Anyone want to talk about the AIG bonus situation?
A few thoughts to start things off:
1)Clearly, AIG has been terribly mismanaged. And the U.S. financial sector as a whole has become too large, in terms of its total size–including employment and employee compensation–relative to the economy as a whole.
2)The fact that a company has been mismanaged does not necessarily imply that everyone in it has done a bad job. Almost certainly, there are people in the bonus pool at AIG who have successfully achieved their individual goals, regardless of the failures of top management.
3)Bonus plans, in my experience, generally have two components: success of the individual in meeting his own goals, and overall success of the business. (“Business” does not necessarily mean the corporation as a whole–for example, an engineering manager at GE Transportation might be bonused based more on the results of the Transportation business than the whole company.) In general, it makes sense for the proportion of the bonus tied to overall business results to go up with the individual’s organizational level. It appears that there wasn’t much tie to the overall results for the people in the AIG pool being discussed.
4)Bonus plans are usually a part of an individual’s compensation package and, as such, are legally enforceable contracts. I believe that in some states, failure by a company to pay compensation that is owed can result in additional damages, above and beyond the payments themselves.
5)If you are an owner or a part-owner in a business, it behooves you to pay appropriately to attract and keep the people you need. Suppose the U.S. Government, for some strange reason, became majority shareholder of a fashion business. Would it make sense to drive the designers away by cutting their compensation to a level below that which they could get elsewhere? What if the government owned a Hollywood studio? Would we be *more* or *less* likely to get our money back if we required that the actors, directors, and screenwriters all be paid at Civil Service levels.
6)The U.S. Consitution explicitly forbids bills of attainder and ex post facto laws. Some of the proposals floating around in Congress have elements of both.
7)Sen Charles Grassley suggested that senior executive of failing financial companies might want to consider killing themselves. I wonder how he would feel about a similar suggestion for legislators who support legislation that turns out, in retrospect, to have been a very bad idea.
8)Many “progressive” Congresspeople, along with professors and media types, have spoken endlessly about the need for “nuance” and “shades of gray” when dealing with terrorism. In the eyes of these individuals, apparently nuance and shades of gray are appropriate when dealing with people who fly airplanes into buildings, set off bombs in pizza parlors, and bash out the brains of children in front of their parents–but when it comes to American business people, only the highest-contrast black-and-white will do.
9)The atmosphere being created by Congress and the Administration–and by much of the media–has a lynch-mob tone to it which is very disturbing. Don’t be so sure that this treatment will be limited only to highly-compensated people in one particular industry. The guillotines of the French Revolution started with the aristocrats, but did not stop with them.
Congress’ feigned outrage over “bonuses” to AIG employees is like a three card monte game. The real purpose is distract the spectators while the card players confederates pick their pockets. AIG was a conduit for over $170 billion to its counter-parties like Goldman Sachs. The “bonuses” were 1/10th of 1% of that amount, and what is worse, 1/100th of 1% of the $1.5 trillion that Congress has appropriated since Jan 20. The spectators are the taxpayers. The three card monte players are the politicians.
If you don’t know who the mark is, it is you.
My immediate response is emotional, which, of course, is almost always problematic.
And my emotion is….
…the sinking feeling that our Technocratic Elite uniformly suckz. Private and public sector, both. It’s the same geniuses from the same genius schools thinking the same genius thoughts, isn’t it?
*Okay, that’s not fair at all, but as I said it was an emotional response. A crisis in governance, whether it be the private or public sector (at least the private sector does useful stuff, though, that the difference.)
It is just a political deflection from the real culpits: the political class which does not know how to manage, the politicians that approved the AIG bonuses in a law they signed without reading and the poor outcome of a bailout that should have never ocurred.
It’s very common in the software industry to pay bonus to programmers when a company is bought out. One would think that the people who failed to write good software would be the first on the chopping block but in reality only they understand the code base enough to work with it. The really good programers will bail from a failing company because they can find work anywhere. The new owners have to cough up to keep the necessary talent.
The situation applies to AIG. They must have large numbers of analyst and number crunchers who understand the company’s business but who had no key decision making authority. Indeed, these people would have been fired a year ago. It makes sense to retain the technical people who understand AIG’s equivalent of its code base.
