The federal government's reported figures for jobs "created or saved" by the "stimulus" bill (formally the American Recovery and Reinvestment Act of 2009, or "ARRA") are now known to be wrong. The Recovery Accountability and Transparency Board, which oversees these figures, apparently has decided not to correct them.
A scandal has erupted over the federal government's reporting of the number of jobs created or saved by the "stimulus" bill (formally the American Recovery and Reinvestment Act of 2009).
This scandal would have been avoided if the government had complied with the Information Quality Act.
The collapse of the housing bubble, with 20% to 50% reductions in home values across wide swaths of the country, has led to an extraordinary high rate of foreclosures. The federal government has responded with various programs to "help people stay in their homes." These programs have one or two typical features: (1) lower interest rates, (2) forgiveness of some portion of the loan principal, (3) forbearance of nonpayment for some period of time, or some combination thereof.
These remedies have in common a similar diagnosis: foreclosures are rising because some aspect of the mortgage changed such that borrowers suddenly found themselves unable to afford the payments. Typically, what is presumed to have changed is that a low "teaser" rate ended, and the house was no longer affordable when the interest rate reset to market levels.
It was in this setting tha the Administration announced a new Public-Private Investment Program (PPIP), the stated purpose of which was to provide a facility for banks to sell so-called 'toxic assets" and for investors to buy them at fire sale prices. An obvious deterrent to buyer participatin is the Treasury Department's decision to impose on buyers TARP-like restrictions on employee compensation.
Both banks (sellers) and investors (buyers) have declined to participate. As we predicted, buyers are deterred in large part by political risk: they do not trust the government as a business partner.
In the seventh in our series of posts on the AIG bonuses and the incentive effects of efforts by the Obama Administration and Congress to forcibly recover them, we predicted that investors in the Treasury Department's "Legacy Loans Program" would be regulated by the same constraints on employee compensation and, ultimately, profits. We said that H.R. 1586, the House-passed bill to impose confiscatory taxes on bonus recipients, would have unintended consequences on the Treasury Department's Public-Private Investment Program (PPIP):
In short, the House's action, which President Obama did not contemporaneously discourage, creates the precedent that the government may choose not to honor the legal commitments it makes to investors who participate in the Treasury Department's new program. If investors earn "too much" in profit -- a term that would be defined subjectively after the fact -- they may be prevented from realizing these earnings. It is reasonable for prudent investors to discount the government's credibility.
The Obama Administration could have included strong language promising to protect these property rights in [the Treasury Department's Public-Private Investment Program], but it did not do so. Such a promise might prove to be unenforceable in fact, but the absence of a promise means there is nothing yet for investors to rely upon. This uncertainty may (or may not) be resolved when the Treasury Department issues implementing regulations. For now, the cleanup of underwater financial assets has entered a zone in which political risk -- uncertainty about the government's reliability -- may be as great or greater than financial risk.
A story in today's Washington Post says that this has come to pass.
Several recent news stories have covered the efforts of some large financial institutions to repay the funds they received from the federal government under the Troubled Assets Relief Program. Executives of these firms are chafing under the costs resulting from acceptance of these funds, which in some cases they did not accept voluntarily.
The federal government is imposing conditions on repayment that mean recipients cannot get out from under the TARP without the federal government's permission. What lessons can be learned from this experience?
In this series we've predicted that the government's efforts to confiscate employee bonuses would have significant unintended consequences. Specifically, the highest-valued employees of AIG and other targeted firms would quit rather than subject themselves to public humiliation and the loss of income to which they were contractually entitled.
In the Wall Street Journal, Liam Pleven and Randall Smith report that this is now happening, with predictably adverse consequences for the taxpayers who now own these companies.
AIG has been criticized for paying approximately $165 million on contractually obligated retention bonuses after receiving about $175 billion in government capital injections We've blogged a half dozen times on the subject.
The Wall Street Journal reports that Fannie Mae and Freddie Mac are contractually obligated to pay $210 million in retention bonuses. Both government-sponsored enterprises have been placed in conservatorship. Members of Congress have demanded that these bonuses be rescinded along with those due to AIG employees.
H.R. 1664, the second bill passed by the House to regulate compensation received by employees of firms receiving government capital injections, would prohibit these retention bonuses. Compensation would be limited to salary and "performance-based" bonuses, a term that the bill would direct the Treasury Department to define by regulation.
Today's Journal story reports on a letter send by the government's senior regulatory official for GSEs defending the Fannie Mae and Freddie Mac retention bonuses, reiterating a statement he issued on March 18th. This places him at odds with both H.R. 166 and the the Obama administration, which has demand that retention bonuses not be paid, be rescinded, or be returned.
This post is not about the AIG bonuses on congressional reactions thereto, but because it is so closely related we're continuing to use the same thread.
