From the NY Times – Obama Orders Treasury Chief to Try to Block A.I.G. Bonuses

In strongly-worded remarks delivered in the White House East Room before small business owners, Mr. Obama called A.I.G. “a corporation that finds itself in financial distress due to recklessness and greed.”

“Under these circumstances, it’s hard to understand how derivative traders at A.I.G. warranted any bonuses at all, much less $165 million in extra pay,” Mr. Obama said. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”

I don’t have all of the details, but I think a much better question would be.  When the government gave all of this money to A.I.G. time, and time again, did they ever think of putting conditions on it that restrict bonus payouts?  If not, then get over it.  These employees of the firm have a compensation package that includes bonus payout.  In many cases, their base pay is likely lowered to reflect this bonus payment.

All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses,” said Mr. Obama, who called the issue one of “fundamental values.”

“All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules,” he said.

A.I.G. entered into contracts with its employees.  These contracts entitle the employees to bonus payouts based upon conditions.  The conditions may have been wrong, and they may not be deserving based upon your criteria, but that does not change the contract.  That is the rule we are all playing by – the law.

A.I.G. executives say that they are contractually obligated to pay the bonuses to their executives, including those who are part of the A.I.G. division where the company’s crisis originated.

The government’s rescue of the insurer began last fall with the Federal Reserve’s $85 billion emergency loan. The taxpayer assistance has now grown to $170 billion, and the government owns nearly 80 percent of the company. On Sunday, the company disclosed the names of dozens of financial institutions that benefited from the bailout money injected into A.I.G. that the insurer then paid out to satisfy financial contracts.

This sort of lunacy is the reason moral hazard is continually discussed.  President Obama, get out of A.I.G., Bank of America and Citi.  If these institutions are insolvent, then assist with an orderly bankruptcy , nothing more.  We cannot have shell companies that are forced to operate with political pressure on every move.

Let the markets work.  For the sake of our country.  Quit meddling with these organizations, quit forcing money down their throats and then expecting them to act differently.

Trading in this market is extremely difficult.  I’ve been fortunate enough to make a nice return so far, however I’ve made more mistakes than I care to admit.

For example, just this morning I committed a super blunder… Over the weekend, Citigroup received a huge bailout package and the market responded this morning.  I figured this was a situation that could be scalped, and decided to go ahead and do that. 

To scalp this move, I did two things… 1 purchase a bunch of Calls on the DJX, and a bunch of Calls on C.  First move, smart, second move stupid.

Why was buying calls on the DJX smart… Well, because I trade indexes… I tend to have a MUCH better feel for the overall market disposition, and I do much better when trading indexes or larger sectors.  I tend to lose lots of money when playing a single stock.  So, back to C… I bought those calls at about the high of C for the day, so I’m long a ton of C 7.5 Dec Calls that will be worth next to nothing soon enough…

Now, for the stupid part of the DJX trade.  Rather than setup a contingent stop on the trade and allow it to ride the market movement up, I simply set the trade to close out as soon as the SPY hit a daily retracement level.  This was just silly.  If the market retraces, fine, that is what a stop order is for.  Instead of properly using a stop to close it out, I simply put in an automatic order based on the price action of SPY and closed it out WAY early.  If I’d have simply kept it open, there was another 1.5 on EACH contract during the day.  This wasn’t exactly a small position, so $150 X a bunch = a lot of money left on the table.

Now, to get really, really stupid.  I’m still long a truck load of C calls, and now a bunch of DJX PUTS! So, I’m betting against myself…. you might make a case for hedged, but it seems like a bet against myself to me… And better yet, I’M ON A PLANE ALL DAY TOMORROW!

So, what to do… Well, I’m going to properly set up some Contigent Stops on each of these positions before the open tomorrow.  I will set these up as One Cancel’s Other orders on the TOS platform.  The Stop will be contingent on the price action of the underlying equities, they will drop in based on price action.  Then, I’ll have contigent Trailing Stops that will drop in based upon price action as well.  If the prices move in my favor, the trailing stop will drop in to protect my earnings, while the initial stop will protect my downside exposure.

If things work out nicely, I’ll capture quite a bit of premium… However, it all depends on the price action.