practice of charging higher premiums to people with a history of medical problems. The offer from America's Health Insurance Plans and the Blue Cross and Blue Shield Association is a potentially significant shift in the debate over reforming the nation's health care system to rein in costs and cover an estimated 48 million uninsured people. It was contained in a letter to key senators.

In the letter, the two insurance industry groups said their members are willing to "phase out the practice of varying premiums based on health status in the individual market" if all Americans are required to get coverage. Although the letter left open some loopholes, it was still seen as a major development.

That implicates the key differences between the Obama plan and the Clinton/Edwards-style plans. Obama sought to dramatically reduce the number of uninsured Americans, while Clinton and Edwards argued for unversality and the elimination of free riders - people who would go uninsured until the moment they became ill. It's safe to say, health insurers are emphatically opposed to being required to insure, and take huge losses on, free riders.

Checks and Balances

Just curious: Will those participating in the Geithner Plan's "markets" to buy up toxic securities be forbidden from holding or investing in the same securities outside of the fund? That is, if a bank holding the securities wants to participate, will it be required to first sell its toxic assets or to include them in the auction no matter what the sale price? Or if a hedge fund participates, will it be forbidden from trying to buy up a security at $30 with the intention of subsequently bidding on it at $50 or $60, then selling its "outside" shares at the newly inflated "market price"?

It seems that serious restrictions need to be in place to prevent opportunism and self-dealing....

The Mechanism of the Geithner Plan

I'm obviously missing something big here.

The Geither Plan creates public-private funds that can bid for securities presently held by banks. This pseudo-market will create a new "market price" for the securities, recapitalize banks (replacing the security they hold with cash), and restore private investor confidence in the securities (so that investors not participating in the funds or, like you and me, excluded from the opportunity will also start investing in the securities.)

Let's say a bank holds a security presently trading at $30, and lists the security on its books at $60. Let's say that the Geithner funds bid the price of that security up to $45, or even $50. Why would the bank sell it? The bank would have to take $10 loss on its books, and would end up being less solvent (on paper) than it was going into the scheme.

Paul Krugman estimates the value of the government's subsidy of these plans at 30%. If the "investors" are seeking to fully exploit that subsidy, and don't care too much about profit, they could in essence bid $60 on a security they actually believed to be worth barely more than $46.

Perhaps, then, Geithner's hoping that when objectively evaluated, the securities are worth between 10 and 25% less than their value on the books, so that bids will meet or even exceed book value while still leaving plenty of room for participating investors to profit. But that won't inspire others, not receiving the subsidy, to join in the "market", and as huge as this program is its success depends upon even larger amounts of private money to come into the market for these securities. And if the current market price is fair, the subsidy falls far short of what it will take to get the bids close to the banks' book value.

Also, if the new "market" results in banks being able to sell their securities for more than their book value, won't the magnitude of the subsidy become obvious? If Bill Gross believes that a security is not worth his money at $60, but is giddy to buy it through one of these plans for that amount or more, how does that establish anything but how stupid the plan is in the first place? (Or how clever, at least from Gross's perspective.)
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Update: Nouriel Roubini's answer to the question of whether banks will participate even if it means selling securities below book value? Mandate participation, and then deal with the consequence if a bank proves to be insolvent.

Reasonable Minds, Indeed....

First the facts:

Savana Redding still remembers the clothes she had on — black stretch pants with butterfly patches and a pink T-shirt — the day school officials here forced her to strip six years ago. She was 13 and in eighth grade....

The search by two female school employees was methodical and humiliating, Ms. Redding said. After she had stripped to her underwear, “they asked me to pull out my bra and move it from side to side,” she said. “They made me open my legs and pull out my underwear.”

The search produced... nothing. But what would justify such a search? Obviously this was an investigation of a horrific crime, right?

An assistant principal, enforcing the school’s antidrug policies, suspected her of having brought prescription-strength ibuprofen pills to school. One of the pills is as strong as two Advils.

Oh my goodness - you say these pills are big, yellow and different? Well then, let's hear from the "experts":

Richard Arum, who teaches sociology and education at New York University, said he would have handled the incident differently. But Professor Arum said the Supreme Court should proceed cautiously.

