Why the AIG bonuses seriously piss me off

[elfs]

There is only one way in which "wealth" and material value is created: something of an inferior utility is converted by labor and human creativity into something of greater utility. Rocks are smelted into metals; dirt is turned into food and wood; fibers are turned into cloth. Scale and combination give us cars and computers, bars and banks, networks and notepads, all of the material of modern life.

Along the way of creating this modern world, we discovered some important and interesting things about the way people who make stuff get inspired to make more stuff. A whole industry grew up around codifying the value of one's work, of making that codification highly portable, transferrable, and even manipulable in its own right. We discovered money.

But money is only a codification of value, a representation of what others value. The entire point of an investment culture is an ability to say,

I have made things of value, and have been rewarded. I see you make things of value, and I would like to reward you ahead of time in the hopes of encouraging and empowering you to make more, faster, by alleviating your financial burdens and enabling you to hire helpers now, rather than later. If we make this agreement then you agree to return to me some ongoing fraction of your later reward as my reward for having made this investment.

The entire point is to reward smart risk-takers and punish stupid ones, all the while enabling an investment culture that harnesses human creativity into creating more value.

One value people cans seek out is efficiency improvements in this investment system. One of the less obvious places is, say, mortgages: banks give people a vehicle for investment, their own homes, and get a return on their own investment in that vehicle, the mortgage. The assumption is that these homeowners, having a home, are happier than renters, and therefore are more productive. (This assumption has yet to be proven.)

AIG is supposed to be at the forefront of this particular enterprise: their purpose was not to necessarily create wealth so much as to figure out how to reduce inefficiency, to make sure less wealth was lost to the friction of the market. Instead, they slicked the floors with snake oil and pretended they'd not only reduced the friction, they'd figured out how to make things go faster: they'd increased the velocity of money themselves, yet somehow did this without actually creating value.

(Huh... why did I never think of that before? Why did no one else think of it before? Is that some kind of warning signal: can we create an upper limit on the velocity of money, a light-speed barrier so to speak, and when an institution claims to have broken it, can we call bullshit on it? I suspect the actual velocity of money between producers and investors would be hard to quantify in a way that makes monitoring the intra-investor velocity impossible.)

What pisses people off, most notably those of us who don't watch CNBC, those of us who look at our portfolios once a year, make index moves based on the last year's performance, is that AIG is delivering bonuses to departments responsible for this crisis.

AIG is set to deliver over $780 million dollars in "retention" bonuses-- dollars of taxpayer money to the very people who created the need for a bailout. Most of us are still happy to have a job. Some of us are being required to take unpaid leave, and many of us are making concessions to our employers so that they can stay afloat.

Yes, this is a nation of laws. And we can't retroactively break the contracts AIG has with its employees. But why wasn't AIG forced into bankruptcy court so a court panel could review the contracts, as permitted by law? I can't believe the laws as they stand aren't going to change in the next three years, and probably for the worse. And you can bet those who know they're the target of fraud investigations are going to squirrel away their cash somehow as fast as they possibly can.

The anger just grows as you watch the AIG Financial Products Division, the derivatives trading group that helped wreck the world's economy, walk off with $400 million in "bonuses." For what? What are they getting paid for? And why "retain" people who were so obviously reckless?

Man, I'm this close to the pitch and the feathers, I really am.

Comments

[codeamazon.livejournal.com]

It's almost fascinating to watch how deep and wide the problems are.

It's important to remember that the way we got here was by having a very short memory and being willing to look at some particular example of corruption (say Martha Stewart) while ignoring much bigger issues.

There remain much bigger issues than a number of employees owed bonuses due to contracts that were based on measures other than company health. It's headline grabbing, but so some extent it really IS last year's budget.

What we need to be looking at are the very ways we count "financial success." Money cannot remain the sole measure. There are too many ways to hide damage and destruction to our world behind 'profit'. As you note, the whole point of money was supposed to be to measure PRODUCTIVITY. Advance. Improvement. Benefit. WORTH.

It no longer does this.

[satyrblade.livejournal.com]

Count me there with you.

[satyrblade.livejournal.com]

As I wrote years ago in Goblin Markets: The Glitter Trade, money is an illusion, the greatest magic trick in human history. By itself, money has no intrinsic worth. Its value is a consensual hallucination - a figment of our collective imagination that we all more or less agree upon. A stack of burning hundred-dollar bills creates no more heat than a stack of burning toilet paper. The value of those bills is based entirely upon a shared illusion of worth.

