{"id":636,"date":"2009-03-30T10:00:12","date_gmt":"2009-03-30T15:00:12","guid":{"rendered":"https:\/\/thebigpictureandthecloseup.com\/?p=636"},"modified":"2009-03-28T13:43:24","modified_gmt":"2009-03-28T18:43:24","slug":"bonus-baby-befuddlement","status":"publish","type":"post","link":"https:\/\/thebigpictureandthecloseup.com\/?p=636","title":{"rendered":"Bonus Baby Befuddlement"},"content":{"rendered":"
<\/div>\n

<\/p>\n

Bonus Baby Befuddlement<\/span><\/p>\n

\u00a0<\/span>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>As a number of commentators have pointed out, the $165 million in AIG retention bonuses that have so preoccupied us all in the last couple of weeks are a mere distraction.\u00a0 <\/span>Our economy has huge problems to solve, and the bonuses are neither at the heart of the problems nor, in relative financial terms, even a drop in the bucket.\u00a0 <\/span>But unlike many aspects of the crisis, the bonuses are something most of us think we can wrap our minds around, and surely for that reason the politicians, tabloids, and other deep thinkers have dragged the rest of us into obsessing about them.\u00a0\u00a0<\/span><\/span>\u00a0<\/span><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Most of us don\u2019t credit ourselves with fully understanding the bonuses yet.\u00a0 <\/span>There are too many facts we don\u2019t know as of this writing, like the names of the bonus babies, and exactly what they did to secure promises of such golden recompense for their labors.\u00a0 <\/span>We also don\u2019t have a good grasp as of this writing on who in government knew, and\u00a0 <\/span>when, about the fact and the significance of the bonuses.\u00a0 <\/span>But we feel that the situation is potentially understandable \u2013 particularly if we drop into our mental summaries a few \u201cblack boxes,\u201d i.e. things that we don\u2019t have to understand how they work but only how they affect everything else, \u201cblack boxes\u201d with names like credit-default swap and derivative.<\/span>\u00a0<\/span><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>But there\u2019s more reason for the furor than the fact that this is a relatively comprehensible part of the present economic chaos.\u00a0 <\/span>The bonus babies in some ways challenge, in others rely upon principles about which right-thinking people are deeply concerned.\u00a0 <\/span>Settling on outrage as our only reaction may be understandable, but it is a cheap and facile way out.\u00a0 <\/span>For seldom have we seen situations where policies we rightly care about are more sharply in conflict.\u00a0 <\/span>It may hurt one\u2019s head to think about it, but if we must obsess, we should do so honestly.<\/span>\u00a0<\/span><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>So let\u2019s take a stroll:<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Distributive Justice<\/em>.\u00a0 <\/span>Most of us feel that society\u2019s wealth should be distributed with some modicum of fairness.\u00a0 <\/span>Not that everyone should get the same, but that everyone should at least get enough.\u00a0 <\/span>It goes without saying that right now lots of us aren\u2019t getting enough.\u00a0 <\/span>Meanwhile many of the bonus babies at AIG are receiving what for most of us are enormous sums.<\/span><\/p>\n

\u00a0<\/span>And we know that the Babies are just the latest manifestation of something that\u2019s been going more and more profoundly wrong in our society for some time: the rich getting richer and the poor getting poorer.\u00a0 <\/span>Reaganomics, practiced for a generation now, promised \u201ctrickle down,\u201d backdoor distributive justice, if you will.\u00a0 <\/span>But \u201ctrickle down\u201d simply didn\u2019t happen.\u00a0 <\/span>What happened was tax cuts for the rich, huge pay for senior corporate officials and financial professionals, golden parachutes and games with options.\u00a0 <\/span>In practice a diminishing share of the enormous wealth that our corporations produced ended up in the pockets of shareholders, governments, or workers.\u00a0 <\/span>And this malign effect applied in good times and in bad.\u00a0 <\/span>Owing to guarantees like the ones the bonus babies at AIG received, the big guys profited immoderately whatever the financial results they produced for their enterprises.\u00a0 <\/span>In a phrase so common I cannot determine now who first coined it, we privatized our gains and socialized our risks.<\/span><\/p>\n