“Do we really want to encourage cases,” Professor Arum asked, “where students and parents are seeking monetary damages against educators in such school-specific matters where reasonable people can disagree about what is appropriate under the circumstances?”

Well, no... But the problem is we live in a country so wrapped up in its "war on drugs" and "zero tolerance" rules that people can actually delude themselves into believing that there's any cogent argument that the strip search was reasonable. The school district coughed up this horse manure:

Lawyers for the school district said in a brief that it was “on the front lines of a decades-long struggle against drug abuse among students.” Abuse of prescription and over-the-counter medications is on the rise among 12- and 13-year-olds, the brief said, citing data from the Office of National Drug Control Policy.

Among them, how many cases involve abuse of ibuprofen? That would be zero, you say?

They seem to know that's pretty thin, so they're also offering this claim...

In a sworn statement submitted in the case, Safford Unified School District v. Redding, No. 08-479, Mr. Wilson said he had good reason to suspect Ms. Redding. She and other students had been unusually rowdy at a school dance a couple of months before, and members of the school staff thought they had smelled alcohol. A student also accused Ms. Redding of having served alcohol at a party before the dance, Mr. Wilson said.

The relevance of that would be... what? School officials thought, in retrospect, that the kids might have been all hopped up on ibuprofen? That the girl may have been hiding cans of beer inside her ibuprofen tablets?

The school district does not contest that Ms. Redding had no disciplinary record, but says that is irrelevant.

Rumors that don't justify any disciplinary action? Now those are relevant. Leave the danged facts out of this, thank you.

“Her assertion should not be misread to infer that she never broke school rules,” the district said of Ms. Redding in a brief, “only that she was never caught.”

Exactly. Now let's have the school employees involved subjected to strip searches, applying that same reasoning.

Taxing TARP-Funded Bonuses

Josh Marshall offers a reader comment on the proposed 90% tax of bonuses. There's no indication that the Senate will pass a 90% tax - quite the opposite - and Obama's coming pretty close to threatening a veto. But let's take a look at the complaint:

Since his income is mostly in the form of a bonus, he thinks that the confiscation of the bonuses amount to a constitutional taking.

From a constitutional law standpoint, I think that's an argument destined to fail (even though I think the tax bill is bad policy). As for the "my bonus is really salary" argument, I'll repeat my position: if the compensation is intended as salary, it should be negotiated as salary, paid as salary, and taxed as salary (to the employee and the employer). Renegotiate right now, so that your "bonus" becomes the salary you claim it is.

If you won't do that, let's stop pretending your bonus is really salary.

I'm Prepared to be Convinced

One of the puzzling things about Geithner is that, if he truly believes in his policy as the best policy, he's done so little outreach to people who have a public platform, who want a bailout to work, and are sympathetic to the Obama Administration. I understand the need to keep some details under wraps, but it isn't as if the broad outline of the plan is a secret - it's been known to the public since Paulson's first TARP proposal. You can tell by reading the loudest critics of the plan, such as Paul Krugman, that no effort has been made to win them over. Not even a slight effort to persuade them to take another look. Why not?

Part of my skepticism comes from the feeling that Geithner's not being honest about his goals and intentions, or the risks involved. Sure, he wants to fix the economy and get things back on track. But it seems, without inflicting any sort of price on the people who got us into this mess and, in fact, making them richer than ever with the bailout funds. Is it a joke or a sad truth to observe, if this proposal is half as good as Geithner says it is, none of these sweetheart, non-recourse loans are available to the general public. Only billionaires need apply.

Geither's own defense of his plan, at least the one in the Wall Street journal, is drivel. Granted, it was published when he was still trying to keep the details under wraps, but I think it did a lousy job even with the big picture. I also suspect that the leaks were deliberate, so I'm skeptical of the notion that Geither didn't want them out there - I suspect that he just didn't want his name on them until the official announcement.

Yet even now the strongest defenses I see of the Geithner plan are coming from third parties. There's speculation about the difficulty of getting Congress to approve nationalization, the up-front cost, and the potential for disaster - but none of that is coming from Geithner. Instead I get an editorial in which he offers nothing of substance, and talks to me like I'm stupid. No, that didn't leave me in a charitable mood.

With Assumptions Like These....

