William Black, now a professor of economics and law at the University of Missouri (Kansas City) was a senior bank regulator during the savings loan crisis (his claim to fame was his pursuit of Charles Keating of Lincoln Savings, in which he was removed from the initiative and more management friendly investigators were assigned, and events later proved Black correct). Black has seen a lot of bad behavior at close range.

He is not at all impressed with how the Treasury has handled AIG. Via e-mail:

This is the consequence of six things on the Treasury end of things: (1) the failure to use Chapter 11 bankruptcy/pass-through receivership to deal with deeply insolvent financial institutions (2) the failure to expose, and to the extent possible, remedy through restatements the massive accounting fraud that AIG was/is engaged in that triggers the bonuses (3) the failure to bring criminal charges against the control frauds (4) the failure of Treasury as negotiators — they had all the leverage when they bailed out AIG and could have conditioned the aid on at least the VP tier and above giving up their bonuses (5) the weakness of Treasury’s current lawyers who, if press reports are accurate, couldn’t think of any way for the U.S. government to take effective action against what it reportedly views as a scandal, (6) (and I haven’t seen this discussed) why was Treasury blind-sided by this? It confirms that they did not conduct even the most obvious due diligence on AIG’s assets and contingent liabilities Given what we know about the lack of due diligence by AIG on underlying assets, particularly nonprime paper, this confirms exactly how dangerous Treasury is to the the nation. It is also consistent with the concern that it faces such a critical staff shortage, particulary in the relevant skills (which the folks it hires from Wall Street lack). I doubt that they have five senior officials that have ever reviewed loan files for a living or conducted meaningful due diligence (which requires cracking the loan files). On the AIG end we see the perverse incentives of keeping the senior level folks on that caused the crisis. They have every incentive not to be honest about the true extent of the losses. They know the place is dead (hopelessly insolvent) and have strong incentives to loot the corpse, e.g., through bonuses. They do not alert Treasury sufficiently in advance even to bonuses that they should know will be perceived as scandalous (though another problem with keeping these failed elites in power is that they are clueless about the reaction of normal people). They do not work to limit bonuses, e.g., by being honest about past accounting fraud. I believe when the facts come out that we will find that they did not make criminal referrals on the prior senior officials that led AIG’s accounting fraud (which would have given AIG and the Treasury a far stronger legal basis for refusing to pay bonuses that were “earned” via accounting control fraud. I don’t oppose bonuses that are actually earned through long term performance. That is not the case with the AIG bonuses. We can offer well designed performance pay if we use bankruptcy or receiverships.

We see tonight another lame defense that the Treasury is trying really hard to claw back the bonuses. Please. Even if Treasury consulted outside counsel, I would strongly suspect it would be a large firm with a big corporate clientele.

Guess what? At those firms, HR is a backwater. The best HR lawyers are typically at boutiques or solo operators because they sue large corporations (that would represent a rather insurmountable conflict of interest for any firm seeking to represent those nice big meal ticket clients). I’m not current, but a decade ago, there was a woman lawyer (I cannot recall her name to save my life) who was an absolute killer, When a wronged executive or employee walked in with her at their side, BIg Co. knew they had a very serious problem on their hands. I am told by people who used her she was also a phenomenal negotiator on deals. It’s certain that Treasury did not attempt to secure advice from that sort of attorney.

And to Black’s point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5×7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity.