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Bonus Babies
Hilzoy comments on the terms of the bonus contract written last year for AIG's Financial Products division:
The introduction to the contract says that one of its aims is to "recognize the uncertainty that the unrealized market-valuation losses in AIG-FP's super-senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FP's employees and consultants."
That certainly suggests that AIG-FP was aware that there might be significant losses, as does the fact that they got their compensation locked down in a way that made it independent of their profits or losses.
Of course they got their comp locked down when they saw the storm ahead of them. This is what executives always do. Back during the dotcom bubble, corporations handed out trainloads of cheap stock options even though the practice was heavily criticized. Why? Because the stock market was going up and it was a nearly guaranteed way to make lots of money. After the bust, they suddenly took the criticisms to heart and largely stopped the practice. Why? Because the stock market was going down and it wasn't easy money anymore.
Likewise, in the financial industry, pay has long been heavily linked to performance. Why? Because the industry was going gangbusters and it guaranteed everyone a big payday. Now, though, banks are all talking about increasing base pay and cutting back on bonuses. Why? If you think it's because they've finally taken public criticisms about short-term incentives to heart, I have a bridge right here in my backyard with your name on it.
What happened at AIGFP is standard practice throughout corporate America. America's corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it's not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.
The AIG traders who got this sweetheart deal are nothing special. Management probably didn't even think twice about it. Of course you switch from performance bonuses to retention bonuses when the market looks stormy. What else would you do?
I don't, frankly, care all that much about the AIG bonuses being slashed. The only reason AIG isn't in Chapter 11 is technical (they're too big to fail!), so morally I don't see any reason not to treat them as if they were in Chapter 11 like any other failed company. That means employees stand in line for their bonuses along with all the other creditors. On the other hand, this whole thing really is small potatoes in the grand scheme of things, and Tim Geithner and the United States Congress have better things to worry about.
But the culture that brought this on? That deserves to be dismantled brick by brick. I may not care much about AIG, but if it's the spark that finally gets Americans to take the executive comensation racket seriously, then hallelujah. If it's not, then it's just a carnival sideshow.
I think this situation
I think this situation points to the desirability of keeping such firms limited in size, so as to avoid the "too big to fail" syndrome in the future. Personally, I'm not a big fan of having the government micromanage the compensation that employees receive. I figure that's a job for the firm's owners. If the compensation scheme misaligns employee and firm interests, then it's the owners who will ultimately suffer -- too bad for them. The problem, of course, is that when a firm is too big to fail, it becomes the problem of taxpayers.
If you are "too big to fail" then maybe you are too big to exist
Break 'em up.
Boronx
I wonder what would happen if we went back to a system where companies were allowed to do only one thing, whatever it is they were chartered for. AIG is an insurance company. Credit Default Swaps are beyond it's scope. GM makes cars, they can't be a bank, and so on. One implication would be that companies couldn't own other companies.
Yes, yes, and yes. This is
Yes, yes, and yes. This is how I feel about the compensation culture and these particular bonuses.
FWIW, I think one answer is, writ large, to use tax policy as a means of discouraging this ridiculous culture. It would be hard to define "appropriate bonus" behavior, but taxing 80 or 90 percent of bonuses defined as unjustified (company losing money, share price going down, short-term focus, etc. etc.) would make most of it go away.
And even if base pay all of a sudden looks more attractive now that easy profits are gone, it is still less likely to result in the negative externalities that come with the bonus culture, which is, cutting corners and taking outsized risks.
Super-Alpha Males
Now that we're going to make finance boring, what do we do with these testosterone-driven guys who loved to work 100 hours a week, torture their co-workers, and slime their way to the top?
Keynes pointed out that one virtue of capitalism is that it kept the power-hungry away from politics and in business. So while the Soviets had Stalin, we had Milkin or Fuld. Not a bad deal for us.
But it's a real issue, where do these freaks go now that finance hopefully won't tolerate them anymore? Maybe we should find an island.
The solution is the tax code.