\u00a0<\/span>Under this arrangement, all potential downside was reserved for the rest of us.\u00a0 <\/span>Labor unions were systematically destroyed to keep down wages, companies boosted bottom lines by firing workers or shipping their jobs overseas, and shareholders who relied upon the companies in which they invested for their retirements found that they were generally the last and least paid.\u00a0 <\/span>As a result of this scheme of redistributing society\u2019s wealth upward, people have been tumbling out of our middle classes amid foreclosures and bankruptcies.\u00a0 <\/span>Unemployment benefits have run out on untold workers whose actual state of unemployment has not run out.<\/span><\/p>\n

\u00a0<\/span>The recent election was surely a referendum on Reaganomics.\u00a0 <\/span>We\u2019re going in a different direction now.\u00a0 <\/span>And surely under the new scheme, there will be much more searching scrutiny before an employer can promise staggering and nearly unconditional rewards like the AIG bonuses.\u00a0 <\/span>BUT …<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Fairness at the Cusp<\/em> is a problem.\u00a0 <\/span>In general we feel that it isn\u2019t fair to change the rules of the game once the play has started.\u00a0 <\/span>The bonuses in question were promised in April 2008, before the great recession got under way, and before the election that began the change of the rules.\u00a0 <\/span>When the bonuses were promised, distributive justice was not the rule of the economic road.\u00a0 <\/span>However much we dislike it, promises were made.\u00a0 <\/span>In general, we believe in keeping our promises.\u00a0 <\/span>AND …<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Impairment of Contract<\/em> is something we really don\u2019t like.\u00a0 <\/span>We hate it so much we wrote\u00a0 <\/span>into our Constitution a very explicit prohibition against state impairment of contracts.\u00a0 <\/span>Almost everyone agrees that contracts should be lived up to.\u00a0 <\/span>Everyone EXCEPT …<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Management-side employment lawyers who frequently find Reasonable Excuses for Nonpayment<\/em>.\u00a0 <\/span>Among the many things we don\u2019t know are the extent to which the AIG Financial Products employees lived up to the job requirements they promised to abide by.\u00a0 <\/span>On the face of the Employee Retention Plan, which is posted at http:\/\/www.scribd.com\/doc\/13395005\/AIGs-Employee-Retention-Plan<\/a>, it would seem likely that if their job was underwriting other people\u2019s bets that subprime mortgages would hold up, then, yes, they lived up to their contracts.\u00a0 <\/span>One could argue, of course, that if following orders meant driving their company over the cliff, this might somehow be unacceptable performance no matter what the agreements said.\u00a0 <\/span>Many (although not Larry Summers) would think so.\u00a0 <\/span>HOWEVER …<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Nonpayment might not be prudent.\u00a0 <\/span>We all strongly support Salvaging Taxpayers\u2019 Equity<\/em>.\u00a0 <\/span>It\u2019s said that even if the bonus babies made the wrong calls at one point, we have to remember how few people foresaw the systemic collapse we have all experienced.\u00a0 <\/span>It may not prove the Babies are worthless, and it certainly may not prove they\u2019re dispensable.\u00a0 <\/span>Claims have been made that we can\u2019t afford to lose these Masters of the Universe, that if they leave AIG and take their financial expertise with them, AIG will become far more of a worthless shell than it already is, because only they know how to unwind the complex toxic assets positions they helped create.\u00a0 <\/span>This is a factual call which further evidence will probably elucidate.<\/span><\/p>\n

\u00a0<\/span>Such claims are inherently dubious.\u00a0 <\/span>The Babies may in reality have little more savvy than the bond-broker\u2019s kind of expertise so memorably demolished by Tom Wolfe in Bonfire of the Vanities<\/em> (1987): \u201cDaddy doesn\u2019t build roads or hospitals, and he doesn\u2019t help build them, but he does handle the bonds<\/em> for the people who raise the money…. Just imagine that a bond is a slice of cake, and you didn\u2019t bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that…. If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic<\/em> cake.\u201d\u00a0 <\/span>But maybe AIG\u2019s obligations really are more like the doomsday weapon assembled by a James Bond villain, crafted by financial workers with highly specialized and unique skills, and you have to incentivize the bad guys to disarm it, because there\u2019s no one else who can.\u00a0 <\/span>If so, then it might be a good idea to pay the extortion.\u00a0 <\/span>ON THE OTHER HAND …<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>There\u2019s the Moral Hazard<\/em> to think about.\u00a0 <\/span>It\u2019s not just AIG, after all.\u00a0 <\/span>It\u2019s Bear and Lehman and Bank of America and Citi, and most of the A-List financiers.\u00a0 <\/span>It\u2019s the geniuses at the hedge funds.\u00a0 <\/span>Our Best and Brightest, the products of Wharton and Darden and the London School of Economics, have failed us.\u00a0 <\/span>As President Obama put it, they drove the economy into a ditch.\u00a0 <\/span>Even if you think that in general the principle of distributive justice must take a back seat to incentivizing the Best and Brightest so they produce wealth for the rest of us, what do you do when the Best and Brightest lay an egg?\u00a0 <\/span>If they don\u2019t get whacked hard, what will motivate them to stop laying eggs?\u00a0 <\/span>So paying the bonuses might be even more imprudent than not paying them.\u00a0 <\/span>BUT YOU NEED TO CONSIDER…<\/span><\/p>\n