I've been debating with CWD about whether or not I should have suggested that Geithner could be a "dedicated, hard-working public servant who means well, and who believes in this approach to the problem". (Note, it's possible for him to be all of that and also be wrong.) Geithner appears to be taking CWD's side:

Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions - so-called legacy assets - are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

That's simply not true. Market prices for many of those securites are established, and it's easy enough to establish market prices for the rest simply by putting them on the market and seeing what people are willing to pay for them. To the extent that there's uncertainty, it's in the banks' book values for the assets, and within that context there's obvious inflation, not deflation, of the values.

The idea that market values are "depressed" is an assumption, not a fact. It is perfectly reasonable to assume that market values are where they are because of the enormous risk involved in the assets. Geithner's entire "shift the risk to taxpayers" plan is built on that premise - his proposal enables investors to "buy" toxic assets for more than market value while funding the purchase primarily with taxpayer money, find out they're completely wrong, then walk away (potentially with a decent profit) while leaving taxpayers with increased exposure due to their overpayment. So when Geither says,

private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

it's simply not true. For example, we could require banks to sell on the market some percentage of their toxic holdings at arm's length, under an agreement that we would then purchase a greater percentage of those same assets at their market value. Geithner's plan is designed to prevent the market from setting a price and to inflate the value of assets he's already told us he assumes to be depressed. The enormous subsidy and moral hazard is made necessary by Geithner's quest to have the assets purchased at or above the banks' book values, so as not to harm their balance sheets, as otherwise the banks might not sell.

Geithner professes,

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession.

If the big concern here is "risk", there are plenty of ways the government can reduce risk to investors without running up the cost of these securities or putting taxpayers on the hook for investment losses. But the problem is, they aren't likely to provide the type of price inflation that Geithner hopes to obtain with this plan.

Geithner completely overlooks the nature of the "risk" that got us into this mess. He seems to be claiming that banks were making prudent investments that were a bit too risky, and somehow managed to make so many simultaneous mistaken assessment of risk that we ended up with a multi-trillion dollar bubble. That's not the story of this crisis. This mess was built on the passing of the buck - shifting risk onto somebody else. The broker sells the loan to a mortgage company, that sells the loan to a bank, that sells the loan to a financial institution, that slices and dices its loan portfolio and sells it to investors, and a bunch of institutions buy cheap insurance against losses from AIG, which... can't cover its debt, so it gets billions handed to it by Geithner.¹ But up to the point of collapse, everybody was looking at a commission or short-term profit, coupled with shifting the risk on to the next guy.

Geither's plan shifts risk onto the taxpayer - that's not a distinction from the calamitous environment that led to the bubble; it's an extension of that calamitous environment. Once again, institutional investors get to take huge risk for potentially huge profit with other people's money, but with an even greater assurance that somebody else will cover them if the investments go bad. (There's a part of me that wonders if the goal here is to obfuscate - that Geithner doesn't care if the plan succeeds in the sense everybody else is talking about, and that he's more than content to have taxpayers absorb losses on toxic assets at the rate of $100-$200 billion per year.)

Geithner's sprinking of platitudes about how working people are suffering, the need to be responsible with public money, "never again", whatever, aren't even slightly convincing. Geither doesn't walk that walk. Obama must believe in Geithner, and maybe in a year they'll both look like geniuses, but Obama's praise of Geithner may turn out to be a "Heckuva job, Brownie" moment.
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1. Yes it's more complicated than that, but the gist remains the same. As long as profits were to be made, nobody cared about risk.

Compensation Limits on a Government Giveaway?

In keeping with its long pattern of unnecessarily granting anonymity, often in violation of its own policies, the New York Times recites,

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

The easy reply to that is, "Okay then, don't participate." But let's think for a moment - why would this even be a concern? They're entering the program as investors not employees, right?

Well, sort of.

They're barely investing. The plan is overwhelmingly generous, and we may be looking at an "investment" of only $3 for ever $97 in taxpayer money put on the line. Picture the moral hazard:

• The "investor", with its comparatively minimal contribution and vast quantities of federal money in the form of non-recourse loans, snaps up a bunch of securities.

