At any rate, Burke is one of my favorite bloggers, particularly when he writes about academia. His prose is dense, nuanced, and extraordinarily enlightening about the institutional difficulties of creating a perfect university.
I hope he will forgive me for saying that I think he, along with a whole lot of other bloggers, are making a common mistake that conservatives do when they talk about academia.
Burke, like most of the academics I know personally, is aware of the deep problems in academia. (That's not a slam on academia; most institutions have deep problems, and the older the institutions are, the deeper the problems often run). Conservatives critiquing academia do have a point: the culture is nearly monolothic on a lot of issues, and that can't help but chill discourse. Where they are wrong is with the cartoon diagnosis of both the problem and the solution.
Conservatives tend to paint academia as a conspiracy of the smug. What Burke illustrates so well is that academia's problems are both smaller and larger than this: when it fails, it often does so in the ways that all organizations fail to make themselves socially optimal for either their members, or the society to which they belong. Groupthink, self-perpetuating institutional world-views, self-dealing by insiders, and so on, are not problems of academia; they are problems of humanity. And many of the disagreements are on values questions that don't actually have an answer, like whether a college education is properly vocational or aspirational, or whether George Washington or George Eliot were more important human beings to learn about.
I think what Burke's posts show so well is simply that constructing truth, and passing it on, is hard. When academia fails, it doesn't fail because lefties have gleefully seized the precious mind-control machine; it fails because the task is difficult, failure is often hard to detect until too late, and institutions are never perfect. One can argue that the institutional structure of academia makes it particularly difficult to change when it is failing its constituents, but that's not a cause for anger; it's just a fact of institutions. Yet conservatives have too often made this a battle against villains instead of a discussion of institutional reform. They are far too willing to hurl accusations of active malice, or at least, excessive greed for power over young minds. (To be sure, liberals have often been willing to hurl those sorts of accusations right back). And those who make blithe assumptions that it would all be perfectly easy if only they, the good guys, were in charge, can be profoundly irritating, not to mention wrong-headed.
So I'm distressed to see Tim Burke, of all people, making these kinds of statements about AIG:
Considering that the 11-year veteran executive VP says that he's not at all accountable for AIGFP's losses because he wasn't involved at all in the CDS trading and knew nothing about it, maybe the 26-year old MBA might do a fair enough job.
Really? Really, maybe a 26-year-old MBA might do an okay job of liquidating the financial products division of the world's largest insurance company? I was a 28 year old MBA from (she noted modestly) one of the top finance programs in the country, and let me assure you that there is not the faintest whiff of a possibility that I or any of my classmates could have done an adequate job. We would have cost the taxpayer billions.
Among the necessary assets we would have lacked: 1) adequate skill to maintain the company's portfolio trading strategy in a really screwed up market until they could be wound down 2) contacts in other firms who could buy either our securities, or our line of business 3) experience in executing trades so that they make, rather than lose, money 4) knowledge about current market conditions 5) experience with complicated transactions.
This kind of hyperbolic speculation about an industry which he, respectfully, knows nothing about, is the exact opposite of how thoughtfully he approaches the institutional problems of his own industry.
What I find really worrying is that neither he, nor most of the other normally thoughtful commenters making these kinds of statements, appear to give any credence at all to the possibility that this just might be really, really hard--that it simply might not be a matter of throwing a lot of well-meaning guys in there to replace the jerks currently running the place, and by applying the cleansing forces of American middle class values and good old fashioned common sense, make everything all right again.
Would Burke take seriously critics who suggested that his course might be just as well be taught by a freshly minted BA--who would, no doubt, be glad to do it for his salary even without tenure. Or folks who repeated that it just can't be that hard to do historical research, and pointed to their nice neighbor who's working at the village historical society for free?
As I see it, the problems of academia and the problems of financial system reform are very closely related in one important way: the people who understand them best are often those with the most to lose from change. This makes reform difficult and frustrating for those outside who see the real problems inherent in both systems. The true and valid answer that people like Tim Burke offer to critics is that while academia has problems, there is often no clear and easy fix, and that for all the issues, the system as a whole is really valuable. That answer can be self-serving without being untrue.
And I think the same is probably true for finance--indeed, for almost everything. I tend to assume, as a first principle, that most things are probably a lot harder to do than they seem to those who are offering advice from the metaphorical back seat. For all its issues, the financial system is still providing most of us housing loans, insurance, and so forth. It has given us more than it has cost us. We would obviously like to make it cost even less--but it is unlikely that this is such a simple matter as flogging the scoundrels thrice around the public square.
I'd suggest expelling all the Jews but people would probably take that the wrong way. People are looking for a goat to scape and the financiers are sufficiently alien that they can all be blamed as fully as someone directly connected to the problem.
The government is the only investor I can think of that would spend billions buying a company and then deliberately trash their investment in public while driving off performing employees.
Look I am not going to get anywhere with most of the commenters around here, so let me simply say: I hope you remember these lessons when times are good. For years-- for years-- people like myself have been told by economic conservatives that we pay financial executives so well because they do such a good job; that finance is such a high risk/reward business, so when people succeed, they're rewarded with great wealth, but the risk is also huge; that it's wrong to use government money to secure the interests of a few; that we can't reward incompetence or failure; and that Darwinian economics ensures that those who fail, company or individual, will be weeded out. Now you've got a situation like these AIG bonuses, and so many of those old saws have just been abandoned.
So I'm just asking you to remember how quickly some of these ideas of economic conservatism have been jettisoned given the circumstances, and maybe pause when you apply them to talking about social safety nets, government spending and the lower classes. I don't think that there's anything wrong with my saying "it is extremely disturbing to me that so many economic conservatives seem bent on defending the interests of the rich or powerful" given this situation. I think it is perfectly natural to ask why the use of government money on social safety programs is unthinkable but the use of government money on bonuses for a company that failed in its most basic fiduciary responsibilities is okay. I don't mind the people who have developed positions that support the AIG bonuses. I'd like a little more chagrin, a little more context and a little more recognition that the payment of these bonuses utilizes precisely the same logic that many libertarians have argued against for years.
For years-- for years-- people like myself have been told by economic conservatives that we pay financial executives so well because they do such a good job;
We pay the Detriot Lions "so well" for the same reason, yet they failed to win a single game. All markets have winners and losers.