\u00a0<\/span>\u2022\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>The argument that these guys may really be only Whipping Boys<\/em>.\u00a0 <\/span>Reaganomics wasn\u2019t only about redistribution; it was also about hobbling government oversight of almost anything in which there was money to be made.\u00a0 <\/span>Sure AIG may have insured terrible bets on bad mortgages.\u00a0 <\/span>But it was government that had allowed the monster to grow: wiping out the boundaries between banks and insurance companies and brokerages, encouraging the unregulated growth of Fannie Mae and Freddie Mac and their loose ways with underwriting, looking the other way as brokers at Countrywide juked the numbers to qualify financially ineligible people for home ownership, failing to regulate the hedge funds or the rating companies at all, allowing banks to pile up toxic assets without proper reserves \u2013 and allowing irresponsible borrowers to victimize the rest of us with loans they should have known they could not repay.\u00a0 <\/span>The men and women who pumped up the froth at AIG were only doing what government policy was bent on having them do.\u00a0 <\/span>Where\u2019s the fairness in penalizing them?<\/span><\/p>\n

\u00a0<\/span>Thus, in sum, the correct course of action here is \u2013 uh, I forget.\u00a0 <\/span><\/span><\/p>\n

\u00a0<\/span>\u00a0\u00a0\u00a0\u00a0 My only proposal: Take comfort that it\u2019s just a sideshow.\u00a0 <\/span>We need to start lending up again, cut the deficit, cut unemployment, reignite the housing market, and re-regulate the economy.\u00a0 <\/span>As for the bonus babies, however we treat them, it\u2019s all political theater.\u00a0\u00a0 <\/span>I\u2019m with Rhett Butler. \u00a0<\/span>Frankly, my dear, I don\u2019t give a damn.<\/span><\/p>\n

\u00a0Copyright \u00a9 Jack L. B. Gohn.\u00a0\u00a0 <\/span>All rights reserved.<\/span><\/span><\/p>\n

<\/div>\n

<\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n

<\/span>\u00a0<\/p>\n

\u00a0<\/p>\n

<\/span><\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

Bonus Baby Befuddlement \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 As a number of commentators have pointed out, the $165 million in AIG retention bonuses that have so preoccupied us all in the last couple of weeks are a mere distraction.\u00a0 Our economy has huge problems to solve, and the bonuses are neither at the heart of the problems nor, in […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[463,635,644,651,649,648,638,652,658,654,640,643,636,656,637,657,642,645,650,655,219,639,659,646,647,641,653],"class_list":["post-636","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-add-new-tag","tag-aig","tag-aig-financial-products","tag-bank-of-america","tag-bear-sterns","tag-bonfire-of-the-vanities","tag-bonuses","tag-citicorp","tag-countrywide","tag-darden-school","tag-distributive-justice","tag-employee-retention-plan","tag-executive-compensation","tag-fannie-mae","tag-financial-professional-compensation","tag-freddie-mac","tag-impairment-of-contract","tag-larry-summers","tag-lehman-brothers","tag-london-school-of-economics","tag-reaganomics","tag-retention-bonuses","tag-rhett-butler","tag-taxpayer-equity","tag-tom-wolfe","tag-trickle-down","tag-wharton-school"],"_links":{"self":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/636","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=636"}],"version-history":[{"count":5,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/636\/revisions"}],"predecessor-version":[{"id":641,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/636\/revisions\/641"}],"wp:attachment":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=636"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=636"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=636"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}