• Based upon its profitable investments, the investor draws out the maximum return allowed under the plan, keeping its stake in the plan to an absolute minimum.

• Within a year or two, it becomes apparent that they overpaid for most of the securities, and their investment is a long-term disaster.

• Once they've recouped their investment, perhaps also taking a reasonable return on their actual stake, they walk away and leave taxpayers with the mess.

Taxpayers at that point might cry, "Foul!" The investor would have increased our exposure by overbidding for securities, so why should he be allowed to draw out billions of dollars while costing taxpayers many times that amount?

Is "Because otherwise he wouldn't have 'invested'" an adequate response?
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Update: Krugman's done the math. I'll defer to his numbers not only because he's, you know, a Nobel Prize-winning economist, but because he's actually done the math. ;-)

All Talk, No Action....

Fiddling while Rome burns.... [Insert cliché of your choice here.]

The point of calling on Congress to come up with the type of "Chapter 10" bankruptcy that its members know to be needed, or for Summers and Geithner to come up with a plan to wind down "too big or too entangled to fail" financial institutions, is not simply to goad them into taking action for the benefit of future generations. It's because things aren't exactly coming up roses right now, and those solutions could be useful, right now.

A group representing General Motors Corp. (GM) bondholders doubts whether the auto maker's survival plan will be enough to keep the company out of bankruptcy given the sharp decline in U.S. vehicle sales.

In a letter sent Sunday to U.S. Treasury Secretary Timothy Geithner and advisors to President Barack Obama's auto task force, advisors to the group say demands that bondholders swap two-thirds of their debt for equity in a restructured GM pose too much risk given the company's precarious state.

I'm not sure whether their concern is truly about GM's ability to survive; I suspect it's mostly about getting better security for their stake. But one way or another, if a "Chapter 10" existed, we wouldn't be having this discussion - either the parties would agree, or the company would enter into the new bankruptcy proceeding. There could be brinksmanship, but it would be qualitatively different - it would be between whether the negotiated outcome was likely to be better for everybody than a bankruptcy proceeding, not about which interest group gets the greatest benefit of an ad hoc taxpayer bailout.

This is Too Much to Ask?

Brad DeLong provides his summary of how the Geithner plan would work. It still sounds like a phenomenal deal for the private investors who get to go along for the ride - we put up $97 to their $3, then split any profits 5:1 (fortunately in our favor), and almost nothing to lose if they walk away. But despite some melodrama, DeLong offers by far the clearest explanation and most compelling argument in favor of the plan that I've heard to date.

If Geithner (or Summers) were to offer an understandable synopsis, like this, or even just confirm, "Yeah, that's what I'm talking about," we could have a much better conversation about the bailout. Is that really too much to ask?

(I still await an answer to Krugman's concern - what if this isn't just about the banks' balance sheets? Or the question raised by others (possibly inlcuding Krugman), what if the prices offered at auction are below the banks' "book values" for the assets and are rejected? It occurs to me also - will this be like an auction of repossessed autos, you can look at the surface but no test driving permitted, or will investors be allowed to fully scrutinize the securities in advance of the auction?)

Democracy is... Flat?

Tom Friedman shares his insights....

If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once - like Treasury Secretary Timothy Geithner or A.I.G.’s $1-a-year fill-in C.E.O., Ed Liddy - and you’ll ensure that no capable person enlists in government.

We could call this "meta-condescension". If I don't excuse Liddy for being condescending to me about contract rights and the importance of overcompensating people in the financial industry, I get a condescending lecture from Friedman about how unfair I was to react to the condescension.

Sure, I've had my moments of conscience about talking about the mistakes of both of these men, whose biggest sins appear to be that they are extraordinarily conventional thinkers for their respective industries, further hampered by tin ears. But that doesn't mean I'm not going to respond to a patronizing commentary about the "sanctity of contracts" from the former CEO of Allstate, or dismiss his notion that the people at AIG are doing taxpayers a great favor by unwinding contracts that should have landed the company in bankruptcy court, not made it the beneficiary of the largest taxpayer bailout in history. You know what? If the choice is between sitting silently while Liddy earns his $1, or being able to fully and fairly criticize the decisions of the CEO of AIG, I say pay him a market wage.