So I'm just asking you to remember how quickly some of these ideas of economic conservatism have been jettisoned
No they haven't.
And I suspect many of last year's Lions will find themselves out of work this year. As was their coach and general manager.
Anyone who asserted that the Lions' failure was so complicated that only Matt Millen was qualified to lead them back to success would be laughed out of the room.
TallDude, umm, your are aware of the NFL's revenue sharing agreement are you not?
Basically, the NFL is quite possibly the greatest example of private "socialism" in America.
Let's take a look at how things work in the NFL.
Torry Holt and Orlando Pace have both been Pro Bowl performers for the St. Louis Rams for the past 10 years. They helped them win a Super Bowl in 1999.
But the Rams have had two straight miserable years. Pace was injured for one of them, but nobody seems to think that either Pace or Holt carried out their duties with anything but the utmost of professionalism.
Both had contracts that called for them to be paid millions of dollars for 2010, but the rebuilding Rams don't have a need for players over the age of 30 pulling down multimillion dollar salaries, so they got released, and will not see the money their contract calls for them to be paid this year.
This is how responsible, accountable companies work. And this is how life works outside of the Wall Steet bubble. That I find myself pointing to the St. Louis Rams as a model of accountability and responsibilty should tell you how out of whack AIG is.
If you want something closer to the socialist worker's paradise, look to baseball with its stronger union, where when the St. Louis Cardinals decide they don't want Adam Kennedy, he gets his full salary.
The MLBPA is the strongest union in the country.
Off topic, but just out of curiosity, do you view the social safety nets and programs as fundamentally geared towards providing temporary aid to those who have fallen on hard times to help them get back on their feet or as something that should provide more permanent aid even in cases where there isn't an obvious disability preventing the person from being self-sufficient?
That is, to perhaps brutalize the metaphor, are they the kind of safety net that one might have under a trapeze in which the odd unlucky trapeze artist occassionally falls, but then quickly brushes himself off and climbs back to the swings or is it okay if a trapeze artist sets up shop in the safety net and seems either incapable or unwilling to ever again try swinging in the heights under his own power?
Sorry for the off topic question, but your defensive mention of social safety nets tangentially touched on something I've been thinking about and I'm curious to get a thoughtful person of your sort of outlook's view on whether they are fundamentally about temporary aid to restore self-sufficiency or are more about providing a supplement to people who will never be self-sufficient.
I think what you've touched on here is the fundamental difference in the ways people of different political philosophies view those programs. Many of the conservatives/libertarians I've talked to feel that the reason these programs are bad is because they offer incentives for people to be lazy; if one can live off the government, some percentage of people will. This is true.
The liberal point of view, I think, is that while that is an unfortunate occurrence that should be limited wherever possible, the existence of a social safety net is such a necessity for society that abuses are not a sufficient argument against the programs themselves. The argument that those people unable to find a job or those who find themselves broke as senior citizens are either lazy, stupid, or both is one I hear a lot, and one that I think rings somewhat hollow, especially now.
That is, as a liberal I entirely agree, and hope you would as well, with the characterization that the social safety net *should be* "the kind of safety net that one might have under a trapeze in which the odd unlucky trapeze artist occassionally falls, but then quickly brushes himself off and climbs back to the swings". Obviously it's not entirely perfect.
Sorry if this is a threadjack.
"...the existence of a social safety net is such a necessity for society that abuses are not a sufficient argument against the programs themselves."
The point is conservatives believe such abusive behavior is simply human behavior, hence the analogy of the "permanent safety net"--it is no longer the sort of safety net for the "odd unlucky" few but an alternative means of living for people making these decisions at the margins.
I don't want to threadjack either, but I did want to thank you for the thoughtful response to my question.
I do think it'd be an interesting conversation to flesh out where the boundaries are vis-a-vis letting it become a permanenet crutch for people versus the necessity and efficaciousness of a temporary helping hand.
Ah well, another time perhaps.
For years-- for years-- people like myself have been told by economic conservatives that we pay financial executives so well because they do such a good job; that finance is such a high risk/reward business, so when people succeed, they're rewarded with great wealth, but the risk is also huge
That was true, and still would be true, if the government weren't stepping in to bail these companies out in the first place.
I don't think that there's anything wrong with my saying "it is extremely disturbing to me that so many economic conservatives seem bent on defending the interests of the rich or powerful" given this situation.
What are you talking about? The conservatives are against the bailouts altogether! That doesn't mean that the government has a right to retroactively take peoples' money that they were contractually promised, after keeping their company in business.
This isn't about "defending the rich and powerful", but about opposing tyrannical government overreach. Overreach that could just as easily be used on any of us, btw. Would they have gotten their bonuses if the government hadn't stepped in to "save" AIG? Maybe, maybe not. I guess we'll never know, will we? But, if they hadn't, at least it would just have been the result of bad fortune rather than deliberate government malevolence against its citizens.
I think it is perfectly natural to ask why the use of government money on social safety programs is unthinkable but the use of government money on bonuses for a company that failed in its most basic fiduciary responsibilities is okay.
The use of government money for failed, irresponsible companies is not okay, period. However, if the government is going to go that route, it is at least obligated to keep its contracts and not terrorize innocent citizens. If the government wanted those contracts done away with, it should've made that the terms of the bailout in the first place.
For years-- for years-- people like myself have been told by economic conservatives that we pay financial executives so well because they do such a good job; that finance is such a high risk/reward business, so when people succeed,
"We"? Who is this "we"? Financial executives are paid by the shareholders, not the public at large. If you don't own stock in the company it's literally none of your business. So the CEO makes a lot of money? So what? That's something the shareholders need to think about.
Now, AIG is a special case because the taxpayers have taken a large piece of equity ownership in exchange for a truckload of cash. But what does that have to do with CEOs of other, more solvent corporations?
Just look at Byron Dorgan. He predicted repealing Glass-Stegall and other banking "reforms" would be a big fiasco ten years ago. And he had the time frame right.
Megan, I don't disagree with your analysis. It is always better to have experienced, competent people over novices. But you seem to place technical competency in higher regard than business ethics. The worst person to employ is a really, really smart person who will lie, cheat or steal to achieve his goals. We have lost faith with current management of the major financial institutions, not because they are incompetent, but because many of them exhibit unethical behavior. We would prefer an inexperienced person with our best interests at heart over the corrupt technocrat.