[elfs.livejournal.com]

There's an extended rant on "money gets is value from magick" in The Illuminatus! Trilogy. It's not a new observation, I'm afraid. That's the same book that taught me how to recognize when the press was using certain words and phrases in a way to drive you into being afraid, all in a bid to make you buy tomorrow's paper in the hopes of getting a fix that would alleviate today's neurosis.

[solarbird]

why did I never think of that before? Why did no one else think of it before? Is that some kind of warning signal: can we create an upper limit on the velocity of money, a light-speed barrier so to speak, and when an institution claims to have broken it, can we call bullshit on it?
It's called leverage ratio limits, and every time you get one of these crisises, they get levered down to sanity, only after a while to get ignored, loosened, or frauded-around to spin up another bubble like like the one we just popped, because, as always, "it's different this time," only, of course, it isn't.

[sianmink.livejournal.com]

Well you know without these retention bonuses, theses 'talented execs' who ran AIG into the ground could leave and run other companies into the ground, too!

Seriously though, AIG has to weigh the cost of paying these douchebags against not paying them and then soaking up the not-inconsiderable legal costs when said douchebags sue them for the money they so clearly deserve.

[doodlesthegreat.livejournal.com]

Pitch and feathers my ass. Get a rope and drag 'em behind a car over cactus.

[elfs.livejournal.com]

But those are artificial limits, aren't they? While I'm sure there's a gigaton of math behind it, aren't leverage ratio limits ultimately just a judgement call on the part of regulators? I suspect that what I want is something more empirical, more deterministic: the leverage ratio limit beyond which Man Should Not go.

[solarbird]

Well, these are observationally derived - that's empirical. And there's an assortment of math (as you guessed) to justify the observations. But since economics is in no small part governed by psychological factors, it's really not like physics, and really isn't going to be.

Right there with you!

[(Anonymous)]

The pacific northwest's evergreens should provide plenty of pitch.

I'm down here in Arkansas, poultry is a major export. There's plenty of chicken and turkey feathers available for the asking.

"This close"... Elf, I'm there. I just don't think it'd be effective.

Now if it were televised, perhaps a cross between "Candid Camera," "Jackass" and "Survivor," people would behave properly with the specter of negative enforcement and public humiliation hanging over their head.

Bryan.

Congratulations

[ideaphile.livejournal.com]

According to the article you linked, the average bonus is about $19,000.

I don't know what the average salary is at AIG for people who receive retention bonuses, but I doubt it's below $100,000. It could easily be $130K or more. Fifteen to twenty percent isn't some vast windfall. It's just another part of the compensation package. You might as well complain about their base pay. In practical terms, it's all the same thing.

The article also says that AIG's employees are also taking a 10% pay cut, so they're still not making as much as they were before the crash.

And AIG already laid off many people it didn't need any more because of the general contraction of the economy.

Why AIG would promise retention bonuses regardless of results is another matter, of course. It may have been a stupid promise, but it was a promise, and it factored into the employees' decision to take and remain in those jobs.

Do you really want to the Federal government to have the power to go in and decide on a case-by-case basis exactly what each employee of a failing company really deserves?

The fact that AIG is still getting Federal funding is a sign that President Obama wants it to keep operating, right? And presumably AIG is down to about as many people as it needs to provide these necessary economic services, right? So what the heck are you complaining about? Just the symbolism, that's all. There's nothing objectionable about the facts.

Obama and his people are simply manufacturing all this outrage over the bonuses for political reasons.

In other words, you're being manipulated by the same guy you just helped elect because you thought he'd bring openness and honesty to government. Congratulations, you've been duped.

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Re: Congratulations

[elfs.livejournal.com]

True, for some part. In a just world, AIG would have collapsed back in October, when the first "bailout" requests came through.

AIG is currently owned by the American people. We are the principle stockholder, with a 79.5% stake in the company as of the last "infusion." So yeah, in this case, I do want "us" to have the power to decide, on a case-by-case basis, what goes on there.

Re: Congratulations

[ideaphile.livejournal.com]

A company's owner is bound by the company's contracts.

