OT: the other side of the AIG coin

[Tobias]

Originally Posted by Ray

The bonuses, THESE bonuses in particular, have got to be the least important part of the AIG story, but they're easy to understand and get pissed about.

-Ray

Not in my opinion. And not because of the dollar amount (which I think you are refering to) but because of the long-term message it sends about taking risks and being responsible for one's decisions.

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.

[93legendti]

AIG gave Pres. Obama $110,332 in campaign contributions. AIG gave Sen. Schumer $111,875. Sen. Dodd got $281,038 from AIG.

[93legendti]

Best line about AIG Outrage:

"...Soon the device migrated to the op-ed pages. Writing in her May 18 Times column about Obama’s inability to show much if any anger over the A.I.G. bonuses, Maureen Dowd cracked: “Barack Obama even needs a teleprompter to get mad.”...

[1centaur]

Originally Posted by don'TreadOnMe

The reason his contract should no longer be honored is because the company he worked for is bankrupt.
The only reason why A.I.G. has any money to spend on bonuses - or even on paper clips - is because we the taxpayer gave that money to them. We didn't contract to pay him any g*dd*mned bonus.

It's also interesting that the man was paid three quarters of a million dollars to, essentially, trade things back and forth. (it looks like they're also trying to sell the company, so I imagine he had plenty to do with getting it ready for sale -- this is more pointed at the general case of these very high salaries.)

There's some economic utility in this kind of trading, but mostly, he and AIG are just extracting value out of the economy. And the economy has gotten so messed up that trading, instead of production, pays on the order of 20 times the average wage.

That $700K he was paid is a claim on real goods and services, and I doubt very much that he's providing even close to that kind of utility to the system as a whole. As far as I can see, most of what they do is simply taking from other people; for every dollar they win, the system as a whole loses. Again, there is some value there, because commodity traders help constrain volatility (buying low and selling high means that they help move their chosen commodity back toward true economic value), but that kind of compensation seems wildly excessive to me.

It's the nature of capitalism that things get out of adjustment, but there's a difference between ordinary maladjustment and downright dysfunction. The modern Wall Street is largely based on fiction, and they can use that fiction to take vast amounts of wealth from the world.

I'm not saying that janitors should be paid $700k; I am saying that when speculation pays better than real investment, real investment doesn't happen. Many of the brightest people go where the money is, and if that area is wealth-subtractive, we all suffer."

A reasonable question might be: why did AIG think the guy was worth $700K? A reasonable answer might be: he was worth more than $700k to them. Why? Because the skills and knowledge to trade billions of dollars of derivatives contracts with best execution and appropriate risk offsetting (within the trading book only) is quite rare and the consequences of getting it wrong potentially hugely more expensive than $700k. Guess who would pay for those mistakes? That answer might be the taxpayers, or it might not, depending on the other side of the trade being supported by the government or not. Odds are a lot of counterparties are not supported by the government, so the US taxpayer might have (if the guy did his job right) saved many millions for their $700k. Not that such considerations should get in the way of "outrage" (which if it had continued a while longer I would have nominated for Time's Man of the Year, the first time a word would have earned that honor).

Compensation is about supply and demand. It is best not engineered for political or philosophical reasons. I think it's very fair to ask whether AIG was correct in its need to pay retention money (I'd rather use that term than "bonus" because bonus means extra and retention money is supposed to be "enough") to that many people in those amounts in order to preserve the value of the business (ultimately, for taxpayers), but somehow I never hear that discussion. Probably because the people asking would just not be able to understand the arguments.

Why are taxpayer dollars any more powerful than private investor dollars when it comes to changing contracts? If private investors had bought 80% of AIG, should they have been outraged that the company they bought into lived up to its preexisting contracts? The government is an entity that we trust (?) to invest our dollars wisely, but it specifically chose NOT to create bankruptcy for AIG and so can't pretend that it has the same powers as a bankruptcy judge after the fact. The government COULD have made its investment while abrogating contracts, but either wisely or dumbly did not (the consequence would have been a litigation claim from the employees and probable mass defections last fall with potentially huge costs to the system and taxpayers, but whatever) yet has the gall to call foul on others rather than themselves when the public (and they?) figure it out. Another example of the observation that government does complex things badly perhaps.

Trading has never been about investment, but the trading function is critical to any investment firm. It is the sheer size of the money being moved that leads to big compensation for traders, not the relative value of trading vs. investing. A 25 basis point error on a mere $1B of trading is many times the amount of that guy's retention payment. Might such errors have occurred if the experienced trader left (to work for hedge funds and tell them all about AIG's trading book so AIG could be picked off) and a junior trader who had no choice but to work for a firm that was going away in a year or two took his seat? That's the question to ask (especially if you are about to invest billions of my tax dollars), and I don't know what the answer would have been.