Anyway, experience is vastly overrated. Look at who we elected and who is the current Treasury secretary.
Precisely what I am contesting is the notion that we know these executives were actually malfeasant.
And while I have my issues with Geithner, I don't think we'd be better of with, say, a random CPA
Why do you think these particular people are competent? Don't you think the burden of proof falls rather strongly upon them to show that this is the case? And don't you think that if the person in question says that they had no idea what was going on that maybe they aren't particularly competent?
This isn't rocket science you know.
How will the government assess competency of skills in the area of these complex financial instruments(derivatives, mortgage securities, etc...)? How?
This suggests a reimbursement problem; paying anyone for doing a job that will limit their future pay simply doesn't make sense. In health care, for instance, we reimburse a physician for procedures/visits; often driving up costs. If, on the other hand, we reimbursed doctors based on the health of the patient, we might see real improvements in the system.
Except then doctors would avoid chronically and/or terminally ill patients like the plague (excuse the pun). So how would the system be better off?
source
If we ignored in some way, the top 5 percent, the system would be better off for the remainder, but such a thing is morally repugnant. The European health-care systems have lower per-capita expenditures largely due to rationing care for this segment of patients. Yet, the high expenditures drive innovation, ultimately providing for both better outcomes and lower costs.
As Megan says, some problems are hard.
Via Boing Boing, where this mess began:
I was studying for the CPA exam at the time, and many of my accounting professors said people didn't understand just how bad this could get.
I still don't understand how the people making these decisions could be so shortsighted. We had just gotten past the S&L crisis, for crying out loud.
The beginnings of this mess were earlier than that. Clinton instituted the quota system to force banks to lend to unqualified borrowers in the mid-1990s, and Fannie and Freddie had already developed the subprime mortgage market by 1999.
The most insightful panel Scott Adams ever drew had the pointy-haired boss explaining to Dilbert that, "I begin by reasoning that anything I don't understand is easy to do."
Let's try something that's a bit less exaggerated, if the newly-minted MBA premise doesn't grab you.
1. Do you accept that someone who is receiving high compensation relative to the starting salaries of potentially qualified replacements is facing a really tough challenge in arguing for their indispensibility at a firm or institution which has collapsed or is in danger of collapse? It's not enough in those circumstances to have some social capital in that firm or to have some expertise in the field: if you cost many times as much as a potential replacement, you need to be fundamentally difficult to replace. Alternatively, you need to believe that firms and institutions have social and moral responsibilities to their long-term employees that outweigh the economic needs of the moment, and should sacrifice everything else to meet those obligations. You don't seem to me to be someone who believes in the latter as a general principle.
2. Do you accept that at the moment, the financial industry is awash in newly unemployed individuals, many of whom possess considerable expertise? E.g., I concede that the newly-minted MBA is not qualified to oversee the winding down of something like AIG-FP, but do me the favor of conceding that there is at the moment a considerable surplus of potentially qualified people who are, I am guessing, willing to accept considerably less compensation than what they previously received, especially for a contract position of this kind. This is the hard-nosed thinking about labor markets that capitalists supposedly pride themselves on: when you can get it cheaper, you're supposed to do that, especially when cheap is a dire necessity.
3. If DeSantis' representation of his own situation is correct, then his positions ought to be relatively simply to wind down. He argues that his own line of business did not have the same complications or liabilities that the CDS business in his division had, and returned sound profits to the parent company. If his positions are so intricate and difficult to understand that they require his specific expertise and social capital to interpret and conclude, then I really wonder if everything at his end of the business was as straightforward as he makes out.
More importantly, you're making out that the winding-down of positions of this kind is a completely novel, unprecedented enterprise that requires the people who were involved in the first place. There is an entire field of financial expertise for dealing with companies in receivership, managing failed investment positions, or even in simple terms, taking care of the unfinished business of an executive who died or was incapacitated. I'm completely willing to believe that the CDS business of AIG-FP really is intricate and unprecedented and requires a pretty careful hand. But if we accept DeSantis' claims, the rest of the division's business was pretty vanilla. If so, there are vanilla skills involved in taking care of it, almost certainly at less cost than what it takes to pay DeSantis and his senior colleagues.
Tim,
I think it is understood that lower paid replacements could be found for a number of these individuals. However, there would be a lot of transitional problems introducing an entirely new set of employees for a relatively brief period of time. Additionally, your current employees already have completely valid compensation agreements agreed to prior to government involvement which you have no legal basis not to pay and you are required to pay even if you dismiss them. How exactly would bringing in new personnel help? You would end up paying your old personnel and a premium to your new personnel who are short term hires. I'm not sure I see your point.
I don't know what the relevant market is--I'm not a recruiter. I do know that when AIG signed these contracts, they were doing it with their money, not ours, and were therefore probably, within the limits of institutional relationships between managers and employees, offering about what they thought they had to in order to retain these guys in a down market. What I am disputing is that YOU know, better than Liddy, who joined the firm a few months ago and has no reason to give sweetheart deals to people he's never met, what the relevant skill set is, and how to value experience. I know a lot better than you do, and I don't know. I can tell you that these kinds of wind-downs are a relationship business, and someone with no institutional connections is going to get you a significantly worse deal than a freshly minted kid. You're talking about books so big that these salaries are a rounding error. He made profits of $100 million many years, which means his book is much bigger. Even if his successor makes a small error, that will cost you much more than the salary difference.
I also question your assertion that if what he's saying is correct, his positions ought to be relatively simple to wind down. From what body of experience with running a commodity trading desk are you inferring that closing his book ought to be a low-skilled job? Your job looks pretty easy from the outside--just wander around and read some stuff, right? Can we really hand it to the lowest bidder?
It is true that his job is not the worst job at the firm, closing the CDS positions, but my understanding is that most of *that* has actually been worked through, stupidly and expensively, in the wake of the departures of those who wrote the business. That doesn't make it easy. It certainly doesn't make it worthless.
We had the opportunity to repudiate the contracts when we nationalized; we didn't. We let all these people work for us for six months, then informed them that--surprise!!!--we weren't going to pay them the money we had promised.