Geithner's department is far from fully staffed, and he's taken on a tough job - in normal times, probably only 1% of Americans even know who the Treasury Secretary is, and probably not many more than that know that we have one. As I said yesterday,

I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem. But if he can't or won't explain himself, he deserves no deference.

We also shouldn't overlook the fact that public servants, first and foremost, are supposed to serve the public, and the public has the right to question them when their priorities appear to be the advancement of private commercial interests. Frank Rich captures the apparent attitude of the officials who are supposed to be addressing our concerns:

Bob Schieffer of CBS asked [Larry] Summers the simple question that has haunted the American public since the bailouts began last fall: “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?” What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk needn’t worry about it.

Contrary to Friedman, I'm not content to be treated like a toddler just because Geithner is paid about $200K/year. I want to know what's in the bitter pill I'm being asked to swallow, and why other remedies aren't better.

You will ensure that every bank that has taken public money will try to get rid of it as fast it can, so as not to come under scrutiny, even though that would weaken their balance sheets and make them less able to lend money.

Oh no.... You mean, private banks that don't need government money wouldn't take it, and market forces would dictate their ultimate success or failure? What a horrible possibility! And again, you say, the solution is for us to "shut up and take it"? That seems like the least we can do....

And you will ensure that we’ll never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets - and fund managers are growing terrified of any collaboration with government.

Arguably the solution involves nationalizing the troubled banks, including those of the "big four" that can't make it on their own, cleaning up their balance sheets, and restoring them as quickly as possible to public ownership with new shareholders and new management.

Friedman has apparently embraced Geithner's solution - the government provides the money for private companies to buy up toxic debt, providing enough of a subsidy that they're willing to pay the valuation given to them by the banks that hold them, while "sharing" profit and protecting the private buyers from taking losses. It assumes that the assets at issue aren't grossly overvalued by the banks, or that the real estate bubble will quickly reinflate, or... well, we can't really be sure, because Tim Geithner won't tell us his assumptions. And Friedman implies, "We have no business asking; shut up and take it."

What's funny is, Friedman can't even follow his own advice:

Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail - no matter how reckless. From bankers we hear about contracts too sacred to break - no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” I’ve never talked to more people in one week who told me, “You know, I listen to the news, and I get really depressed.”

The first words, put into the mouths of "business", could as easily be assigned to Geithner (or Ben Bernanke), who plainly believes that certain banks and financial institutions are "too big to fail". The "banker" could easily be AIG CEO Liddy, whose deference to compensation contracts goes way beyond what I can recall ever hearing from an employer, let alone from an insurance executive. And to attack public officials as immature and self-serving? As someone, oh yes, Thomas Friedman put it, "If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once".

Yesterday, addressing bankers, Ben Bernanke commented,

Many of you likely are frustrated, and rightfully so, by the impact that the financial crisis and economic downturn has had on your banks, as well as on the reputation of bankers more generally. You may well have built your reputations and institutions through responsible lending and community-focused operations, but nonetheless, you now find yourselves facing higher deposit insurance assessments and increasing public skepticism about the behavior of bankers - outcomes that you perceive were largely caused by the actions of larger financial institutions. Many of you managed your businesses prudently and shunned more exotic instruments and activities. And many of your customers--households and businesses - avoided excesses and are able to meet their financial commitments on a timely basis.

No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail. Indeed, the too-big-to-fail issue has emerged as an enormous problem, both for policymakers and for financial institutions generally. Creditors of a firm perceived as too big to fail have less incentive to monitor and restrict the firm's risk-taking through adjustments to the price at which they lend money to the firm. If left unaddressed, this weakening of market discipline creates an unlevel playing field for smaller institutions, which may not be able to raise funds as cheaply, even if their individual risk profiles are better, or at least no worse, than those of their larger competitors. The erosion in market discipline distorts market behavior and can give firms an incentive to grow - either internally or through acquisitions - in order to be perceived as too big to fail.

Government rescues to prevent the failure of major financial institutions also have required large amounts of public resources. These actions have involved extremely unpleasant and difficult choices, but given the interconnected nature of our financial system and the potentially devastating effects on confidence, financial markets, and the broader economy that would likely arise from the disorderly failure of a major financial firm in the current environment, I do not think we have had a realistic alternative to preventing such failures.