In today's Wall Street Journal, Fox Business Channel host Stuart Varney claims that at least one bank has not been allowed to return, with interest, the TARP funds it received last September.
In recent years there has been a notable increase in the use of expert elicitation in human health risk assessment. The method usually involves empaneling a group of experts and, through a carefully crafted and complex set of procedures, asking each panel member to provide a subjective probability that some phenomenon that cannot be directly observed is true or false. The Environmental Protection Agency has an informative external review draft white paper on the subject.
In environmental health, expert elicitation has been used to quantify the risk of cancer from drinking water disinfection byproducts, the likelihood that routine exposure to particulate matter in air causes premature mortality, and the magnitude of uncertainties related to climate change. Each is a tough scientific question. For example, the risk involved may be quantitatively small, and hence hard to discern, or the scientific uncertainties may be very large. Judgment is required, and the judgments of scientists inevitably reflect a mixture of scientific expertise and nonscientific opinion.
The need for discerning science from policy in expert judgment has been recognized for decades, at least since the 1983 National Research Council Red Book. No consensus yet exists concerning how to do this in practice. As a result, practitioners of expert elicitation typically acknowledge the problem but not much else. The EPA external review draft white paper mentioned above, for example, says that Agency technical support documents relying on expert elicitation should address "[p]ossible correlations with non-elicited components of the overall analysis or policy question" -- a phrase that, when translated into plain English, means the inflitration of experts' policy views into their characterization of science.
Today's Wall Street Journal has an example drawn from a very different arena -- macroeconomic forecasting -- that offers a wealth of insight about the problems with expert elicitation.
We have provided several analyses of the AIG bonus controversy, most recently on the political risk that now may poison private sector participation in the Treasury Department's new Pulic-Private Investment Partnership Investment Program, which includes the Legacy Loans Program and Legacy Assets Program. The effectiveness of this program hinges on aggressive private sector participation. However, recent actions by the House of Representatives to impose a 90% tax on bonus payments (H.R. 1586), and repeated statements of opprobrium from President Obama and the actions of New York Attorney General Andrew Cuomo and others, signal to investors that the government will not be a reliable partner.
In particular, prudent investors should expect that if they make "too much" money -- where "too much" is defined after the fact, based on political criteria -- the government will act to confiscate these profits. H.R. 1586 indicates that the government is willing to confiscate profits indiscriminately, for example by taxing away bonuses that AIG was contractually obligated to to pay to employees who had volunteered to work for the company to clean up financial messes create by others.
According to the Associated Press, Congress understands the destructive effects of the incentives it has now created, and it is trying to find a way out. It seems to have discovered such a path, but the path likely will fail because it does not involve admitting error.
In short, the House's action, which President Obama did not contemporaneously discourage, creates the precedent that the government may choose not to honor the legal commitments it makes to investors who participate in the Treasury Department's new program. If investors earn "too much" in profit -- a term that would be defined subjectively after the fact -- they may be prevented from realizing these earnings. It is reasonable for prudent investors to discount the government's credibility.
The Obama Administration could have included strong language promising to protect these property rights in its Legacy Loans Program, but it did not do so. Such a promise might prove to be unenforceable in fact, but the absence of a promise means there is nothing yet for investors to rely upon. This uncertainty may (or may not) be resolved when the Treasury Department issues implementing regulations. For now, the cleanup of underwater financial assets has entered a zone in which political risk -- uncertainty about the government's reliability -- may be as great or greater than financial risk.
Even if Treasury's regulations appear bulletproof, it is not clear they can ever constrain Congress from undermining them. Finally, nothing can constrain other political actors, such as New York Attorney General Andrew Cuomo, from exercising other legal and extralegal powers. As an example of extralegal power, Washington Post staff writer Brady Dennis says Cuomo threatened to publicize the recipients names, thereby exposing them to public ridicule and potential risk of physical harm, if they did not agree to return their bonuses:
[AIG's] chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.
"We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week," Pasciucco wrote. "To the extent that we meet certain participation targets, it is not expected that the names would be released at all."
Yesterday afternoon, 18 of the 25 most senior Financial Products executives had agreed to return their retention payments, amounting to more than $50 million thus far. Company officials expect more employees to follow suit.
"They are doing the right thing," Cuomo said on a conference call with reporters, adding that he now saw no need to reveal the names.
Returning one's bonus is not the end of it, however. Recipients still will be subject to significant taxes. We address that issue today.
This morning, Treasury Secretary Timothy Geithner announced the Obama Administration's plan for public-private partnerships to liquidate so-called "toxic" assets from bank balance sheets.
The proposal runs head-on into H.R. 1586, the bill recently passed by the House of Representatives that would impose confiscatory taxes on employees who are entitled to receive bonus payments in 2009.