I certainly don’t think the Republicans did themselves any credit by pouncing on this as they did (even if they have walked back). Now the Democrats have the bit in their teeth and seem to be looking for other targets.
Beating up on rich people is always popular and always dangerous. Bailed out companies are going to find it hard to hire technical talent and other companies are not going to want to accept future bail outs due to fear their talent will be gutted.
Onparkstreet…a somewhat similar viewpoint here.
The main thing I ask of my government is that it enforce laws that make for a productive society – and the thing I fear most is a society in which the government doesn’t restrain the mob but reinforces it. Farmers in Zimbabwe, for instance, have found out the importance of the rule of law. The current group seems to think that laws are meant to be bent – whether it is Geithner thinking tax laws don’t apply to him or that signed contracts can be taxed into oblivion. I don’t like my retirement funds disappearing, but that doesn’t bother me nearly as much as the kind of society in which Cuomo’s and Grasso’s and, perhaps most unbelievable Barney Frank’s, self-righteousness is given the tools of our government to extend and enforce their vulgar, vicious mob-oriented wills. This passion over the bonuses does, indeed, seem to be the guy kicking his dog after a bad day at the office. These are not the acts of grown ups. (And of course I see the bonuses as representative of the general lack of oversight, silliness, hypocrisy, etc. that we’ve seen for the last few months.)
The bonuses are purely symbolic.
Having said that, it’s entirely predictable that the same people now making noises about the sanctity of contract – the WSJ opinion page – are the same people who have no problem tearing up contracts when the beneficiaries are working class stiffs like union workers.
And all distraction, All the parts of The Won’s agenda that the market hated is still out there – from having Vets pay for medical care for combat related injuries to the Carbon “Offset” – listen carefully to Mr. Summers, this is not considered a tax. Yet we are all focusing on the small stuff. The MSM is still bitterly clinging to the big 0. Any minute now he will wave his magic wand and everything will be okay, if we can only keep the mob occupied until the agenda passes.
SeanF,
Having said that, it’s entirely predictable that the same people now making noises about the sanctity of contract – the WSJ opinion page – are the same people who have no problem tearing up contracts when the beneficiaries are working class stiffs like union workers.
Well, let’s see what could be different.
(1) The AIG bonuses are targeted at people with knowledge and skill particular to AIG. Union benefits go to people who buy their own admission could be easily replaced without the Union.
(2) The AIG bonuses are a trivial part of the company’s budget. The labor cost forced on companies such as the steel and auto industries comprise the majority of their production cost. In such industries, the entire top 10% of the executives could work for free without making a dent in the cost structure. If such companies don’t restructure their labor cost, they’re just dead.
(3) Most importantly, the AIG bonuses are the result of people voluntarily negotiating between themselves without one side threatening to use violence if they don’t get what they want. Union contracts by contrast are the results of outright violence (in the not so old days) as well as the implicit violence of the government enforced labor monopoly. Business must eventually give into union demands or go out of business. If they refuse to deal with the union, they lose their businesses and go to prison.
Contracts negotiated under duress are not morally binding. Since the government granted the unions a monopoly on providing labor for specific businesses the government can undo the contracts it forced people to sign.
Is it ever possible to use the expression “working class stiffs” unsanctimoniously? Sean, you’ve got to sharpen up your rhetoric – or give it up.
Sanctimonious or not, it’s how I feel KJ. My sympathies are not with the executives.
Here’s something interesting – an explanation of why people feel the need to punish the AIG executives despite such a desire being, perhaps, irrational.
“Myriad experiments in behavioral economics have found that people are willing to pay to punish members of a group whom they believe to be shirkers or free-riders. In other words, people are willing to make themselves worse off (they have to pay their own money) in order to ensure that others don’t get undeserved rewards. Economists call this “altruistic punishment” (because the punishers are putting the interests of the group ahead of their own interest), and argue that it played an important role in fostering cooperation. So even if people believed that getting the A.I.G. bonuses back would be a net loss for the economy, chances are they’d still want to do it.”
http://www.newyorker.com/online/blogs/jamessurowiecki/2009/03/the-aig-bonuses.html
seanf…union contracts can only be “torn up” either:
a)with the consent of the union, which would normally require a majority vote of their members, or
b)as part of a bankruptcy proceeding
I have never heard anyone propose that the government should *require* the workers of GM/Ford/Chrysler to accept a pay cut and/or to repay a portion of their wages over the last year. Nor would such a requirement be legal.