Yet where Geithner and Bernanke appear content to (possibly) create a solution for these institutions to apply "next time", I think "There's no time like the present". I would be creating a Chapter 10 bankruptcy for companies like Chrysler and GM that are "too big to fail", and putting the weakest of those companies through it as a "test case". I would do the same thing with the "too big to fail" financial institutions. Why not? As Bernanke says,

Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.

There's no time like the present.

The Bad Bank Bailout Plan

Was that an ambiguous title? It works both ways. Seriously, how can I make sense of this? Why do Geithner and Obama believe its okay to keep trucking out the same, tired idea without responding to the critics, explaining why their plan is better than the alternatives, or explaining why we should expect it to work? I have tried to assess the plan sympathetically, but what's to love?

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.

So we give money to "investors" who can safely overbid on securities, while the government protects them from taking losses. The most charitable interpretation of this would seem to be that the Obama Administration believes that market prices for toxic securites are significantly below their actual worth, and thus that there's minimal downside in creating a system that inflates their price. A far less charitable interpretation is that this is seen as a quick way to clear banks' balance sheets of garbage assets for something close to book value, with the difference between the inflated purchase price and actual value being absorbed the taxpayer over time... perhaps $100-$200 billion per year, or so.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

As others have pointed out, taxpayers do the best under this plan when sale prices are low, as we're protecting the investors from taking losses. Auctions don't protect taxpayers - higher purchase prices make eventual losses more likely, and thus increase the risk to taxpayers.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

Call it the "hair of the dog" cure - fix the hangover from excessive leveraging of debt with a bit more leveraging.

Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.

Why are we betting, when it's... not necessarily easy, but perfectly feasible to check beneath the hood? What about that isn't supposed to make me conclude that the last thing Geithner wants to do is find out what these securities are truly worth. If you don't trust market value, why not look at the underlying assets, the default rate, recoveries after foreclosure, the number of properties that aren't likely to ever recover in value....

Analysts worry whether the prices investors offer will be high enough to induce the banks to sell assets. The hope is that high valuations at the auctions will increase the price of assets that remain on the books of banks, bolstering confidence in the sector.

This part has never made much sense. It's a given that these assets are overvalued by banks, at least compared to current market values. Swapping the bad assets for cash doesn't improve the bank's balance sheet, but perhaps we've injected enough cash into the banks that Geithner no longer regards that as a concern. Yet it's reasonable to assume that banks aren't going to want to worsen their balance sheets.

This notion that "auctions will increase the price of assets that remain on the books"? Where's the basis in reality for that type of optimism?

Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.

Yeah, so many that you can't even name one. Spare me.

Rather than trotting out the same plan, with a few details changed, time and time again, I would really like it if the Obama team would explain (a) the assumptions they are using, particularly in relation to toxic assets; (b) why they believe toxic assets are undervalued by the markets, using objective data; (c) why they believe banks are either fairly valuing or undervaluing those same assets, even though they're listing them far above recent market prices, using objective data; (d) the precise nature of their plan; (e) why their plan is better than alternatives - in detail; and (f) how much they expect it to cost taxpayers, both if it goes as planned and if it turns out that critics of this plan are correct.

I'll add this; I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem. But if he can't or won't explain himself, he deserves no deference.

And Yet The World Didn't End

One of the unexpected aspects of staying in a hotel high in the Andes was the ready availability of a local treatment for altitude sickness (and headaches, and fatigue).

Coca leaves are not generally available in Chile - you have to go to really high altitudes, in areas where they're also considered a sacrament. But just as at sea level, it's the alcohol that gets locked up. The President of Bolivia attempts to explain why western drug policy toward the coca leaf is absurd; but although he's right, I doubt his opinion will have much impact.

(If you want a first-hand description of coca chewing, sorry, I guess I'm too much a product of our 'war on drugs' culture.)

Being a Mouthpiece is One Thing....

But abandoning any shred of dignity in the process? Michael Gerson recites from the latest party memo:

The most famous piece of legislation passed by the 111th Congress may have nothing to do with health care or energy. It could be the Dodd amendment, also known as the Geithner amendment, or perhaps the low-level-anonymous-staffer-everyone-can-safely-blame amendment, reading in part:

"The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . . " AIG executives were foolish to use this loophole to "retain" employees, some of whom nearly destroyed the American financial system. But the company did not act with deception or secrecy.