[1centaur]

Originally Posted by ghsmith54

There is an interesting dichotomy between the perceived sanctity of the AIG contracts versus the contracts the UAW had with the automotives which have pretty much been scrapped.

The UAW is being asked to renegotiate. AIG workers could have been asked the same thing but were not. Same party on the other side. Government is not talking about changing the UAW contract itself or taxing 90% of anything above "fair" compensation.

Tobias asked: "If the payment is a fixed amount for sticking around, why are they called a bonus at all? Wouldn't that be regular compensation paid out once a year? There has to be more to it than is being stated by both sides."

Retention payments are often negotiated when somebody new buys into a company where people are the key assets, such as in the investment business. They have by convention been called bonuses because they are in addition to regular salary and because the term sounds appealing to those getting them (the bonus being typically the main goal for the year of investment people), but they are not performance based, other than the performance of being there. Most retention bonus plans last longer than a year for obvious reasons. 2-3 years is typical. Many AIG commentators have confused retention bonuses with performance bonuses, some intentionally I am sure.

[Ray]

Originally Posted by Tobias

Not in my opinion. And not because of the dollar amount (which I think you are refering to) but because of the long-term message it sends about taking risks and being responsible for one's decisions.

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.

You're arguing against the bailout generally. Legitimate argument, and probably at the root of the anger that generated the outrage at the bonuses. I don't know which is the lesser evil - letting it go down and seeing just how bad that makes it for the whole economy and for how long, or bailing these firms out and keeping the economy vaguely afloat despite the horrible message it sends about corporate consequences. I was just arguing that the bonuses are probably the least important detail in this overwhelmingly big issue. But its the easiest to understand and get pissed about, so the press and, ultimately, politicians feed on that detail.

-Ray

[DreaminJohn]

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

[SamIAm]

Originally Posted by DreaminJohn

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

+1000

And another thing, no way does the proposed tax legislation make it into law and if it does, it gets struck down posthaste as unconstitutional, not to mention stupid.

How do you break a contract? Renegotiate if both parties are willing or declare bankruptcy. The government did not want AIG to go bankrupt so the contracts are valid and should be paid.

[johnnymossville]

Originally Posted by DreaminJohn

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

I agree, I read it two or three times so I could fully take it in.

[RPS]

Originally Posted by Tobias

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.

It's too bad we will never know what would have happened if the government had let the problem work itself out through the system under existing laws and policies; then change laws to prevent a repeat.

I find it interesting that some smaller banks are now returning or turning down "help" because they either don't need it or because the financial help is more trouble than it's worth. That part I like -- that's how it should unfold IMHO. Granted it's not the same magnitude, but the principle applies.

[SamIAm]

Originally Posted by LegendRider

Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut.

On a side note, how did the current congress and president arrive at this magic number of $250,000. It just keeps turning up like a bad penny or fundamental constant of nature.

[johnnymossville]

Originally Posted by SamIAm

On a side note, how did the current congress and president arrive at this magic number of $250,000. It just keeps turning up like a bad penny or fundamental constant of nature.

I'm gonna blame the teleprompter for coming up with that doozy.

[Samster]

no win possible here, though the letter makes some noteworthy points. as shown by some of the commentary that comes with it on the nyt site, he's not likely to get a lot of sympathy given how wealthy he already appears to be. it's a shame that this economic fiasco we're in so often comes down to "you've made more in one bonus than what many americans will make in a lifetime" kinds of statements. thinking seems to be a lost art.

and as noteworthy as the some of desantis' points are, you have to admit that the banking sector (generally) seems to have succeeded in "tearing a hole in the fabric of our economic universe." (rolling stone quote, almost). and we're re-employing these very people to fix the problem they created. how can that not piss you off?

[Birddog]

and we're re-employing these very people to fix the problem they created. how can that not piss you off?

and we re-elect the misguided morons that let this sheite blossom in the first place. Congress and the regulators didn't learn much from the deregulation of the S&L's in the 80's.

Birddog

[Samster]

Originally Posted by Birddog

and we re-elect the misguided morons that let this sheite blossom in the first place. Congress and the regulators didn't learn much from the deregulation of the S&L's in the 80's.

Birddog

that also pisses me off. perhaps even more. in fact, no matter how you look at it, from whatever angle, whichever party, i can't see any way not to be completely pissed off.