Dodd and AIG Scratch Each Other's Back

The Hartford Currant has documented Connecticut Senator Christopher Dodd's flip-flop on the AIG bonuses, but it seems that there is more going on than he's addressed.

On Tuesday, Dodd said that he was not a member of the conference committee that crafted the final compromise bill and said that the exception had not been in the bill as he drafted it.

But late Wednesday, Dodd admitted in an interview with CNN that he had been involved in the change.

"I agreed reluctantly," Dodd said. "I was changing the amendment because others were insistent."

Don't think that Dodd is at an arm's length relationship with the financial services conglomerate. If you check the record of donations to him, you quickly see that AIG was his fourth largest contributor from 2003 to 2008, with a total of $223,478 donated.

The total money he raised during that time was $8,938,003. That means that AIG was directly responsible for 2.5 percent of all the money he raised during that period. The insurance industry was one of his top five industry donors with a total of $1,440,422, making AIG responsible for 15.5 percent of all insurance company donations to Dodd.

It's not surprising that Dodd has close ties to financial services as he's chair of the Senate's Banking, Housing, and Urban Affairs Committee. This is clearer when you add the total of campaign money received from 2003 to 2008 from securities and investments, insurance, and commercial banks: $6,588,012, or 73.7 percent of all campaign contributions to the senator.

It's not that the money comes directly from the companies, because that would violate election laws. However, 71% of the money comes from individuals; organizations like OpenSecrets.org collect the public information and then cross reference to find the totals. It seems pretty hard to believe that Dodd's own office wouldn't have made the same calculations.

Bankerss Living in World of Dreams

David Reilly in the Wall Street Journal wrote an interesting analysis of the banking system i which he argues that the institutions need as much of an overhaul as the auto industry.

The crisis, they have argued, is down to an impossible-to-predict perfect storm, predatory hedge funds, panicked investors, unrealistic accounting rules and economic changes that emerged so quickly there was no way to be prepared for them.

If only. The reality is the crisis is due to bad lending and investment decisions.

I agree, but would extend this a bit. Bad decisions caused the problem. The trigger was a series of events that stressed the business model enough that it crumbled.

The problem with the banks' explanation is that it effectively says, "If only things hadn't gone wrong, we'd have been fine." But nothing goes right forever. Bankers rode a long string of wins, and then kept pushing their luck. They didn't test extreme scenarios. That was heinously inept. As I've mentioned before, when you have events that are independent of each other, the probabilities of at least one happening add. Maybe some of these events aren't completely independent, but they're not completely dependent either. As the number of things that can go wrong increases, so are the chances that one of them will.

Executives who cannot grasp this simple fact and who keep telling themselves that everything will be fine are nothing more nor less than addicted gamblers. There is a reason that some financial institutions with a reputation for being overly conservative have lasted hundreds of years. They don't look for the short cut to profit.

Roiling Financial Regulation

Today's the day that Treasury Secretary Paulson publicly rolls out his plans, as I understand it, to turn the Federal Reserve into a super regulator of all things business and eliminate a number of independent agencies, including the Securities and Exchange Commission. Although I'm all for trying to have one set of regulations for a given industry - for example, have mortgage lenders responsible to one agency - I think that has natural limitations. At issue is two aspects of firms: how they interact with the global financial infrastructure, and how they interact with shareholders.

The two topics are really separate. If you are focused, by your nature, on the greatest efficiency for doing business, you aren't necessarily looking at the need to keep company shareholders informed and making corporate decisions as transparent to the investors as possible. Putting everything under one roof could be a conflict of interests, and one side or the other might be slighted. Even if you wanted to argue for the combination of the two areas, would doing it under the Fed really be that wise? The agency is semi-autonomous and doesn't directly answer to the government, even if it must keep everyone informed of what it does. I'm not sure that I'd want more extensive power over markets and financial activities regulated by such a body.