Yes, that's the part that's widely circulated. And, as party hackery goes, Gerson's use is "correct" - he's using it to suggest that the goal was to "protect" excessive compensation going backwards, as opposed to limiting new compensation agreements going forwards. But it's exceptionally misleading to suggest that the provision was meant to reach the masses of employees at a company such as AIG, as opposed to the executive suite:

(b) Executive Compensation and Corporate Governance-

(1) ESTABLISHMENT OF STANDARDS- During the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, each TARP recipient shall be subject to--

(A) the standards established by the Secretary under this section; and

(B) the provisions of section 162(m)(5) of the Internal Revenue Code of 1986, as applicable.

(2) STANDARDS REQUIRED- The Secretary shall require each TARP recipient to meet appropriate standards for executive compensation and corporate governance.

(3) SPECIFIC REQUIREMENTS- The standards established under paragraph (2) shall include the following:

(A) Limits on compensation that exclude incentives for senior executive officers of the TARP recipient to take unnecessary and excessive risks that threaten the value of such recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(B) A provision for the recovery by such TARP recipient of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees of the TARP recipient based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate.

(C) A prohibition on such TARP recipient making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(D)

(i) A prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition developed under this paragraph shall not apply to the payment of long-term restricted stock by such TARP recipient, provided that such long-term restricted stock--

(I) does not fully vest during the period in which any obligation arising from financial assistance provided to that TARP recipient remains outstanding;

(II) has a value in an amount that is not greater than 1/3 of the total amount of annual compensation of the employee receiving the stock; and

(III) is subject to such other terms and conditions as the Secretary may determine is in the public interest.

(ii) The prohibition required under clause (i) shall apply as follows:

(I) For any financial institution that received financial assistance provided under the TARP equal to less than $25,000,000, the prohibition shall apply only to the most highly compensated employee of the financial institution.

(II) For any financial institution that received financial assistance provided under the TARP equal to at least $25,000,000, but less than $250,000,000, the prohibition shall apply to at least the 5 most highly-compensated employees of the financial institution, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(III) For any financial institution that received financial assistance provided under the TARP equal to at least $250,000,000, but less than $500,000,000, the prohibition shall apply to the senior executive officers and at least the 10 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(IV) For any financial institution that received financial assistance provided under the TARP equal to $500,000,000 or more, the prohibition shall apply to the senior executive officers and at least the 20 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

(E) A prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.

(F) A requirement for the establishment of a Board Compensation Committee that meets the requirements of subsection (c).

(4) CERTIFICATION OF COMPLIANCE- The chief executive officer and chief financial officer (or the equivalents thereof) of each TARP recipient shall provide a written certification of compliance by the TARP recipient with the requirements of this section--

(A) in the case of a TARP recipient, the securities of which are publicly traded, to the Securities and Exchange Commission, together with annual filings required under the securities laws; and

(B) in the case of a TARP recipient that is not a publicly traded company, to the Secretary.

Is it conceivable that the Secretary would have been asked to review the bonuses under this legislation, to determine if it should be applied to employees outside the 25 highest paid individuals as contemplated by the legislation? Sure. Is it likely that the Secretary would have found it consistent with prevailing wages in the industry, the intent of the legislation, or the treatment of employees in other bailed-out organizations who had already received similar bonuses, so as to merit extending the prohibition to everybody at AIG? Not at all.

Gerson carries on,

Concerns on the broader compensation issue were serious enough to ensure unanimous Senate passage of an amendment to the stimulus bill sponsored by Sens. Olympia Snowe and Ron Wyden that penalized bailout bonuses in excess of $100,000.

But the Snowe-Wyden amendment disappeared into the misty bog of a House-Senate conference committee, only to be trumped by language that grandfathered in AIG's retention bonuses.