The solution is the tax code. 50% marginal tax rate for over 1 million dollars a year. To include wages, interest, dividends, bonus, stock options, jet use.
g. powell: "Now that we're
g. powell: "Now that we're going to make finance boring, what do we do with these testosterone-driven guys who loved to work 100 hours a week, torture their co-workers, and slime their way to the top?"
These people suffer from Antisocial Personality Disorder - that is, they are sociopaths.
They should be in mental institutions. Use civil commitment laws to get them off the street.
Boronx is on to something.
Boronx is on to something. Small IS beautiful.
Isn't this the same problem that Standard Oil created in the 1890s? When will we ever remember what we used to know?
tax and eat the rich. pass the salt please.
It's like two universes; the one I live in has certain consequences 'cause I'm a chump. The one the masters of the universe live in allows them to take my money and leverage it so that they get rich. AND avoid paying taxes.
Have I got that straight? Temmeh is one of THEM. Can I expect that anything will change without major loss of blood?
AIG
Thanks to congressional rightwing and media rants and misdirection, this whole issue is becoming a great distraction from Obama's efforts to change the political and economic environment. That is, the very people we want changed are now making the loudest noise about Obama's wicked failings. Very tiresome.
You've almost got it.
The bankruptcy analogy is right: AIG is being reorganized, and indeed, it's very like a bankruptcy except that the bankruptcy laws weren't done with this kind of giant multinational in mind.
Now, ask yourself how a company in bankruptcy keeps the best people in order to do the reorganization. Do they tell those employees that they can stand in line with all the other creditors when they want to collect their paychecks?
Here's a hint: no. There are laws against that kind of thing.
And if they want to make sure that some of the employees stay around through the whole process, instead of finding a new job and giving two weeks notice? Why, they write a contract with them that says "If you stay around through the whole process, then one such and such a date we'll give you a bonus of such and such an amount."
Since this bonus is intended to retain employees, this is called a "retention bonus."
See, it's not hard to understand.
Merit Pay
My university is going through another round of the merit pay debate. I said give me one million dollars or I'm leaving you with a stack of ungraded papers. Everyone laughed.
While it is true that the
While it is true that the money involved is small potatoes in the big scheme of things, I still think the bonus issue is much more relevant for 2 reasons:
1. How do you dismantle the system brick by brick if the criminals who caused the whole debacle (I think we should start seriously start considering that AIG committed actual crimes) are not only NOT punished in any way, but are, in fact, rewarded. I truly think there is a large core of the financial sector that is absolutely rotten and the more of a brain (dead) drain we have the better. Allowing them to take home 7 figure bonuses hardly seems like a good way to ensure this stuff doesn't happen again.
2. I very reluctantly believe these bailouts are necessary, but continuing to do so requires political will. Handing the bailouts in a totally reprehensible manner, by, say, rewarding the assholes who caused the problems (and the dumb asses at the other banks who bought AIG's insurance are among that group), is a sure fire way to have that political will disintegrate.
Bonuses Are Relevant
While it is true that the money involved is small potatoes in the big scheme of things, I still think the bonus issues is much more relevant for 2 reasons:
1. How do you dismantle the system brick by brick if the criminals who caused the whole debacle (I think we should start seriously start considering that AIG committed actual crimes) are not only NOT punished in any way, but are, in fact, rewarded. I truly think there is a large core of the financial sector that is absolutely rotten and the more of a brain (dead) drain we have the better. Allowing them to take home 7 figure bonuses hardly seems like a good way to ensure this stuff doesn't happen again.
2. I very reluctantly believe these bailouts are necessary, but continuing to do so requires political will. As the bailouts have been handled so grotesquely, rewarding the assholes who caused the problems (and the dumb asses at the other banks who bought AIG's insurance are among that group), is a sure fire way to have that political will disintegrate.