Are you willing to sacrifice the entire concept of contract law just to deal with a temporary economic emergency? If so, you have no more sense of perspective than those in the previous administration who felt the threat of terrorism justified violating other crucial rights.

AIG has a hundred thousand employees. Less than one percent of them are responsible for what went wrong there. The rest are still working profitably at jobs that President Obama regards as crucial to the recovery. Abrogating their contracts will serve no useful purpose. Over time the problem will solve itself without sacrificing principles to expediency.

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Re: Congratulations

[elfs.livejournal.com]

On the other hand, when a company goes down, nobody talks about how "unfair" it is that the people who lost their jobs don't have them anymore. That is corporate capitalism is: workers hitch their wagons to the company in the hopes that the company continues to make decisions that maintain profitability. Nobody shed a tear when the secretaries and janitors at Enron lost their jobs, although I'm sure they were good people who would never cackle along with the salesguys who brought Enron down while he joked about how he just "jacked Grandma Millie's bills to $250 per megawatt hour." They didn't cause Enron to fail, but they still lost their jobs. That's the breaks.

Life's Not Fair.

And given what a pig AIG has been, I don't think Geithner and Obama really know what they're doing with respect to it. AIG, of all companies, should have been allowed to fail along with Lehman. The contracts AIG has with its employees would have been subject to a body of law that, surprises, arbitrates the entire concept of contract law in order to deal with a temporary economic emergency.

The entity "AIG" wholeheartedly participated in the entire sham of pretending that money could continue to make more money without ever really making things; it's overall actions resulted in the destruction of wealth, not its creation or even the mitigation of market inefficiencies. Attempting to appeals to my sense of humanity over the "hundred thousand employees" is a mistake.

You're right; I shouldn't hope that contract law is abrogated, even exceptionally, by this one case. I just don't see how any amount of hand-wringing makes one bit of difference.

Over time, yes, the problem will solve itself. I can't wait for the effects the Zimbabwe-like levels of inflation this forward-grabbing debt we've created will have. It looks as if the productivity gains of the past nine years were mostly illusory and when the fantasy money of the derivatives market is subtracted we've barely improved as a nation in making things. As I pointed out in a previous post, our government policies and our national will do not add up to an ecosystem friendly to innovation. I do not have much hope that this country, as a whole, has the mindset necessary to ever again accelerate growth the way it did in the 1930s or 1950s.

Re: Congratulations

[ideaphile.livejournal.com]

I'm not trying to appeal to your sense of humanity. That wouldn't be an appropriate way to discuss this issue. I mentioned the size of the company only to illustrate that the problems at AIG were caused by only a small fraction of the company.

You seem to think that AIG is all about manipulation, but that just isn't true. Most of AIG is profitable and prudent. Most of it provides valuable services. That's why President Obama and everyone else wants to save it. (Enron, by comparison, was a company built entirely on fraud and extortion; I don't think they had any good business going on. That was a terrible point of comparison.)

We taxpayers are only likely to get our money back from AIG if the company can get itself back onto a firm financial footing and continue operating effectively-- or by breaking it up and selling the profitable divisions. Either way, AIG needs to retain the people who have made these divisions successful.

But the larger point here is that you're being manipulated to your own detriment. Politicians are sacrificing the valuable 99% of AIG for the sake of something with no intrinsic value-- their own popularity. And they're getting you to go along with it. You're usually smarter than this, Elf. You saw through the rhetoric behind the Iraq invasion and the Patriot Act. This is the _same thing_. Why can't you see through it?

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Oh, and as for the inflation thing...

[ideaphile.livejournal.com]

Inflation isn't yet likely to be a big problem. So far the government has been able to borrow the money it's been spending on these bailouts and stimulus payments. As far as I know it isn't just printing money yet.

But even if all this spending was truly inflationary, the numbers are still relatively low. The total payouts have yet to exceed $2 trillion, which is still only about 2% of the net value of goods in the US economy (about $50 trillion in personal wealth and as much more in government holdings). Even the much narrower M3 definition of the money supply is still somewhere north of $10 trillion, but this is more about money in circulation than in the total cash value of the economy; that doesn't imply that inflation is running at 20%. It isn't.

Anyway, inflation being an increase in the supply of money relative to the supply of real value backing it, you can see how the current situation isn't even close to threatening "Zimbabwe-like" inflation.

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