Ms. McArdle,
I think you're dead-on accurate here. In a very turbulent market a multi-billion dollar book of equity and commodity trades is going to be extremely difficult to unwind profitably ahead of schedule, especially when your counterparties are going to be fully aware that you're a distressed player in the market. I think it's safe to conclude that this episode guarantees that you will not find "a considerable surplus of potentially qualified people who are, I am guessing, willing to accept considerably less compensation than what they previously received, especially for a contract position of this kind", let alone for $1 per year salary and a retention bonus.
It is truly a sign of the troubled times in which we live that Timothy Burke is wrong, and Megan McArdle is right. I will now have a drink, or several.
Ok, fair enough. Let me try to come at this again tomorrow over at my digs, because I'm getting too wrapped up in the specifics of this bonus, this company, when I really think the bonuses are an opportunity to reconsider some larger ways that we judge risk and consequences--and the risks incurred by others. The only thing that still bugs me some about your take on it is that you are thinking quite carefully about the value and lifeworld of AIG insiders, and about the systemic constraints on their actions, when you are fairly dismissive about similar concerns when it comes to credit card debt or underwater mortgages and so on. I think there's a way in which our overall views of what markets should do and be are being challenged, and I'm not sure any of us are thinking our way through that challenge very well at the moment.
It's not enough in those circumstances to have some social capital in that firm or to have some expertise in the field: if you cost many times as much as a potential replacement, you need to be fundamentally difficult to replace.
This makes no sense. Social capital in the firm (and beyond the firm) and expertise in the field are what makes someone difficult to replace!
This makes no sense because it has been amply demonstrated that the academic is a naif.
(Yes. I said it. An academic is a naif.)
What am I missing here, on the expertise issue? The government is honoring these CDS commitments 100%, which means that liquidating them is a clerical matter, doesn't it? I'd be interested to hear a concrete (if hypothetical) example of something in AIG's locus-of-disaster division that requires expertise beyond how to take government money and pass it along to counterparties per the terms of CDS contracts.
This is kind of what I'm getting at in a more long-winded way. Where's the evidence that winding down AIG, even the CDS commitments, actually does take the expensive expertise, experience and social capital of AIG-FP's senior management?
Well, for instance, AIG sells commodity hedges. You need someone who understands the commodity in question and its price behavior in order to accurately gauge the risk involved and how to offset it.
I do have a pretty simple objection here.
If AIG-FP's senior executives met this description ("someone who understands the commodity in question and its price behavior in order to accurately gauge the risk involved"), why did AIG-FP kick off one of the most disastrous failures in the history of capitalism?
I guess that's part of what's driving my admittedly highly inexpert skepticism: no one (including Jake DeSantis) has taken the trouble to convince me that the foxes are suddenly reliable guards of the henhouse. At least some of these people are the people who actively are the antithesis of TallDave's description: people who absolutely did not understand. Even if we buy DeSantis' self-description, he was among those who worked right alongside a budding apocalypse and paid no attention to it. So there is at least this major reason to mistrust their own estimations of their knowledge and value, without knowing any more about what specifically is needed in terms of expertise.
It's a bit of the argument that I've made in the past about academic expertise on the Soviet Union. One of the striking things about late-Soviet experts is that very few of them even imagined that the collapse of the USSR could occur. I'm not saying that they should all have been out of work the next day, but at the very least, that should have appended a skeptical footnote to their later work. And yet, many of the most prominent Kremlinologists simply retooled and went into other fields of expertise, where I have to say that at least a few of them had equally dubious interpretations. I guess when people get it really wrong, I'd like to hear them explain to me why they should now be regarded as someone who precisely what we need--and that should be something more than, "I wasn't involved in that".
I think that it is fair to turn that question around - what evidence do you have that it doesn't take this kind of expertise? AIG - with their own money - decided that this type of experience was going to be very important.
They have experience in this area while you do not, its easy to say that it should be easy when you don't actually know what is required.
Companies that are in financial distress overpay to compensate people for future uncertainty. Perhaps AIG was making a desperate gamble, that if they did unwind everything perfectly that they wouldn't go bankrupt. A task where I think DeSantis skills would be much more needed. Before AIG went bankrupt they would have felt a lot of pressure to enhance their short term position, and possible stave off bankruptcy at the expense of long term expected value.
Also can someone explain why AIG and DeSantis both chose this compensation structure? I get that its back weighted to encourage him to stay, but why only 1 dollar? Why not pay him 20% as a normal salary, and have the remaining 80% as a bonus?
No, it's not fair, and it's not even logical. The rules are that the person making the claim defends it. Generally a good rule, and in this particular case, given that a lack of expertise was very conspicuous, and given that the principle agent admits that they had 'no idea' what was happening in that division, a most excellent rule indeed.
There's no reason to be angry that AIG honored its contractual commitments and you probably shouldn't spend too much time worrying about whether the expensive expertise, experience, and social capital is worth the deferred compensation.
You can be angry that AIG is gettingn bailed out. The gov't could have let AIG declare bankruptcy and all of AIG's unsecured creditors could have taken a haircut (or worse) together. Or, the gov't could have simply guaranteed the debts it thought were important (say guaranteeing connected counterparties 100% payouts and hanging employees out to dry). Or Congress could have even crafted legislation that bailed out AIG but voided certain contracts (I don't think the Contracts Clause applies to federal gov't, although there are obvious practical reasons why you wouldn't want to do this). If any of this had happened, the employees wouldn't have anything to complain about if AIG couldn't meet its contractual obligations to pay them; it would suck for them, but that's a risk that they assumed when they agreed to the contract.
But none of those things happened. Instead, the gov't gave AIG money, no strings attached. As a result, AIG has enough money (at the moment) to meet all of its contractual obligations and as long as this is the case, it can't willy nilly decide which contracts it will honor and which ones it won't honor. Nor should the employees be asked to give back their compensation while AIG's other unsecured creditors get 100% payouts. If the gov't wants to try to clawback money, it may legally be able to do so, but it should try to clawback any payments made to any unsecured creditors on a pro rata basis, and it should do so with the knowledge that it is going to make people mighty nervous to know that the political will exists to retroactively issue punitive taxes on individuals and busineses (anybody know if there is something that would make clawbacks aimed at certain individuals or businesses unconstitutional? Is that a Bill of Attainder(sp?)?)