The government *could*, however, require contract changes to be agreed to as a condition of aid to these companies. They could have done the same for the 10 or so senior executives of AIG…ie, a small enough group that unanimous agreement could feasibly be sought, which is *not* feasible for 1000 or so AIG bonus recipients. (Contracts with the AIG people being on an individual basis, as opposed to a collective entity such as a union)
Sometimes it is obvious who deserves the title “shirker,” more often not. Then “undeserved rewards” and “working class stiff” arise. Squichy definitions lead to bad policy as does an already irrational position.
I think these guys should pay their bonuses back; I think the Democrats who got huge amounts from AIG should figure the interest, add it, pay it back. I’m not wishing for suicide, but humility, reimbursements and resignations would be appropriate. It would be nice to house Dodd & Franks (& God knows who else) with the honchos at Fanny & Freddy in a very small, 6-flight walk up somewhere.
But, you know, there are a lot of things I’d like and that I don’t think it is the government’s job to enforce.
David,
Those are but two grounds – there are many others. One of grounds to invalidate a contract is asymmetry in bargaining power. The reason we have union contracts in the first place is that lower-paid fungible workers have very little individual bargaining power.
Here, the WSJ opinion-page had the bright idea that the government and GM auto excecs should threaten bankruptcy and use the threat to tear up the union contracts. I don’t have a link but here is the NYT’s Sorkin with the same blinding flash of genius:
http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?pagewanted=all
Of course, that threat wouldn’t work with the AIG execs anyway, some of who have already left. Threats work only against the kind of people who need to stay employed, not the kind who collect multi-million dollar bonuses for screwing up spectacularly.
I’m a little snarkier than usual but having one set of standards for the powerful and another for the not-so-powerful really irritates me. It’s one of the reasons my politics tend to the left (although, I’m sure it irritates a lot of those on the right as well).
The bonus situation is trivial compared to the risk that AIG exposed taxpayers to. This Oct 3rd piece by Porter Stansberry summed it up well.
http://www.dailywealth.com/archive/2008/oct/2008_oct_04.asp
Long years ago, when I was a liberal, I read an infuriating book called “Up From Liberalism”. Liberals, Buckley said, start with a sentimental predisposition toward such folks as “Working stiffs” (and, remember, that’s the idiom, Sean, though your inserting of “class” sort of says something about the way you come at these things). They’re driven by a righteous feeling of outrage on behalf of folks that few of them actually know. Logic and argument aren’t prized for their own sakes but only as instruments in support of the faith. An appreciation of irony, complexity and the doctrine of unintended consequences – that’s for unbelievers. In the end it comes down to whether you’re on the side of the angels….
That book infuritated me no end. I had imagined I was thinking bravely and freshly and out of a pure heart. Buckley’s taunt – that a complacent and stale piety was the core of my faith – stung. Time passed. The book held up better than the Great Society.
Well I wish I were getting an AIG bonus. If I were a culpable executive I’d say “give me my money”; If I had preformed brilliantly for the company I’d say “give me my money”. In either case I’d tell the hypocritical, and often, disgusting members of congress (btw, what’s up with Massachusetts?) to sue me if they wanted it. If I were an AIG shareholder I might be upset.
Now, if I were a U. S. voter who looks to congress for oversight,
wisdom (or just common sense) I’d be saying “why did you make a deal that included the bonuses?”. I might be upset. “Shell game” is about right.
BTW David, I’ve often wondered how much the killing and exiling of, generally, the most capable people during the French Revolution allowed for the promotion of Napoleon on a fast track.
No one has every said what these AIG people did to earn their bonuses. Because the bonuses were paid to members of the trading division I suspect it had something to do with trading billions of dollars and either earning billions or preventing losses in the billions.
AIG is a perfectly healthy company that simply doesn’t meet the requirements of Sarbanes-Oxley (SOx). [SOx is the chemical formula for a very corrosive, very poisonous gas]. If SOx was repealed the economy would recover. The current depression is exists only because Obama says it exists. (proof available, with citations, if requested)
“7) Sen Charles Grassley suggested that senior executive of failing financial companies might want to consider killing themselves. I wonder how he would feel about a similar suggestion for legislators who support legislation that turns out, in retrospect, to have been a very bad idea.”