I've quoted enough legislation for the moment, and the Snowe-Wyden language is somewhat opaque - let's let Wyden put it into simple terms:

In an interview with the Huffington Post, the Oregon Democrat noted that during the crafting of the stimulus package, he and his Republican colleague from Maine introduced a provision that would have forced bailout recipients to cap their bonuses at $100,000. Any amount paid above that would have been taxed at 35 percent. The language made it through the Senate, but during conference committee with the House, it was inexplicably removed.

Note, the 35% tax would be payable by the company, not by the employee. And nothing in the Snowe-Wyden language would have prohibited or voided the bonus. Yes, under this proposal, a bonus contract negotiated after January 1, 2008 would have been covered. But if AIG is correct, as seems to be the case, that it was contractually bound to pay the bonuses, it would have had no meaningful impact on the present conflagration. The bonuses would have been paid, and AIG would owe an additional $60 million or so in taxes, all of which would still have effectively come out of taxpayer contributions to AIG. Would that have made you feel better about it?

Gerson carries on,

President Obama vowed to "pursue every legal avenue to block these bonuses," when the proper "legal" avenue was to write a responsible law - a process his own administration apparently undermined.

If you actually look at the legislation back when it contained the Snowe-Wyden language, it didn't just cap bonuses - it retroactively capped pay to an amount not "in excess of the amount of compensation paid to the President of the United States". It did not prohibit or invalidate bonuses - it instead imposed a corporate tax on bonus payments in excess of $100,000. You shouldn't have to be a very strong thinker to recognize why that would trouble the Treasury Secretary who is trying to bring sanity back to the financial industry, as there's every reason to believe that arbitrary salary caps of this sort would have been destabilizing. (Having made the "conservative" case for wage controls, what's up next? Price controls?)

Gerson next imagines a hedge fund manager having to justify a huge return on a purchase of toxic securities.

"Perhaps the witness can explain to us how he justifies such windfall profits with the people's money? Have you no shame? Give us the names, addresses and phone numbers of every millionaire you enriched at public expense so we can leak them to the press."

If Gerson took the time to find out what he's talking about, rather than doing stenography from the party memo, he might have seen the following in the Snowe-Wyden language:

(C) BONUS PAYMENT- The term `bonus payment' means any payment which--

(i) is a discretionary payment to a covered individual by a financial institution (or any member of a controlled group described in subparagraph (D)) for services rendered,

(ii) is in addition to any amount payable to such individual for services performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate, and

(iii) is paid or payable in cash or other property other than--

(I) stock in such institution or member, or

(II) an interest in a troubled asset (within the meaning of the Emergency Economic Stabilization Act of 2008) held directly or indirectly by such institution or member.

Such term does not include payments to an employee as commissions, welfare and fringe benefits, or expense reimbursements.

If he imagines a popular uproar over a subsidized giveaway of troubled assets to hedge fund managers, why does he think there would be no such uproar over the giveaway of the same assets at fire sale values as bonuses to the leaders of bailed-out companies, as would have occurred under the Snowe-Wyden language he endorses?

Gerson concludes,

What sane money manager would want to partner with a government that blames others for its mistakes, urges the violation of inconvenient contracts and threatens to tax benefits retroactively?

No doubt, the lack of effective regulation and oversight of the financial industry, most crucially under G.W. Bush,¹ constitutes a government mistake - but is that what Gerson means? Even if so, it hardly exculpates the financial industry. Also, you don't need to look past the auto industry to recognize that, if it means walking away with billions in your pocket, people are willing to eat a lot of crow (both deserved and undeserved) in front of Congress.

But Gerson's suggesting that it's Obama who "urges the violation of inconvenient contracts"? No, that would be Gerson himself. Although some pretend otherwise, as previously noted, not even the Snowe-Wyden legislation would have abrogated the AIG bonus contracts. The final legislation didn't retroactively modify or abrogate contracts, and instead applied only to new contracts - and that's the very part Gerson finds objectionable.

As for threatening to tax benefits retroactively? I think the new tax on bonuses is bad policy, and I've said so, but give me a break. The entire mechanism by which the Snowe-Wyden amendment sought to reign in "excessive bonuses" was through a tax, retroactive to January 1, 2008.
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1. I have sympathy for the argument that most of the policies preceded Bush, but none for the argument that this somehow excuses the Bush Administration from its responsibility for perpetuating those policies, or failing to notice the walls crumbling all around them.