Arguing over whether the expensive expertise, experience, and social capital of AIG-FP's senior management is worth the costs is simply second guessing a business decision. It'd be nice if AIG made good business decisions seeing as how the taxpayers are footing the bill for it, but I think it'd be pretty optimistic (read naive) to expect that and it'd be even more optimistic to expect Congressional involvement to actually improve the decisions. If you have a problem with bad business decisions, your problem should probably be with providing the bailout in the first place.
In fact, this argument has been used before with regard to foreign banks. And found to be false. No special expertise was needed at all, despite the insistence of certain parties within the bank that this was so.
If nothing special was needed there, what makes AIG different?
[i] "Really? Really, maybe a 26-year-old MBA might do an okay job of liquidating the financial products division of the world's largest insurance company?" [/i]
Why is anyone liquidating this? We are in the midst of a global financial crisis - one of the reasons given for rescuing AIG is that their failure would have caused a bank failure in France (etc), causing an insurance failure in Switzerland, causing a CDS payment from Omaha, and on and on....
Any trade to AIG's advantage is a disadvantage to it's counterparty - with government backing, in the current depressed market, is not AIG better situated to a hold and hold strategy than anyone else? Most of the work in AIGFP should be clerk level. Receive payments, post collateral.....
Regarding the complexity of valuing CDS' (which is necessary to unwind them), I would suggest, for starters, this: http://www.tdtf.nl/activities/FarshidJamshidian.pdf
This is part of the reason why these things are so (potentially) destructive: they are, in point of fact, very complex.
That's what you have quants for, who, AFAIK, make far less than 700k a year...
Quants make far less than 700K per year? What planet are you on? Why do you think so many physicists, mathematicians, and statisticians go into finance? It's not for the bum paychecks.
What planet are you on? Starting salaries from a top program are typically 100k-150k in a good market. Upper end is 500k.
By upper end I meant that's what they max out at...
A job at AIG has turned from a highly sought-after hot job to essentially a government beaureaucrat.
I can understand why this would be an unsettling development for an AIG executive (though not any moreso that the UAW worker who thought he had a lifetime middle-class job), and government bureaucrats still need to be competent, but there is no need to pretend this job bears any resemlance to what it was a year ago.
--
A tenured professor is "more qualified" to teach a course at a vocational school than I am, and I probably make errors in teaching my programming course that a tenured professor would not make. But I'm not confident that paying professor-level salaries would be a prudent use of resources.
Add in the moral hazard argument, and that these deferred payments do reveal a fundamentally broken compensation system, and I think most are willing to take that deal.
That's an okay argument for not agreeing to future compensation payments of $700,000.00
And it's also a good reason to not comeup with an AIG employee bailout if and when AIG runs out of money and can no longer meet its obligations. If AIG declares bankruptcy, then the employees can get in line with all the other unsecured creditors
But until that happens, the legal obligations that have already been incurred (under a contract for which the counterparty has already fully performed, no less), should be honored.
I am probably one of a very select group. I have found myself holding the ring both on a substantial attempt at academic reform and on an attempt to sort out a mass of supposedly sophisticated but actually stupid financial trades.
The first thing that I learnt in the financial mess was that a necessary condition of doing anything was to get the men who had made the mess out of the way as soon as possible. That was easy. The second lesson was that even the best imported experts cannot sort out the results of blind finacial idiocy. There are deals so foolish that no one will buy them off you even for the full value of the liability plus a really good lunch. Learning that was hard. Hard for me and even harder for the market expert brought in to do the sorting. AIG seem to have done the first; and paid their experts while learning the second lesson. The guys who are returning their pay are those whose self respect has taken a beating the way our expert's did. I doubt if they have saved/cost AIG/the US Government much more or less than a bunch of 28 year-old MBAs would have done; but they had to try.
The first thing I learned about University reform is that academics are extremely gifted at avoiding acknowledging such problems, and very good at changing the subject if they do accidentally recognise something amiss. (A similarity with AIG Financial Products execs?) Learning that was long and wearisome. The second thing I learnt was that even when academics grasped the benefits of the reform, most of them were tied hand, foot, toes, tongue and eyebrows by a web of social/working relationships which they were very, very wary of disturbing. Learning that was a matter of a penny suddenly dropping; and a lot of laughter at my own expense.
If Tom Burke thinks of the guys AIG has kept on to sort out the mess as members of a Physics Department brought in to sort out a scandalous and dangerous mess in a Biology Department where most of the biology staff have just been fired; he may also sense a penny dropping; and start laughing at himself.
Diversity, the only thing I have a hard time sorting out is who you turn to. You say get rid of the people who caused the mess, and second, don't turn to imported experts. I think the second is very plausible, and certainly I agree with the first. But who is left? I suppose if you think that DeSantis is someone close enough to be knowledgeable and far enough not to be tainted, he would be. But I'm a bit puzzled about why everyone just accepts that as a given based on his op-ed word for it. Didn't you find that a lot of people in the situation you were in assured you that they weren't the guys responsible for the mistake? Isn't that normal behavior, in fact, when things go badly wrong?
Timothy Burke,
It never occurred to me or to my colleagues to accept the word of someone who said they were not responsible. We pinned down who was responsible from the evidence. Then we knew who was not responsible. I assume that the Fed and the Treasury had done likewise.
I do not have any evidence about Mr DeSantis, of course; but someone as he describes himself would have been very welcome in the case I got saddled with. Our expert was imported from further afield.
I think you have to turn to imported experts. They just might find ways of ameliorating the damage. It is like getting the best medico to try what he or she can do before accepting that the condition is incurable.
That is absolutely normal behavior. Police officers will have their own tales to tell, as will parents, but here I'm also reminded of people from East Germany who are confronted with evidence that they helped the Stasi. Almost invariably, the first reaction is "Not me."
We should not take the letter-writer's word for it. And unfortunately, the fact-checking record of the Times is such that the letter's publication of the op-ed page tells us nothing about its factual content either. So we're left with, "Well, maybe."
What I don't understand is why we are spending so much time and energy talking about $165 million dollars in bonuses when Congress has just past spending bills for over a trillion dollars that are surely full of billions of dollars of pointless and stupid wasteful spending. Are we going to be subjecting all of the trillions of dollars of government spending to this level of oversight? I would LOVE to see that happen. But it won't.
What about the bonuses being paid to the Fannie Mae and Freddie Mac executives? Those are higher and those companies had more to do with the economic collapse than AIG. What about the raises that Congress got? And their increased budgets? And their use of Air Force jets to fly around the country? Are they tightening their belts? What about the hundreds of thousands of dollars paid to Congress by AIG and other companies receiving bailouts? Conflict of interest?
Personally, I believe that President Obama is showing us very starkly that experience is NOT overrated.
I'll also add that I don't believe that professions are necessarily "hard" as that they require a learning curve. Many jobs can be done by someone of moderate intelligence and ability but only after they take the time to learn the work. So the AIG traders may not be the most talented but they may be the most experienced and that is pretty important.
Besides, who would want to take a job at AIG knowing that any compensation offered would be subject to retroactive change by Congress in response to public sentiment and that any work they did would be subject to oversight by the media and Congress (neither of whom let a little thing like ignorance get in the way of having a strong opinion)?
I think the reason “why we are spending so much time and energy talking about $165 million dollars in bonuses” is precisely because “Congress has just past spending bills for over a trillion dollars that are surely full of billions of dollars of pointless and stupid wasteful spending.” It’s certainly easier for members of Congress, the President and his administration who rammed through the bill if they can distract the public – with the aid of a willing MSM – with an example of “corporate greed” than if the public focuses its attention on the larger issues in the bill that was passed. They can demonize the people at AIG who are winding down the company, who may very well in the end turn out to have done better by the public than their critics in the government, than have to be held to account for the legislation that they passed.
Unfortunately, there is no proof that AIG's business is harder to manage than any other financial firm. All we have is their word that it's difficult. Everyone involved with them, including the Treasury and Fed, have stonewalled any real attempts to find out what is going on. The closest we've gotten is a partial list of counter-parties, and they paid those out, strangely, at 100%.
The whole situation stinks of graft and corruption.
My guess is that one of three situations is going to take place:
(1) One option is to publicly liquidate AIG, which seems unlikely to take place. I suspect there are a large number of politically connected counter-parties worldwide that do not want to have their names show up on a AIG list.
(2) Tax the American public and hand the money to the counter-parties. This is what I think people expect is happening. They might be right.
(3) Print money and hand that to the counter-parties. This is what I think is probably really going on behind the scenes. The Fed and Treasury want inflation anyway, and this helps that cause. All the stonewalling is necessary to keep the counter-parties happy long enough to hand them their devalued dollars.
No matter how you look at it, the situation stinks.
USA + AIG = UZA.
United Zimbabweans of America.
Choosing between writing seven figure checks to current AIG employees and hiring freshly-minted MBAs for peanuts sounds like a false dichotomy to me. After all, that's not the tack the government took in filling the CEO job, is it? Granted, after the abuse Liddy has taken, I doubt industry vets will be lining up to follow in his footsteps for $1 per year. All the more reason to enact the "Economic Reserve" idea I mentioned in the previous thread.
Have experienced executives already committed to doing this sort of work in an emergency, at a high GS- or SES-level salary. In fact, I can think of the ideal candidate to propose this Economic Reserve idea. If memory serves, his written for the Atlantic before: Owen West, a Stanford-educated commodities trader at Goldman Sachs, who's also served in the Marine Reserves in Iraq. I bet he'd be willing to take a temporary pay cut to wind down a systemically important firm such as AIG, if his country asked that of him. I'm sure others would too. The key, as in the military reserves, is to establish the parameters before there's a crisis, to obviate the need for politicized compensation negotiations during a crisis.
Another point to consider is that the Economic Reserve could include, and call to active duty, professionals currently working at the stricken firm, if a bankruptcy judge or Treasury official deemed it appropriate. Again, you'd avoid politicizing the compensation issue, since the details would have been agreed to ahead of time. Given that this DeSantis fellow is public-spirited enough to donate his $700k after-tax bonus check to charity, it seems reasonable to assume he might have been willing to help wind down AIG's FP group for, say, a cabinet secretary's salary.
What you are suggesting is slavery and prohibited by the 14th amendment.
Incidentally (a Latin word meaning "off topic"): the nested comments make it easier to be clear what you're responding to, but make it hard to follow the ongoing discussion (i.e., what's new here?). I would suggest switching to numbered comments a la Unfogged or Crooked Timber.
The Baseline Scenario:
It seems to me that confusion continues to be the order of the day with respect to what we know about AIG-FP. In his written explanation (which I can't locate), Liddy made clear that the retention bonuses were being paid in order to retain essential employees because of their invaluable experience. His example was that the $2.6 trillion in outstanding CDSs needed to be hedged, and that hedges need to be constantly monitored, and that tiny fluctuations in interest rates could lead to giant CDS losses. Hence the $165 to $400 million in retention bonuses being paid to AIG-FP employees was a necessary if distasteful means of protecting the taxpayers huge investments in the positions being unwound.As Tim Burke has repeatedly pointed out, this explanation is wholly inconsistent with the view DeSantis expresses in his resignation letter. DeSantis, recall, was in an entirely different and consistently profitable division of AIG-FP--commodity hedging--that had nothing to do with CDSs.
I'm confused.
Similarly, about whether the bonuses are being paid to the traders and managers who got AIG-FP into this incredible mess under Cassano--because of their irreplaceable expertise--or whether those individuals have mostly resigned or been fired. In which case most of the bonuses are going to people who ought not be held accountable for the misdeeds of their predecessors.
It gets awfully hard to make normative judgments when (to quote a particularly inapt turn of phrase from an earlier academic scandal) "the facts keep changing."
but do me the favor of conceding that there is at the moment a considerable surplus of potentially qualified people who are, I am guessing, willing to accept considerably less compensation than what they previously received, especially for a contract position of this kind.
I don't think the truth of that assumption is at all obvious. A lot of what would make a person qualified for this position is knowledge of the specific positions, transactions and businesses involved. Even someone with the basic skills and network to do the job would still need to figure out a fairly complex business.
Though I've moved onto other stuff, I spent a number of years as a programmer, and the person who was the most qualified to debug a particular chunk of code was almost always the person who wrote it, even if there were other programmers who were actually better coders. I suspect that something similar obtains here.
re: the metaphorical back seat:
In my late teens through my late twenties, I believed that, because I was smart, as were my peers, we generally were just as knowledgeable as any expert in any field we stumbled upon. We were sure that merely by reading a book or two, we'd grokked the intricacies of our latest subject matter--be it derivative markets, quantum field theory, Hegelian philosophy, etc.
I was wrong. And as I've gained enough knowledge in a subfield or two to know just how much background knowledge you NEED to be such an expert, I no longer am such an idiot as to think I could possibly know as much as an expert in just about any other field, no matter how brilliant I am.
I now recognize how little I know, how often I don't know the whole story in another field, because I am often confronted with how wrong people are about MY field. Ever read the newspaper about a story in your own subfield or profession, and think "what hogwash!" and yet you read the story a column over and believe every word? Too many folks haven't thought even the faintest bit about how complex and sophisticated the inner workings of finance are, and are reading the newspaper reports naively even though they would never do the same in their own profession.
I think many young people make these mistakes more often--the arrogance mistake, certainly, not just because they are smart and surrounded by smart peers who have so many successes at a young age, but because they literally no almost no history. They have not seen that other people have wrestled with these ideas and found them wanting; they have not lived long enough to have been proved wrong; they have no idea how mundane their own ideas are--how they've been tried before.
But more, I think people, and young people moreso, make the mistake that expert knowledge means good judgment. So when they see poor judgment, they assume expert knowledge was a crock, rather than judging that their assumption about good judgment was wrong in the first place. They haven't lived long enough to see that just as their own successes weren't because of how brilliant they were, failures come in all forms, and good judgment is even more elusive than expert knowledge.
The banking sector folks, at lots of levels of risk management, executive strategy, and various financial instrument innovators, knew there was a problem, knew it was coming ,and didn't know what to DO about it. They lacked good judgment. The backlash against them is because people expected that "The brightest guys in the room" would magically have more judgment.
But there is absolutely no way that the people vilifying the bankers have even the slightest idea what most bankers DO all day.
I'm coming late to this discussion, but let me take up what I take to be Megan's point from a different angle. Let's continue her analogy of a historian (although I think a scientist might work better, but I'm a historian too so I'll work with it). Let's say there was an implosion of a university due to a major plagiarism scandal in the history department. Let's say Timothy was not was one the offenders but worked down the hall from these people. But the whole department is slated to be shut down and the (private) university has been, in effect, taken over by the government. Let's say the new president came to him and said, "you know some of the work of Professor Smith and although it's not exactly your field, you've worked with him and heard him give papers and know his work style, would you please stay and finish his research. Plus you are a very good historian with good analytic skills. It's important to finish this book for the reputation of the university and its future health. Don't leave for a new job just yet. We'll only pay you $1 but we will compensate you by paying you a bonus of half your usual salary."
Timothy agrees and plunges into the work. He catches up to speed. He cleans out the plagiarism and finds the nuggets in the research. And is beginning to produce a decent product. Then word of the deal spreads. The president is called before Congress. The members train their outrage on an anonymous Timothy. The president doesn't defend him but let's the inaccuracies stand. The state attorney general hauls Timothy in. The AG threatens to throw Timothy to the angry mob if he doesn't hand over the money. Timothy fears for his family and his reputation and hands over the money. Does he return to finish the book, which he now knows better than anyone else even if he didn't at the beginning, for no composition and no credit but for villification and approbation.
Perhaps DeSantis oversold his case, probably the contract were too high to begin with, perhaps someone can step into his job, but, if in his shoes, I surely wouldn't stay. As the now owner (or at the least loan holder) of his company, I don't see his case as anyone to run a successful business and attract talent. Perhaps some mythical person COULD do his job as well cold and coming for the outside. But who with any talent would possibly do it? Why sign up with a division of a company that is closing all for no compensation for work done to TO BE DONE (or for a contract that can be changed at any moment under threat of chief legal officer of the state), the promise of public and Congressional ire, and lack of support from a boss? Put aside the fairness to the individual employees (a point that can be debated, why would anyone new come?
I'm certainly not going to lose much sleep over the plight of the poor bankers and traders. But at this point we, as Steve Pearlstein of the Washington Post says, can either punish the bankers or we can fix the problem; we can't do both. I would personally rather get my money back so that my children aren't paying for this mess.
In the big picture everyone is replaceable, in these specific instance what costs us more? As to that hypothetical about whether these guys (and whatever few few gals might be there) are irreplaceable in THIS case or not, we're about to find out the answer since I can't imagine why anyone there would currently stay, especially if they feel (or in fact have) no guilt for the mess. I find myself hoping that Megan is wrong and Timothy is right (even though I she wins on pragmatic case) because it means we all win and get our tax investment back. But if Megan's right, we'll all pay a heftier tab down the road in higher taxes
In the big picture everyone is replaceable, in these specific instance what costs us more?
Well, that's the big question that nobody on either side of this argument can address empirically, so the dialogue is reduced to commentators invoking subjective arguments based on their personal experience. I haven't found these arguments particularly convincing.
That may be true, but consider that some 'subjective arguments' are better than others. I would call the one Lisco offers a not very good one, in fact, one designed to force a conclusion, since it left out or altered some relevant facts: in fact we don't know whether or not Timothy was particularly good at his job (fallacy of assuming the conclusion), and we also know that Tim claims he had absolutely no idea what was going on in the offices across the hall from him, even though the plagiarism and forgeries had been going on for some time and that several people had voiced this suspicion for years.
The analogy is more accurate, but not nearly so compelling now, is it?
The second factor to consider is that we know that other banks have made this claim of indispensable expertise in the past on exactly this sort of problem, the unwinding of a bad position, only to be proven wrong by the hiring of outsiders who did the job just fine, thank you very much. It's possibly not apropos, but those outsiders in the particular case I am thinking of subsequently discovered that the banks in question had other reasons for wanting an insider in on the job, reasons having to do with covering up additional malfeasance.
As for me, I find it discomforting that (most likely disgruntled) traders with no skin in the game are free to sell the government's assets -- "unwind their positions". Doesn't anyone else see this as an invitation for some pretty serious corruption, like fall of the USSR-scale corruption? If I was a pissed off trader, I wouldn't quit, I would screw Uncle Sam by giving someone a sweetheart deal in exchange for a bribe.
Let me make a few points from which people can draw their own conclusions.
1) The five necessary assets which Megan mentions don't all have to reside in a single individual.
2) Most of the skills can reside in (if not a 26 year old, certainly in) a 28 year old.
3) The skills needed to do this stuff start to diminish around the age of 34 or 35.
4) Most managers at AIG or other financial institutions don't really understand the transactions and would be completely unable to unwind them effectively.
5) The vast majority of individuals working at AIG are not anywhere creative, tenacious or smart enough to optimally create or unwind these transactions.
6) There is very small group of people with rare talent in AIG and other institutions who can execute these deals in a manner which either maximizes profitability to AIG or minimizes losses to the U.S. taxpayer. Often they are very young
7) Think about an NBA team. Very few individuals have the skills to play. The coaches no longer have the skills to play. The players don't make the rules; they just play according to the rules made by the league. They get paid because they bring extraordinary value to their teams. Teams don't have to win the NBA championship every year to make a lot of money. Teams need both coaches and players. Lebron James is 24 years old. The fact that many NBA teams have losing records does not mean that I can play point guard for the Kings.
8) The above statements are fact not opinion.
Let me add a few points to dtohmatsu's.
9) All of the businesses which have suffered world-historical losses and required societal intervention have one thing in common: they are incredibly complicated.
10) Most of the above businesses had another thing in common: a business plan that included a variant on "let's loan money to people and institutions that have a substantial but unquantifiable likelihood of being unwilling or unable to pay us back."
11) The great majority of individuals with Megan's five necessary assets mastered the complexities of (9) without insight into the implications of (10). Most of those who did understand (10) were engaged in gettin' while the gettin's good.
12) Some of society's safeguards against preventable manmade disaster were dismantled (repeal of Glass-Steagall, CFTC regulation of CDSs).
13) Most remaining institutions were ineffective or complicit (SEC, Congress, NYS insurance commissioner, the Fourth Estate, managements of Fannie and AIG...).
14) Very few citizens have a general grasp of what went wrong, or a reasonable and reasonably complete opinion on what ought to be done now. See (9).
15) Same goes for society's elites.
16) While the meltdown has been calamitous for many and bad for most, some individuals have made out darned well over the past half-decade. Many of these fortunates were leaders or rank-and-files of one of the epicenters' Bonus Armies.
17) Given this constellation of points, outrage over the pay scales at AIG-FP seems entirely warranted. Rather than being quickly quenched, I hope it can somehow be focused, and extended to Merrill Lynch, Fannie, Citigroup, Freddie, and the other insolvent institutions being bailed out with public funds.
18) Much more in the way of facts and fact-based analysis is required before one can hope to make sense of any one piece of this calamity. Definitive answers to Tim Burke's questions would go a long way to framing the discussion we should be having on AIG-FP.
19) The above statements are (mostly) opinion not fact.
FWIW, I think Half Sigma has an insightful perspective:
For some granular background on the real estate refinancing market that contributed to AIG's insolvency, Steve Sailer has a good post up. Many of the comments add to the unpretty picture.
The Office of Thrift Supervision's Acting Director testified at the first panel on Liddy bashing day that: 1. AIG's analytic model was good enough to keep it from writing CDS contracts on subprime mortgages after 2005 and 2. To the end of December,2008, 3years into the 5-year CDS contract life ( if they were written on usual terms) none of the underlying securities on which the CDS contracts were written had yet to register an event of default ( suggesting that Mr. LaRossa's crew were actually identifying the real AAA tranches so better than the rating agencies).
It would appear that little of the stripper's efforts were covered by AIG
Scent of violent, sure, the facts aren't as compelling under that case. But they weren't pulled from thin air; those are the facts as laid out in DeSantis's NY Times op-ed piece about his participation in AIG-FP. You're right that we have no way to verify his veracity or how good he is at his job. But then again no one in Congress calling for his head anonymously seems to bothered to check those facts before they tarred all the recipients of bonus with one brush. In an article in today's WSJ the newly brought in head of FP and apparently higher management, do see real value in the work done by many of those retained in FP. I'm open to another and contrary view of the labors of those in FP from the facts on the ground, but to the best of knowledge. the DeSantis editorial and today's WSJ piece are the only ones we have. I'm willing to at least try to see things from the perspective of the FP traders, even if I don't ultimately swallow it whole.
I'd also like to see more people in charge -- and here I'm pointing at the member of the House banking committee -- make their decisions from facts (which they have the ability to get more than us) rather than all of this uniformed OUTRAGE, OUTRAGE.
I'm not following you on this one. Could you elaborate? Further, I highly dispute the notion that what was touched upon in that letter are the 'facts'. That is, once again, assuming the conclusion. It is also taking at face value the statements of someone who likes to say he's only working for $1 a year . . . but then turns around and demands his 'bonus'. One or the other, but not both; you can't point to the $1/yr as proof of your noble volunteerism while simultaneously demanding to be paid an amount hundreds of thousands of times larger.
I'm also willing to see it from the point of view of these traders, btw. But it's up to them to justify their claims, claims which we know to have been false in other instances. And I would say also that they've long since forfeited any right to argue by simple assertion (if indeed they ever had that right.) What else do we have to go on but what these people have said? Anything? This strikes me as a rather asymmetrical situation.
It is as if no one actually listened to Mr. Liddy's testimony. He was asked what he was doing to replace the individuals at FP. He indicated that he was seeking outside managers to undertake the second year of the wind down. He was then asked what this was going to cost him. He said that it was going to cost him just about as much as for the on-board employees.
I don't think that saying that he worked for $1/year was supposed to make him a noble or good person... it was to explain why he thought he should get the bonus. His "salary" at $1/year was NOT really his pay. The bonus was in lieu of his salary.
i would point out a couple of parallels in recent history. First in the Lehman bankruptcy, virtually all the employees were terminated around the time of the bankruptcy and sale to Barclays. However, a few weeks later, to manage the bankruptcy, the bankruptcy estate chose to hire hundreds of them back and gave them retention and incentive bonuses. Second, when the US took over Iraq, the powers that be threw out all the Baathists on the grounds that they were the bad guys who had caused the problem in the first place, and that turned out to be one of the worst mistakes in managing the post-war envirnoment. I think the one conclusion you can draw from this is that when dealing with a large organization in turmoil it is generally better to keep its institutional knowledge in place. That doesn't speak to the issue of the price one pays for that and I think it is wise to question the amounts of these bonuses but the arguments that no program should have been instituted seem impractical and implausible to me.
Financial executive are highly paid while they DO a good job. Once they fail, they get fired. There is no "good old boys" network that ensures huge bonuses no matter company performance.