I'm watching the AIG hearings, and there is, unsurprisingly, a great deal of ranting about the bonuses. I'm not exactly in favor of the bonuses, but I have to wonder: what questions aren't being asked because of these bonuses? The people who took them are at the very best foolishly arrogant--but the cash flows are trivial relative to the overall cash flows, and the company keeps coming back for more money. Don't the congressmen have more important problems to pursue?
Barney Frank, however, uses the bonuses to make an important point: the compensation structure at all of these firms is seriously screwed up. Bonuses originally intended to encourage performance have morphed into deferred guaranteed compensation, for reasons that aren't clear. That's not necessarily a huge issue--except now, when the time-shifting leads to moral outrage. But the really pernicious problem is that the contracts are set up so that bonuses cannot be substantially cut if profits fall.
It's not clear to me how contracts have come to be written that way--after all, they weren't always handing out taxpayer money, and the big bosses who wrote those contracts were also sizeable shareholders in their firms. The result, however, is that all of the employees holding these sorts of contracts have vastly excessive incentives for risk taking. Perhaps some of them were taking big risks on the moral hazard of having Congress bail them out--but as Lehman shows, that was never a slam dunk. And I doubt a handful of these traders and money managers thought they were betting the firm. Most of them thought they were gambling on their own careers--just not very much of a gamble.
Frankly, Congress shouldn't need to intervene in these contracts; they're inexplicably stupid. Shareholders, having been alerted to the problem, ought to be demanding a fix. Of course, look who's managing a lot of that shareholder money. Honor among thieves?
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
I agree that Barney Frank makes a valid point in this instance, but the point gets lost a bit, since it is rather like observing a 600 pound man provide tips on nutrition.
The moral hazard affects the shareholders more than the employees. That is why they allowed the risk taking and stupid compensation for the help.
As someone who works in the industry, I can tell you that most bonuses are not guaranteed. The most common exception is when a person is lured from one firm to another. A two- or three-year guarantee is often used in this case first because it acts as an incentive to switch firms and second because it allows a person time to rebuild his/her business. By the same token, a firm will often guarantee bonuses to counter offers from other firms trying to lure away employees.
I thought the government treated salaries over $1M differently when it comes to taxes. So most firms with compensation over $1M structure it in weird fashion, including bonuses, in order to avoid the extra tax.
Uh, doesn't the govt own like 79% of AIG now? The govt is the shareholders.
Shareholders, having been alerted to the problem, ought to be demanding a fix.
Isn't Congress pretty much "the shareholders" at this point? I thought the government bought most of AIG's stock.
Ummm. Since the USG owns 80% of AIG, and our Representatives are, well, our Representatives, I think "the shareholders demanding a fix" is exactly what's happening.
I think Salman got it right, http://www.portfolio.com/views/blogs/market-movers/2009/03/17/why-aig-wasnt-allowed-to-fail?tid=true :
So did Pearlstein, this morning, http://www.washingtonpost.com/wp-dyn/content/article/2009/03/17/AR2009031703022.html?hpid=topnews
"I thought the government treated salaries over $1M differently when it comes to taxes. So most firms with compensation over $1M structure it in weird fashion, including bonuses, in order to avoid the extra tax."
I believe you are correct. In the 80's they updated the tax code (provision 162m), in which salary over $1 mil is not deductable. The unintended consequence was the rise in stock options as compensation, since these were exempt.
I think your post touches on a core issue: for some reason corporations are not "properly" accountable to their shareholders anymore. Michael Lewis makes this point in his Portfolio article when he notes that investment houses used to be private enterprises and never would have risked their own money this way. The new game seems to be: take control of a public company (either by becoming CEO or just outwitting the CEO), extract as much money as you can from the company, the end. Long-term interests be damned. Why Boards are unable to do anything about this is not clear to me. But it seems to threaten the entire notion of publicly-traded companies, at least from the perspective of prospective investors. This may be part of the reason for the over-reaction to the AIG bonuses. They are outrageous to be sure, but more than that, they are representative of much that is wrong with the present system. We had a madness that drove this bubble and now it seems we will replace it with a madness that may seriously cripple free markets and capitalism.
Why are you and Tyler and Arnold not proposing solutions? Your analyses are indeed fascinating, but how do we prevent this from happening again? You listed the issues in a recent post (Collective Action), but have not advocated for potential solutions from what I can see. Even if solutions cannot realistically be implemented in this current political environment (or any), they should still be metioned as ideals. How do we prevent this from happening again? Meaning, what happened this time, specifically. You and others have made the point that it is not possible to forsee every possible bubble, but what about this one? We can hope that putting in place, even discussing, such solutions will go at least some ways to assuaging the current madness.
The problem exists outside of AIG; it is certainly true that Congress has some sort of authority over AIG, they don't have the ability to fix the problems that exist at other financial institution, which offer the same poor incentives.
I see others have pointed out that in part our convoluted and punitive tax code is part of the reason why these bonus schemes exist. As it turns out, the government has been doing a bang up job of destroying incentives for corporate executives to perform and has instead made theft-in-all-but-name the surest route to wealth in that realm. It's surprising that such perverse incentives haven't destroyed industry in our country, yet.
If the bonuses are effectively "hush money", stripping them away might loosen a few tongues. Mind you, I am reluctant to attribute respectable motives to politicians.
I'd guess that there's some sketchy accounting presented to shareholders when it comes to subject of bonuses. I'm just pulling this out of my ass, of course, but it really wouldn't surprise me if the bonuses were budgeted as "employee retention and incentive programs" rather than "executive salaries" or whatever, even if in practice they were used almost exclusively for the latter purpose.
I know the $165 million for the bonusus is small in comparison to the overall bailout. But I think this is more than a mere populist issue. The AIG bonuses shed some light on how our government really works. Deference, above all, to executives at organizations like GM, Chrysler, and AIG. Apparently, you can break contracts anytime you want, as long as the victims are the little people. I suspect many people are angry about the AIG bonuses, but deep down, there is a larger disquiet about how Congress does business.
Why Boards are unable to do anything about this is not clear to me.
Boards are made up of executives of other companies who are looking to do the same. The major voting shareholders like this system, because it opens up looting other companies as well. Boards no longer seem to be independent oversight on the executives.
For the curious, the actual text of 162m:
Parts m 4 C i-iii:
So, at first glance it looks to me that you should structure the compensation of the top-paid employees of your publicly traded corporation in excess of 1 megabuck as benefits, commissions, or performance-based compensation. Then, when Joe the C-level executive says he's getting a better offer from OtherCorp you counter by changing his performance bonus to a retention bonus for a few years and eat the tax loss, but if I'm reading §162(m)(3) correctly this only applies to the CEO and four highest-earning non-CEO officers. I am totally not a lawyer or accountant or CEO, so if anyone actually knows how this works, please correct me.
Anyway, maybe Megan should remind everyone of the Jane Galt Tax Plan a little early this year since these shenanigans have made it so topical.
Yeah, the bonus clawback issue has the feel of a sideshow to me, with the (maybe intentional) effect of distracting attention away from something else.
The really telling thing, to me, is the recent statement by Geithner that the amount of those bonuses will be withheld from the next check we write to AIG. Say, seems like there's something in that comment that should trouble me, but at least we're getting the bonus money back....
Easy answer:
CEO's = 90% Ivy Graduates
Board of Directors = 90% of Ivy Graduates
Top Earners in Finance = 90% Ivy Graduates
Circle jerk with other peoples money, priceless.
They have a vested interest in helping each other out to keep their pay as high as possible, and leave only the scraps to filter down.
It's a good old boys frat club, based not on work ethic or ability, but on school networking.
Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.
It occurs to me that the problem with these bonuses is that they are call a "bonus". I think they are really deferred compensation that you only get if you complete the year. They act as a disincentive to leave mid year in order to get your bonus. After paid, however, the bonus has no retention value.
Back in the old days, companies would compel employees to be loyal with a defined benefit pension plan. Once you got a few years in, you would think twice about making a paralel switch before you were vested.
Yes, the $165 million is outrageous, but what I don't understand is where is the outrage over the billions funneled through AIG to Paulson's buddies at Goldman and all those European banks. All anyone is talking about are the bonuses.
If I had a suspicious nature I would say this is all designed to deflect attention away from the bigger crime.
what questions aren't being asked because of these bonuses
Over to Eliot.
Couldn't the Obama administration have insisted on some limitations on these bonuses as a condition for giving AIG another $30 billion recently? If so, their outrage now seems a little manufactured.
Here is my big questions.
I've worked for companies that would spend 4 years and $100 million on a project that - in a perfect world with everyone doing their best - could be done in 6 months for 20 million.
If the company had said if you get this done in 6 months for $20 million will split the $80 million with you - they project would have been done in 6 months and the company would have saved $40 million. But, they were totally unwilling to entertain the idea.
Another example, a company had a policy that if you found a way to save money, and after a year your suggestion was proved right you would get a $2500 bonus regardless of the amount saved. People had ways of saving millions but they didn't suggest them as they objected that they would get such a tiny percentage of the savings.
In each example while a bonus structure would have brought in huge amounts of new revenue - the companies were unwilling to give it a try.
Personally, I think they would rather piss away $80 million than "overpay" the employees. I'm just not sure I understand the logic... And I can't understand why the executives on Wall Street don't object to paying bonuses to their staff as much as industrial, consumer, or tech companies do.
Barney Frank is perhaps the 3rd greatest embarassment in Congress from Massachusetts. The first 2 being the Senators. He's virtually un-understandable.
That being said, NotMyPresident's outrage is funny. He knew about it all along, but only when it hurts his poll numbers does he pretend he's mad and that he just heard about it.
Another lie from The Messiah? say it aint so. (/sarcasm)
Personally, I think they would rather piss away $80 million than "overpay" the employees.
Yeah, that wouldn't surprise me. My employer, which has thousands of employees, has a standing policy that any raises over 5% for any reason (merit, CoL adjustment, promotion, etc) need to be approved by one of a handful of basically executive-level managers, which means that in practice it rarely happens. So lots of people work their way up through the ranks then leave for another company when they realize they're underpaid and have no other recourse. Then the company hires somebody new, and pays them the market wages they refused to give the first guy. So it's not that the company is unwilling to pay normal wages for somebody to do that job, it's just that they're unwilling to pay normal wages to the guy who is already doing it, because that would mean violating the institutional aversion to actually giving money to employees.
Matt D,
In my business no one ever gets a raise or a promotion, the only way you move up is to switch jobs.
Here is how it usually goes down. Company pays 40k to send someone making 65k for training on a new product. Person works for a year or two in the new jobs and gets a headhunter call saying people who know product X are making 120k. Person asks for a 20k raise. Company says no. Person quits.
Company spend 60k on a recruiter to bring in a new person making 120k who needs 20k worth of training and is up to speed in 3-6 months. So, rather than pay the person making 65k 85k they hire a person making 120k and spend another 120k on recruting and training.
It makes no sense. But for some reason most companies are unwilling to do it.
Matt D,
Here is our pet office theory: Why wouldn't the company just give the employee a raise? It would make sense only if the staff woudn't quit when they got f*cked over. We work with a number of people who've been hear from 5, 10, 15 or even 20 years who could be making 2x as much if they quit. But, they just don't seem willing to.
I think at companies like AIG or Goldman or Merril the staff are far more likely to bolt if they get f*cked over.
I don't think the executives are any different at Goldman or Merill than any other industry, I just think the employees are much less likely to be pu**ies.
Matt D,
Here is our pet office theory: Why wouldn't the company just give the employee a raise? It would make sense only if the staff woudn't quit when they got f*cked over. We work with a number of people who've been hear from 5, 10, 15 or even 20 years who could be making 2x as much if they quit. But, they just don't seem willing to.
I think at companies like AIG or Goldman or Merril the staff are far more likely to bolt if they get f*cked over.
I don't think the executives are any different at Goldman or Merill than any other industry, I just think the employees are much less likely to be pu**ies.
I'd say a lot of it has to do with the lack of competitiveness in the financial industry. That is, while the various businesses are competing against each other for clients, the financial industry as such doesn't really seem to face a lot of competition. People can bounce around from firm to firm without ever encountering the notion that, you know, their job could be outsourced to some kid in India for a fraction of the cost. It's just taken for granted that they're worth whatever ridiculous amounts of money they're asking for or being paid. I think that sort of thing is at play in upper management throughout America, it's just a little more pronounced in the financial industry.
Matt D,
But, even to start, kids out of Columbia or some other decent school could make 80k with an 160k bonus, just out of school. I can't understand why they wouldn't hire some kid out of SUNY Binghamton for 55k and a 25k bonus.
In the case of upper management ever dollar they pay out in bonuses to the newbies is one less dollar in the bonus pool for upper management. Yet they seem far more willing to share than most management I've ever dealt with.
I thought the explanation for the arcane pay structures was pretty uncontroversial: salary caps. Big bonuses and other weird things are a way of getting around government mandated salary caps. Which is why, to state the obvious, we shouldn't have salary caps.
jmo,
The 80k/160k figures are about right (or were at least) but I just don't see how you could go lower than that for 2 reasons: time and location.
Time: Those guys work ungodly hours right out of school - consistent 80 hour weeks ( 12-16 hours M-F, 20 hours on the weekend). To do that requires either a huge love for the task or a big paycheck, but most likely both.
I'm not sure there is a dollar figure you could have paid me at 22 to give up 3 years of weekends, trips, vacations or a social life.
Location: You have to live in NYC, and realistically you need to live in the financial district since you are at the office so much. That means 3-5k rent for a 2 bedroom apt minimum, and that translates into 18-20k in rent per year. You also have to eat and wear dry cleaned clothes daily.
If you're base is 55k, and you lose something like 40% of that to city, state and fed taxes, you're living off 15k after rent which is little over 1k a month to cover transportation, food, utilities, clothes and other stuff in one of the most expensive places to live.
If we look to claw back bonuses for an organization that receives taxpayer dollars, then we have to look at all of them. First, state universities continue to produce stellar and not so stellar students... do we headhunt the President or Dean and ask for a refund of their contractual compensation? What about the Athletic Director who has won less than 50% of their sporting events?
What about secondary school teachers? Do we withhold contractual compensation from teachers at schools that do not meet minimum grades?
Impeached Presidents, anyone?
Finally, as a person who pays 10% of my single-earner family income in child support to an ex-spouse who does follow court orders on visitation and access, I am less than thrilled to continue to pay that support knowing that the other person is not living up to their end of the deal. The point is that legally, they have been living up to their end of the deal until proven otherwise. Until Congress proves (in some other court than a Senate hearing) that AIG executives who received bonuses were not legally entitled to them, Congress should back off. Again, we risk setting in motion a huge tsunami of unintended consequences if we let contractual law get in the way of a populist movement.
You say that "employees holding these sorts of contracts have vastly excessive incentives for risk taking", but at least with the retention bonuses, isn't the opposite true?
The people with the retention bonuses had contracts that said that they got $X million after they had stayed at AIG for 12 months (or whatever the timeframe). There was no performance component (beyond just doing their job adequately). Their only incentive was to make sure that AIG was still around in 12 months. That seems like the opposite of an incentive for risk taking.
Skullberg,
You are 100% correct!
I think people wildly underestimate how much extra they would have to be paid to do even slightly more work. For example, I've worked with people making 65k and offered them jobs making 225k and they declined. Why? The 225k job required 50 weeks a year on the road.
When I make a hypothetical offer, most people say "Sure, I'd totally take a job paying 4x as much." But, when I say give me your resume and lets make it happen, +80% say no.
The higher you go up the food chain the harder it gets. A kid making 36k right out of school you can offer him 80k and he'll head out on the road. When you get to the level or Director or Manager, people making 125 to 150k you don't have to pay them 2x as much you need to pay them 6x as much. For, when your making 150k you are pretty comfortable and you need a lot more of an incentive to put up with all the travel hassel.
I think 98% of people are unaware that this is how the world works.
In the case of upper management ever dollar they pay out in bonuses to the newbies is one less dollar in the bonus pool for upper management. Yet they seem far more willing to share than most management I've ever dealt with.
Yeah, that's a good point. I'd guess some of it at least is about maintaining the prestige of the firm and the social/professional network that rich kids from expensive schools tend to bring with. Which I guess is a valid business consideration even as it's rather silly in the broader view.
And, on this subject, I guess it's worth pointing out that the skills that make an employee successful in a bubble aren't necessarily going to be the skills that make an employee successful when the company is trying to pick itself back up post-bubble. So, you know, paying out retention bonuses to the people who were at the top of their game in the middle of the bubble maybe isn't a good idea.
Matt D,
In my experience Skullberg is correct. Question for you - would have taken a job at Goldman making 180k out of school if you were offered?
Skullberg covered most of it, but one of the really major issues is that Wall Street is composed of a small number of people and the industry requires 2 things - capital and people. You can't compare the Street with regular firms, but instead with law, accounting, and consulting.
In retail and commercial banking the firm has the upper hand since the business requires a vast workforce, branch network, ATMs, advertising, regulatory approval (see Walmart's problems getting a banking license)... This means very low salaries for employees in that arm - commercial bankers make minimal money for professional jobs, while tellers are basically on par with grocery store employees (with the same level of productivity, of course). You see this in most large corporations - salaries suck, since the firm has many advantages. In finance essentially the ONLY cost is compensation, and the only asset is the people. You need their full attention and devotion, not DMV level of attention/devotion.
Why are Wall Streeters seen to be more willing to jump ship than employees in other industries? Far more of them take critical relationships with them - sales people at normal firms exhibit much of the same behavior - and they are only a few places where they would be asked to work. Retail and industrial firms have offices in the suburbs and operations in marginal towns around the world. Transferring to another firm usually means a huge change in commute (enough so that you'd want to move), if not a move (to a marginal place where your spouse might not be able to find a job, and probably wouldn't like living). So the salary delta has to be huge. Finance firms are located in the center of globally attractive cities (NYC, Paris, London, Tokyo...) or in premium suburbs (Greenwich, parts of LA) - the next firm is next door, or a change in subway stops for essentially no change in commuting time on the subway.
As to management - they have much more real authority over the professional staff. They can hire, fire, and reward with minimal intrusion. Senior execs will sign off because employee X has a specific, quantifiable level of performance (or at least his desk/team). Back office is like regular firms (and the compensation reflects this.
Financial firms do have a huge amount of inherent competition - start ups are common (Greenhill, Jeffries, E-Trade, Genuity, innumerable Hedge Funds and Private Equity shops). Pricing power isn't because of a lack of competition, it's mostly due to the demand for the product. Firms that are raising money are rather price insensitive on commission, they're worried about their recurring cost and the speed of the transaction. It's much like real estate transactions, where customers make few transactions over their lifetime - the 5% commission is a large amount of cash, but the monthly payment is what really matters and an extra $50 on a $1000 monthly payment isn't worth worrying about. Save 50% of the cost and it's $25 in your pocket, or KFC for 2 people.
Finally (oh thank god I thought he'd never shut up): most of the criminality in finance comes from low paid staff. Kerviel, Leeson, and most inside traders on Wall Street were low paid with minimal prospects. People controlling 9-11 figure sums face huge temptations. Paying them large amounts helps keep them honest - some poor schmuck making $60k who can pilfer $500k is more likely to do so than someone who is making $500k is to pilfer $5M, the net change in living circumstances is much less (even in Manhattan $500k is at least comfortable, if not as extravagant as it would be elsewhere). It's rather cheap insurance, since criminal behavior can destroy a firm (see again Leeson and Kerviel).
Congressman who got the most money from AIG in 2008: Chris Dodd
Congressman who got the second-most money from AIG in 2008: Barack Obama
Place where the AIG bonuses were guaranteed by law: Dodd amendment to the Obama stimulus bill.
Honest politicians would have stayed bought.
Your talking points are screwed up there, PEL.
Dodd actually was the guy who put in the limits on compensation, but Geithner and Summers pushed back and got it weakened in the final bill, saying they were afraid that this could cause companies to refuse TARP money.
So instead of "Dodd blah blah corrupt" your real talking point should be "Treasury blah blah corrupt."
Just wanted to get you started on mindlessly repeating factually-correct talking points.
Col Sanders,
see: "“…you will see the rise of the men of the double standard–the men who live by force, yet count on those who live by trade to create the value of their looted money–the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statues are written to protect you against them. But when a society establishes criminals–by-right and looters-by-law–men who use force to seize the wealth of disarmed victims–then money becomes its creators’ avenger. Such looters believe it safe to rob defenseless men, once they’ve passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter..."
"Whenever destroyers appear among men, they start by destroying money………When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, ‘Who is destroying the world?’ You are……..”
It's weird, just about everyone I know who still has a job on Wall Street and works at firms that aren't getting handouts from the government had their bonuses slashed.
It's like people have no mid-term memory anymore.
How long ago was it that we talked about the execs at FNMA and Bernie Mack, about how they had taken home tens of millions of dollars yearly as bonuses, even as the ship was tipping over.
James Johnson, ex-aide to VP Mondale, was paid over $21 million during his last year as a high-level FNMA exec. (Johnson was, more recently, appointed to head Obama's vice presidential selection committee, until a controversy concerning an alleged $7 millions in questionable real estate loans he received on favorable terms from failed sub-prime mortgage lender Countrywide Financial surfaced and forced him to step down.)
Franklin Raines, Clinton's ex-Budget Director, made over $90 million during his five years there, which isn't bad money for actually aiming at the iceberg. (Raines was later forced to give up about $45 million in a lawsuit alleging that he and the others had falsified the books specifically in order to trigger those massive bonuses. Having avoided federal charges by the skin of his teeth (yes, teeth really have skin!), Raines met Obama's high threshold for top-level management of the country's business and now advises Obama on housing.)
Jamie Gorelick, one of Clinton's deputy AG's, made $26 million in her four-year stint. (During her time there, FNMA was found to be cooking its books, causing a loss of $10 billion - yes, BILLION! - and the book-cooking just happened to have triggered the payment of max bonuses to Gorelick and others.
And here we're all getting incensed about contracted-for bonuses for people who have not been called thieves.
I'm willing to bet we're all following someone's massive misdirection here, and it'll be too late to get the money back when we do find out how we've been misled. I'm trying to remember the specific sequence of steps that George Soros followed when he took down the British pound.
No specific reason, though. Just wonderin' . . . .
Shareholders. Hhhhhhhaaaaaaaaaaaahaaaaaaaaaaaaaa haaaaaaaaaaahhhhhhhhhaaaaaaaaaaaaaaaa
Shareholders!
On you dear sweet innocent lamb.
"Dodd actually was the guy who put in the limits on compensation, but Geithner and Summers pushed back and got it weakened in the final bill, saying they were afraid that this could cause companies to refuse TARP money."
So, Dodd failed to stand up to them, as in do his job? Or he inserted the language because he thought nobody cared? Essentially Dodd's defense is the Unfrozen Caveman Lawyer strategy - "I don't really understand your Congress, or your system of checks and balances.. because, as I said during the campaign - I'm just a caveman!"
Do actually believe that Dodd really did not anticipate this happening?
I am missing your point again. The bonuses have nothing to do with rewarding risk; they are not based on any measure of performance. Rather, they are a retention vehicle.
I also disagree with your point that the traders and money managers at AIGFP and management at the highest level of AIG did not know they were risking the entire ship. AIGFP wrote far more CDS than AIG's balance sheet could ever cover and made ourageously unreasonable assumptions about what the company might have to pay out during any period. The model was inherently flawed (http://www.acredittrader.com/?p=65) and those within the company that had the best understanding of this profited the most from it.
"It's not clear to me how contracts have come to be written that way--after all, they weren't always handing out taxpayer money, and the big bosses who wrote those contracts were also sizeable shareholders in their firms."
All you need to gain a little clarity is ask someone who develops compensation contracts. You can start here:
http://hodakvalue.com/blog/?p=957
Then you don't have to write about things you don't know about.
um, aren't we collectively the 80% shareholders?
I guess the question for me is that if the company decided to pay another $500m in bonuses tomorrow, is that a problem? what if they told us it was essential in keeping the firm together?
What if they did it again next month?
On what basis would you disagree with them?
What if they told us they needed another $30b to stay afloat? What if they paid another $5b in compensation out?
To your point, Megan, the shareholders should do something about this. That's the normal mechanism. But that mechanism doesn't work right now, as the answers to the above questions show. The way the mechanism normally functions is to wipe out the shareholder equity, not subject them to endless capital calls with a gun to the head.
It's weird. That's why the normal way to deal with this is a bankruptcy court and then a restructuring. Without the ability to restructure liabilities and an endless pocketbook on the other end, there is this really nasty feedback cycle. Did anyone remember that the original AIG number, 40b 80b, was picked because it was supposed to be insanely large.
Ask yourself, what exactly IS the incentive against profligate spending uncoupled from prudent management? Honestly, I don't see any. Shame?
XKCD has a great cartoon today about context, and the lack of it in reporting such issues.
http://xkcd.com/558/
HELP WANTED - need to unwind and manage exposure on a $1.7 billion notional credit derivatives portfolio. Expect constant scrutiny of your work and any decision you make will be second guessed (by many layers of reviewers). It is an exciting environment.
Salary - $200,000 plus a bonus taxed at 90%
An exciting opportunity to destroy your reputation, receive death threats, media snooping of your personal life, and participation in congressional inquiries.
Qualified applicants only.
Personally, I think it's time for a Reagan air-traffic controller moment. Don't tax the bonuses. Fire everyone in AIG's financial services decision except support staff. Don't pay out any more salaries or bonuses. Make them sue if they want money, but what jury will give these people a dime? The arrogance of these people is spectacular - don't mess with us, we've got a gun to the head of the economy, just go along with whatever we ask and everything will be fine. Someone needs to be made an example of to make it clear that bad decisions have real consequences. I think the AIG fraudsters are as good a choice as any.
Does anyone do anything more than just read headlines? The bonuses were retention bonuses paid to employees who were essentially eliminating their own jobs by unwinding the financial positions that they had been overseeing. The folks responsible for the root causes were gone. These folks were being asked to stay in a job that was going away to eliminate extra risk for the new shareholders (us). Without the retention bonuses, they probably would have left as soon as they could, leaving all of the investments in limbo and hiring someone to come in and work at AIG to clean up the mess would have been very difficult (would YOU take a job at AIG?).
If I were one of these guys, I'd be pretty pissed that I stayed on board a sinking ship to try to clean things up only to find that Congress was trying to renege on their end of the bargain while demonizing me.
And remember, the guys responsible for the truly toxic work were already gone...
Here's more on the bonus situation... if the traders all quit, then the taxpayers will be truly stuck as what's left of AIG goes down the toilet. Do we want to have a chance of getting some of our money back or do we want to burn the place down and end up with nothing?
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031804104.html