AIG, once the world's most powerful commercial insurance company, has proposed paying $165 million in bonuses to retain key people after the U.S. government invested $180 billion to keep the crippled insurer afloat. Thanks to public outrage at that bonus plan, from the White House right on down to my house, those bonus plans will be revisited.
Regardless, AIG's former senior management allowed a small financial products division to exploit U.S. regulations to sell $400 billion worth of insurance-like investments around the globe to other financial institutions, governments and pension funds.
To get around state-regulated insurance laws that require adequate capital and reserves, this stuff was called "credit-default swaps,'' a type of financial derivative instrument that was loosely regulated and incredibly profitable.
The AIG swaps insured asset-backed securities collateralized by mortgages, credit card obligations and other loans that have fallen hugely in value. U.S. regulators acquired an 80 percent stake in AIG because they feared that reneging on the swaps would collapse the financial system.
John Coffee, a onetime Wall Street lawyer who has studied securities laws and the markets for 30 years at Columbia University, notes that the mortgage and technology-stock bubbles of the last decade were driven by "competition among the major investment banks" and their professional accomplices that "led to a lemmings-like race over the cliff" thanks to short-term greed and ineffective regulation.
It was all grounded in rationalizations such as "real estate prices never fall" and "the credit-rating agencies gave this deal a Triple A rating," Coffee told Congress last week. "Explosive growth and a decline in professional standards often go hand in hand."
Coffee headlines a heavyweight panel at 4 p.m. Thursday at the University of St. Thomas School of Law in Minneapolis that is open to the public (www.stthomas.edu/ ethicalleadership). It's called: "Our National Challenge: A Blueprint for Restoring the Public Trust."
Coffee's testimony is an indictment of thousands of professionals from the mortgage, legal, regulatory, accounting, credit-rating and investment industries. A sampling:
•Investment banks "raced like lemmings over the cliff by abandoning the usual principles of sound risk management both by increasing their leverage dramatically after 2004 and abandoning diversification in pursuit of obsessive focus on high-profit securitizations."
•The Securities and Exchange Commission "allowed the major investment banks to determine their own capital adequacy and permissible leverage by designing their own credit risk models'' to which the commission deferred.
•Financial institutions "abandoned discipline and knowingly made non-creditworthy loans because they did not expect to hold [them] long enough to matter," Coffee concluded.
"Coffee has tackled the current crisis head on by answering the most pressing question before Congress and the Obama Administration: 'What went wrong?'" said Hank Shea, the former white-collar federal prosecutor in Minneapolis who assembled Thursday's panel. "His testimony almost reads like an indictment of certain investment banks, credit-rating agencies and the SEC.''
Coffee also set out concrete steps for reform.
"One can only hope that Congress was listening," said Shea, who works with the professional schools to integrate ethics from his post as fellow and instructor at the University of St. Thomas School of Law.
Under Coffee's plan, the Federal Reserve and the SEC would regulate "systemic risk," focusing less on minute details and more on safety, diversification and capital adequacy. And investment banks would have to retain for their own portfolios some of everything they sell, from the "eat-your-own-cooking" school of regulation.
Fed Chairman Ben Bernanke acknowledged the importance of this type of approach on Sunday's installment of "60 Minutes" on CBS.
The financial elite, aided by powerful politicians and regulators, proved their ability to nearly ruin our financial system from 2001 to 2007. The government has bought huge equity stakes in the country's 25 largest financial institutions to keep the system afloat.
There are indications that the debt markets have stabilized, that the worst of the stock-market panic is over and that Main Street will start to recover. Bernanke, on 60 Minutes, spoke of "green shoots'' of economic revival starting to sprout.
Our strength lies in the decency and ethic of the working class people who show up for a modest wage every day, in spite of some of these board-appointed, seven-figure bums who trashed our economy. Investors are starting to buy discounted securities and grass-roots entrepreneurs are fixing and selling foreclosed houses. The stocks of AIG, Citi and other tainted financiers have lifted off the bottom in recent days.
In two years, those investments should look better for taxpayers. But to prevent a rerun of this debacle, I suggest everyone spend some time with Coffee's analysis and recommendations.
Neal St. Anthony • Neal.St.Anthony@ startribune.com • 612-673-7144