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The angry surrounding the approximately $165 million of bonuses that were due to be paid to executives of AIG on March 15 played itself out in Congress this week as the House of Representatives voted to impose punitive taxes on all AIG bonuses. If nothing else, the whole scandal over the AIG bonus has done nothing more than to widen the mental chasm between Wall Street, and their defenders, and main street.
As best as I can explain, here is why normal, working class people are angry or, inversely, why Wall Street and their defenders don’t get it.
Banking, as a friend who works in a bank said to me, is the perfect business model (insurance is often described as insurance without banking). Think about this for a second. I take your money for safe-keeping and I pay you a small fee to keep it BUT I also charge you money to keep it. Then I take YOUR money and lend it someone else and charge considerably more than what I am paying you. I make sure that when I lend money out, I receive enough collateral in return to recover all, if not most of my loan, if the borrower defaults so your money should be safe even if the loan defaults.
You really have to try hard to mess this business model up and, yet, the bankers messed it up.
On the other side of the ledger, we all drank the cool-aid collectively. We leveraged ourselves to the hilt, bought stupid products that these bankers who were trying so hard to mess up a perfect business model sold to us and never met a tax cut we didn’t like while demanding more services at the same time (see the now nearly bankrupt state of California as Exhibit A).
In what should be the most economically prosperous time in the history of humankind, we collectively mess that up too.
So the “mess up” score is now: Bankers 1, Main street 1 circa September 2008.
On the main street side, do you know what I hear after the mess up score is tied? Yes, we made stupid mistakes but we are adjusting and coping and moving on. We are down-sizing. Shedding staff. Interviewing new investment advisors. Taking more control of our money etc. etc. Is the spike in the savings rate to 5% not indicative of the fact that people are retrenching back to a more responsible lifestyle?
In other words, most people I meet have taken responsibility and have moved on. You have to remember that the world that the media lives in quotes the exception rather than the rule and the exceptions are the people not taking responsibility for their actions. Most people I know have and are adjusting- just that the media doesn’t interview normal people; they find the wailers (there will always be irresponsible people no matter what the economic climate so you can’t speak to someone who is always irresponsible and say they do not take responsibility for the subprime era actions since they never take responsibility at any time). In addition, most people are keeping a stiff upper lip and begrudgingly allowing their tax dollars to the economy whole again.
On the Wall Street side, do you know what we read? I need a “retention bonus” in a job market that has cratered for financial industry management. Keep bailing us out. We want legal immunity (the banks in ABCP restructuring). We’ll move our automotive plant out of country if you don’t do what we want (discounting years of government subsidies). We will not cut our union wages (even though that is part of the source of the problem). This wasn’t our fault- it was previous management/union heads/bad government decision/the general public/geo-political forces etc. etc.
So now the responsibility score is Bankers 0, Main Street 1 in March 2009.
Thus, when the AIG bonus first came to light, it made me feel like it was doing nothing more than reinforcing the responsibility deficit on the bankers’ part.
I look at it this way. You are employed in a large department for an equally large company with your boss having a lot of managerial discretion (i.e. little regulatory over-sight). You boss losses his/her marbles and starts making terrible decisions. But no one in the department actually calls the boss on it; instead, everyone begins to engage in equally terrible decision making. The department completely blows up and nearly puts the company into bankruptcy.
What happens? Employees are fired or disciplined. Pay freezes and budget cuts ensue to punish the department. But the boss stays and, not only does the boss stay, he/she decides to give himself/herself a raise and the company forces you to pay for the raise out of the pay cheque of the remaining employees (this part is not realistic but work with me for a second). Would that not entice a revolt in the company?
That to me is the AIG bonus issue in a nut-shell. Feel free to comment/rant as I just did.
Have a great weekend.
March 20th, 2009 at 7:22 am
Lost marbles? No repercussions? Sounds a lot like the place I work….. Maybe this is the new business mentality, I hope not.
March 20th, 2009 at 8:58 am
The vast majority of the people receiving these bonuses were not the people who made the decisions to make the investments. These are traders who implemented the strategies management laid down, accountants who tracked the positions and back office folks who made sure all of this was settled for the right amount and that all payment to and from AIG were made on time. These are people who are smart, hard working and talented individuals, most of whom could have jobs in other industries or companies. They are also the people most familiar with the AIG book of business so the ones most likely to be able to unwind these positions in a manner most likely to be friendly to the taxpayer (meaning paying them back). If these people left, you would have to pay large incentives to get smart people to come and try to figure out how to unwind the book of business. Ask yourself this…would you go to work for AIG right now without a big signing bonus? Not if you are any good and have any other options. The other alternative is you let these people attrite and you hire whoever will come work for AIG without a signing bonus (or a project completion bonus). You may get a few altruistic people who are willing to come and give it a go but the majority of the folks coming will be the castoffs who have no other options. Are these the people you want unwinding some of the most complex financial products ever invested on the taxpayers dime?
And what if AIG decided to not pay the bonuses and fire them as one congressman suggested? I suspect the breach of contract and wrongful termination lawsuits would cost the company way more than the bonuses they paid.
These are for the most part hard working Americans who have worked harder in the last year than most people do in their lives and deserve everything they received from AIG in the form of a “bonus”. What they do not deserve is the threats against their families, congress painting them out to be the destroyers of America and putting the whole recovery effort in jeopardy, the media (conventional and otherwise) hatred etc. etc. etc.
One last thought…Ed Liddy deserves a medal for doing what he is doing for a buck!
Sorry for the rant but this kind of thing really gets under my skin.
March 20th, 2009 at 9:03 am
From Twitter this morning…Credible ABC Source
GStephanopoulos AIG source says that 3 top financial products execs and several other officials resigned yesterday. Fear for safety given reason
Is this what hard work is supposed to get you?