"The only reason AIG isn't
"The only reason AIG isn't in Chapter 11 is technical (they're too big to fail!)." This is not correct or completely accurate so please avoid repeating this bit of common wisdom. The reason AIG is not in Bankruptcy is that 1) it is an insurance company and therefore excluded from the bankruptcy laws, and 2) because the bankruptcy Code and many state insurance company receivership statutes were amended to add provisions that exclude credit default swaps and other derivative transactions from the stay provisions and avoidance powers of the trustee. Therefore, these contacts would not necessarily be abrogated as, for example, the autoworker union contracts or the bonus payment contracts could have been. See e.g., 11 U.S.C. § 546(e). It is the derivative type transactions that make this a big problem, not the bonuses.
Thanks, Charlie
Thanks for the remedial retention bonus lesson. Though, I'm pretty sure everyone on this thread gets the theory behind retention bonuses. I think what we are all struggling with is the fact that it's not clear you really want to retain the worms who caused the problem in the first place. In addition, this seems far from over so you would probably want to continue to retain the best and brightest. Which makes it odd that at least 11 of the people who got the "retention" bonuses no longer work there.
It's as Kevin described in the original post. The masters of the universe always justify huge compensation. When the environment changes they change the terms of the compensation, but always ensuring themselves grotesque salaries.
I have a feeling this is
I have a feeling this is going to end up being some sort of "battle of the titans", in which a whole generation of entitlement-drunk bankers pulls every crafty trick in the book to maintain their lifestyles and jobs--with the ready connivance of Geithner and Summers, who are after all cut from the same cloth. With the lack of leadership on Capitol Hill and the cravenness of congress, we'll be extraordinarily lucky to get a pallid ghost of Glass-Steagall reinstated, and as to the notion of any of these bankers paying for their failure? Phhht. It's pretty clear by now that the recession is going to get much, much worse, unless of course you're at the upper reaches of financial services.
I have a feeling this is
I have a feeling this is going to end up being some sort of "battle of the titans", in which a whole generation of entitlement-drunk bankers pulls every crafty trick in the book to maintain their lifestyles and jobs--with the ready connivance of Geithner and Summers, who are after all cut from the same cloth. With the lack of leadership on Capitol Hill and the cravenness of congress, we'll be extraordinarily lucky to get a pallid ghost of Glass-Steagall reinstated, and as to the notion of any of these bankers paying for their failure? Phhht. It's pretty clear by now that the recession is going to get much, much worse, unless of course you're at the upper reaches of financial services.
Because of the politics.
badpenny reason #2 is very relevant. It will be easy to demagogue the bailouts, but I believe they are necessary (at least in some form). So, some political cover is created by going after the apparently guilty parties.
Now, retention bonuses, are designed to keep around a small number of key people who are vital to cleaning up the mess. Somehow, I really doubt these are the same people who actually created it. Now, if the bonuses were only going to the cleaner-uppers, not the gamblers -they might make sense.
And think how AIGFP bonuses must be playing out with the AIG employees that aren't part of the financial products division. They will probably get laid off -as the hit to AIGs PR is so severe it's business is drying up -and they see the people who blew the thing up getting the big rewards!
On the other hand, this
On the other hand, this whole thing really is small potatoes in the grand scheme of things, and Tim Geithner and the United States Congress have better things to worry about.
Those who say this bonus issue is not a big deal because the numbers are relatively small are missing the big picture, I think.
We don't decided whether or not to prosecute murderers by comparing the number of people they killed to the total number of nationwide deaths. If you kill someone you need to be punished and other killers need to be deterred. Anyone saying, hey, why worry about this guy murdering his wife when 30,000 people died in car accidents this year? would rightly be ridiculed as a moron.
Allowing these AIG crooks to keep their bonuses would mean rewarding them for tanking their company and the world economy. Letting them know that they'll at the very least be denied their million dollar payday (for a single year, anyway) would at least send a signal that you can't just keep getting away with this shit forever.
This is as big a big picture issue as these things get. Stop the culture that allows executives to essentially raid the public companies they are supposed to serve. That's the entire problem here. We need to get started on this somewhere and the AIG bonuses (as deeply symbolic as they are) are as good a place to start as anything.
