What AIG’s DeSantis Forgot to Mention
Some give Jake DeSantis a standing ovation for his public resignation from AIG with an Op-Ed in yesterday’s New York Times, others dismiss DeSantis as a rich whiner, this morning’s NY Daily News, which gets some nice details. For one, DeSatnis lives in Mark Twain’s old Connecticut house, to which he invites urban kids to play and experience the country – a kind act, I suppose, unless like Tom Sawyer, he convinces those kids to paint his fence.
The real insight comes from the Journal’s Peter A McKay, who (online at least) points out the obvious - that while DeSantis may have not crafted mortgage derivatives, he was involved in another bubble largely forgotten now – the commodities bubble. DeSantis is a 10-year veteran of AIG’s commodity and energy business where, at least according to his Linked In profile, he was responsible for commodity derivatives. Why did his unit make well over $100 million in profits in recent years, as he noted in his resignation letter? Because AIG was helping hedge funds speculate in energy and food futures, helping double the Dow Jones/AIG Commodity Index from 2003 to early 2008 and gasoline to $4 a gallon last year.
Now, let’s avoid over vilification of DeSantis. It’s okay for speculators to bet on whether commodities will rise or fall – it’s part of the market. But this guy is no innocent. By crafting commodity derivatives, he helped leverage the already massive buying and selling power of hedge funds even more, leading to the huge price swings in oil, gas, corn and most everything else we saw. He had his own bubble he helped create and got rich from.
A couple of other things DeSantis didn’t mention. The AIG commodities business is now being sold to UBS. Odds are, DeSantis was out the door once the ink dried on the deal. One possible reason: DeSantis had previously been a UBS trader before leaving to AIG and there could be bad blood there (I don’t know, but there often is).
But if that didn’t get him, the new risk-averse world of UBS would have. UBS, some Wall Street execs believe, was the start of the mortgage derivatives meltdown, because a year or so ago they decided to actually see in the open market how much money their derivatives would fetch.It turned out to be less than 50 cents on the dollar, which eventually led to everyone realizing their were worth way less too. UBS isn’t looking kindly on guys who craft derivatives for a living right now.
But the real reason I think DeSantis quit? UBS has overhauled its compensation structure, cutting its bonus pool by 80 percent to focus largely on salaries, and bringing banker compensation in line with other professionals there, like consultants. The new structure caps top bankers’ pay at $429,000. That’s $350,000 less than DeSantis’ after tax AIG bonus.
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Interesting background on DeSantis, the commodities trader. The credit market bubble has erased most people’s memories of the speculation that ratcheted up oil prices last year. But that doesn’t change my view of him all that much. You need a skilled trader to limit taxpayer losses. Goldilocks doesn’t fill the bill. Assuming DeSantis did a good job (which may be a stretch), the taxpayer loses out. I think of it this way: Joseph Kennedy was the first chairman of the SEC because he was the biggest baddest wolf in the forest. Can you imagine what the press would write about him today? AIG could and should have negotiated better “retention” packages. But it didn’t.Time to move on.
One other thought: I don’t think it’s all that useful to speculate about the relationship between DeSantis and UBS. So what if he left on bad terms? Further, what are the odds that the same people he worked with at UBS are still there more than a decade later? Many people don’t want to work for UBS now. But you could also speculate that’s because of all its unsavory banking relationships. The Swiss are no angels. It’s just too many “maybe’s” for me.
To me, the moral hazard of letting the foxes try and secure the hen house takes precedence. If Wall Street firms think they won’t be allowed to fail, and the traders believe they’ll still get massive paydays no matter what they do, we’re all fools if we think this won’t happen again – heck, just 10 years ago Long Term Capital Management almost did the same thing to the economy that’s happened now and it did nothing to divert greater risk taking by the Street.
My ultimate point with DeSantis is this: he was going to lose his job anyway, b/c his division is being sold. He wants to keep his bonus, so he went out holier than thou. It doesn’t mean he’s a bad guy, or Wall Streeters are (one of my brothers is a trader, another was a long-time derivatives trader), but I just don’t believe his cries of persecution
But if we’re all okay with auto workers having to get their contracts renegotiated by government fiat -as it seems to be judging by the lack of uproar over that – then why not traders?
You’re right. Companies headed into bankruptcy, or nearing bankruptcy, should be putting everything on the table for re-negotiation. And there are stories out there of companies taking steps to preserve jobs by trimming hours for some or extending vacations, etc., etc. I think the key word here is negotiation versus cramdown. Or Congress getting together to tax away your earnings.
No one learned anything from the LTCM fiasco — which is no surprise. Someone recently sent me a seven-year-old speech by Paul Volcker, just around the time of the dot.com bust. I thought he had just written it: Volcker bemoaned how no matter what the Fed does to keep risk under control, bankers try to tiptoe around the strictures. And so it goes.