March 20th, 2009 at 11:10 am
45free: On principal, I do not disagree that hard working people should be rewarded for their efforts and I do believe there is a lot of grand-standing by Congress to win political points when they could have simply passed a bailout bill indicating that they have to approve of all bonuses above a certain amount (and inserted provisions granting legal immunity to AIG et al to revoke a term of contract). But that presumes compotence by Congress (I agree that there were a lot of idiotic remarks made by Congress).
However, I separate the details of the bonuses with the reaction of Congress and the idiots who are threatening the executives with violence.
The details of the bonuses are pretty galling:
The New York Post reports 70% of the bonus money went to the company and not the employees. The remaining 30% went to the employees of the Financial Products Division which got AIG into this mess.
http://dealbook.blogs.nytimes.com/2009/03/18/dissecting-the-aig-bonus-contract/
The bonus contract is in the link. I believe the bonus in question relates to employment from Dec 1, 2007 to Nov. 30, 2008- the period of time when AIG imploded. From what I can tell, there are not even any performance standards for receiving a bonus- it is “guaranteed”.
The New York AG reports that 11 employees who were paid retention bonuses of over $1 million are no longer with the company (most employment contracts state that bonuses are not payable if you resign or are terminated before the bonus payment date). The Guardian has reported that some of this bonus money is going to non-Americans (which would not typically be an issue but for the fact it is the American taxpayer paying this). Should these bonuses not be clawed back at the very least?
I don’t have an issue with the back-office people being paid bonuses; they are realy collateral damage to this entire saga (and there is a 2nd bonus period from Dec. 1, 2008 to Nov. 30, 2009 which would recognize their efforts to unwinding the positions). I do have issue with the decision makers who decided to execute the traders. You have to remember that AIG ended up dominating the market for credit default swap insurance so this was not exactly a one person decision given the scale that they went into these types of products.
My essential issue is that AIG is basically a crown corporation now. It is 80% owned by the U.S. Government. If the Minister of Finance brought down a terrible budget and then announced the Ministry was paying the bureaucrats a bonus after that announcement, would you not be peeved?
Do the AIG employees deserve to be made out to be the sole villians in this drama? Of course not. I do not for a second support how Congress has played this (which, is really a way for them to fuel popularist angry and divert attention away from the fact they mismanaged the bailout bill so badly). This has been managed extremely poorly but both AIG and Congress.
But, stripped of the rhetoric, do I fundementally believe the Financial Products Division deserve this bonus based on the first bonus period stated in their contracts?
No.
Thanks for your comment. Rant away any time.
March 20th, 2009 at 12:45 pm
I do not see where in your link 70% of the bonus went to the company. What I see is a payout comparison to hedge funds that is not the same as the company keeping 70% of the bonus. Whether or not the FPG imploded or not, the fact still remains that these were not the decision makers that put AIG on the path to failure and they should be rewarded for sticking around to work it out. These bonuses, as described by Ed Liddy, were for specific and satisfactory performance of certain tasks (i.e. liquidating a portfolio). Once completed, these employees completed their contractual obligations to receive the bonus and were free to go, which is why there were 11 individuals who left. This type of arrangement is not uncommon in business. I have in the past received “stay bonuses” for agreeing to remain on a particular job instead of moving to another within the same company in order to facilitate the completion of a project. There is really no difference between this common business tool and what happened at AIG. Retention/project completion bonuses are very effective tools for ensuring that organizational knowledge remains in a corporation. You can be disgusted with AIG for behaving in a fashion that led to this but these people are trying to do the right thing for the most part and deserve to be rewarded for it.
As for your comment about allowing AIG immunity to void clauses of contracts, while I am by no means a constitutional scholar (not even a lawyer for that matter) I suspect that type of arrangement would I suspect be covered by the same constitutional clause expected to be used to challenge the 90% tax which states that congress can not pass laws that impact previous arrangements (obviously the legal guys on CNBC say it with much more authority). And as Ed Liddy argues, AIG is in the business or honoring contracts…
I appreciate the differing point of view and understand the frustration of many people but the anger is in my mind mis-directed. Let’s start with congress that failed to regulate the industries appropriately, move on to the CEO’s who used holes in the rules to lever up balance sheets with exotic instruments, move next to the rating agencies who showed absolutely no professionalism in the process and let’s not forget all the end users of the process who borrowed 105% of the value of their house with the expectation that real estate always goes up and then bought a Hummer on their Visa. Plenty of blame to go around here but it all seems to be directed at FI’s in general and people like these AIG employees specifically.
March 24th, 2009 at 1:25 am
So much for concisely summarizing the “issue in a nut-shell”
There are clearly different opinions. Without the taxpayer bailout, would any bonuses have been payable? If not, why use taxpayer money to pay bonuses?
Marilyn Barnewall has an interesting article: http://www.newswithviews.com/Barnewall/marilyn101.htm
Seth Godin has interesting thoughts too: “… if you’re owned by shareholders or bailed out by taxpayers, wasting trillions of dollars because you don’t have the guts to market your jobs properly is silly.” (see http://sethgodin.typepad.com/seths_blog/2009/03/the-myth-of-big-salaries-its-all-marketing.html)
March 28th, 2009 at 10:10 pm
Check out this cartoon about AIG!
http://pastexpiry.blogspot.com/2009/03/cartoon-aig-adventures-in-greed.html
*CARTOON*
April 5th, 2009 at 11:24 pm
After the government gave AIG bailout money, they should have used ownership rights and cancelled all performance bonuses and laid off the executives who have done nothing but run the company to ground. It is insane how AIG justified their action and rewarded failure. At the end of the day, it’s the US taxpayer that is getting screwed left and right. How come nobody is thinking about bailing out the middle class that is losing jobs and homes?