This is called “assassination”. If the legislator is a non-white male, it is a “hate crime” , unless the legislator is a Republican (the Sarah Palin Exception).
“Having said that, it’s entirely predictable that the same people now making noises about the sanctity of contract – the WSJ opinion page – are the same people who have no problem tearing up contracts when the beneficiaries are working class stiffs like union workers.”
SEANF
The union contract torn up is for future pay. The current AIG law takes back money which has been paid and which may have been spent. Everyone reading this blog would oppose any law that required UAW union workers to give back 100% of the wages they were paid in 2008-2009 or face a 100% income tax. It’s the difference between apples and rotten fish. You know this SEANF. Why do you make crazy statements you know are untrue? Who benefits? In America, if you don’t like what you are paid you quit and take a better paying job. “Stiffs” are people who are too inflexible to get a better job.
The problem with AIG is they’ve committed a form of theft in a huge way. They were never able to pay off the 450 billion of CDS they wrote if markets declined, yet accepted the premiums and paid themselves bonuses based on them for years. This sort of uncollaterized trading would never be allowed on, say, futures and options exchanges – if it were then the firm that wrote the most puts would soon dominate everyone, until the ultimate decline came and that firm took down everyone. AIG essentially did this. Because we can’t afford for AIG to take down everyone by not paying on their CDS the taxpayers must pay off the contracts.
The incentives meant this disaster was inevitable. AIG got to post profits/pay bonuses each year they sold more CDS. Wallstreet got to turn crappy mortgage bonds into triple A rated securities and continue to maket their spread. Both sides got rich on the trade for years, and most of the premiums were paid to the firms as compensation. Why would either stop? Yet the profits weren’t real – they essentially transfered future losses (to be paid by taxpayers) to their current year’s P&L.
Going back to the exchange analogy, the same thing could happen at an exchange if they didn’t have the authority to enforce margin requirements. No one played this role for AIG. It was a massive regulatory failure, and the disaster was invevitable.
Folks: Keep your eye on the ball. While you are crawling around on your hands and knees looking for pennies, Congress has picked up T$s (i.e. tera-dollars as in units of a trillion (10^12) dollars) and is preparing to make a bonfire with them.
“U.S. Federal Deficit Soars Past Previous Estimates” by Lori Montgomery, Washington Post Staff Writer on Friday, March 20, 2009:
P.S. do not take seanf as an authority on contract law.
Not-so-random thoughts:
-AIG’s writing of CDSs seems irresponsible in retrospect. Maybe it was irresponsible.
-AIG might not have been liable to pay off the CDSs they wrote if the mortgage market hadn’t imploded. That doesn’t mean they should have written those CDSs, it means that they shouldn’t be blamed for the entire mortgage-market problem.
-The mortgage market might not have imploded if Fannie Mae had not existed, or if it had been run honestly, like a private company.
-The people running AIG now aren’t the same people who irresponsibly wrote all of those CDSs.
-Obama and the Congress knew and approved of AIG’s bonuses long before they objected to them. They began objecting because the phony Rush Limbaugh controversy had expired, and they needed a new phony controversy to distract attention from their own corruption and incompetence.
-The people whom Congress is trying to punish now are the people at AIG who stuck around and are public-spiritedly trying to clean up the mess. That’ll teach ’em.
-Wade’s comment above is what a reasonable, thoughtful finance person would say. It seems obvious that no privately run company in this country is ever again going to write a lot of unsecured CDSs or similar derivatives. IOW, the problem has been solved by negative feedback brought on by the behavior in question, just at the Enron problem was solved quickly in 2002 by share-price losses in companies that were perceived to be corruptly governed. The subsequent SarBox legislation did nothing good and has had huge costs, and the same will be true of any legislation coming out of the current debacle.
-Requiring that credit derivatives be traded on exchanges rather than OTC is not necessary IMO, but it would be an OK outcome, certainly much better than most of the legislation and regulation that we may suffer.
-The Chicago Mercantile Exchange could be the big winner here.
Seanf always promises that this is the last jelly bean he will eat. Addicted to this blog, eh?