From a strictly political standpoint, it would be nuts not to take the ball on this and run with it. Reigning in executive malfeasance should be a major Democratic priority. And finally, with this AIG thing, we've got something that really shows the country that the class war has been going on for decades and the rich have been killing us.
Also, if the millions in bonuses are such small potatoes, why not toss a few of those potatoes my way?
Hear, Hear!
Thank you. This is what I came to the comments to say.
RE: If you are "too big to fail" then maybe you are too big..
RE: "If you are "too big to fail" then maybe you are too big to exist"
Wow, that statement couldn't be more perfect. I feel exactly the same way, in all situations.
- Julie, consultant for Credit Report
An offer they can't refuse
It is simple in the land where water torture isn't torture--then there are no offers that can be refused in the name of national security. Either the bonuses will be returned in full or the execs brains will be on the contract (start with Liddy) as will his or her family--that way these executives would "willingly" offer their entire holdings to cause of America. They would remain tenants in their zillion dollar homes but they would own nothing! At the time the American public has been repaid the debt then they can start to own things again. These people have lost the right to make terms and the price of non-compliance is the price of a single bullet, i.e. an offer they can't refuse!
It's the Bonus Army!
At the beginning of the Great Depression a great mass of unemployed veterans descended on Washington to demand their WWI bonuses. The bonuses were supposed to be paid fifteen or twenty years down the road, but the veterans demanded them immediately.
Today there are these executives, who are mostly employed, who are veterans of gaming the system and destroying the economy, who already have their bonuses and Washington would like to get them back.
Are there other ways in which the present is a perverse mirror of 1929?
Bonus? Pah! They're balloon payments of delayed compensation!
tagged as:- result
Those payments are not what the media thinks they are. The contracts were written in Jan 2008 to give to the technician managers of the bundles of CDO's that remained after firing Joe Cassano and shutting down his financial products division because of the losses that had occurred in the CDO's AIG was managing.
AIG had massive investment in the remaining CDO's. The current investment is still $1.6 trillion dollars. They have a fixed termination date and don't pay off until that date, and have to be managed on a daily basis every day until that final date. Each bundle of CDO's has to be hedged against changes in default risk as the risks in the market change. The technicians, the bundle managers understand both the hedging markets and the particular structure of the given CDO bundle they are managing. Replacement bundle managers simply cannot be trained and trusted not to cause a default of the CDO which loses the entire investment AIG has in it AND triggers massive default penalties. It is critical that each manager remain on the job until the last day of the bundle he manages.
However, AIG has shut down the FP unit. After the bundle expires, there is NO JOB for them at AIG. AIG is reverting to being an insurance company and has been since January 2008. Only, they have to recover the investment in each CDO bundle without it going into default, which can only be done after the Bundle final expiration date has passes. Then those managers are out of jobs.
How do you stop the managers from finding new jobs and moving on now, instead of at the end of the life of the bundle they are managing? Keeping those managers on the job for the life of the investment is crucial to the recover of the funds invested in those CDOs by AIG, and that is crucial to AIG actually repaying the taxpayer bailout funds. The alternative is a series of defaults in which the investment funds are lost, AIG is destroyed, and the world banking system is seriously threatened at least. Imagine the economic consequences of that. That will be avoided if those managers remain at their jobs until the contracts expire and the investment in each intensively managed bundle of CDOs is recovered with the expected profit.
Those payments should be called deferred compensation with a balloon payment contingent upon completing the job to the final expiration. They don't get the pay until the job is finished. Which explains the 13 bundle managers who have left AIG before getting paid. They had to finish the job to get paid, and after that, the job was over.
The $175 billion in taxpayer money will be repaid with a significant profit if the bundles don't go into default. It is WORTH taxpayer money to pay those bonuses if it keeps the managers protection OUR investment funds and keeping them out of default. You want the managers to collect that money. I want those managers to collect that money. That means they finished successfully and WE GET THE BAILOUT MONEY BACK - with interest. Probably a big profit.
Only the incompetent financial media is looking for a story to sensationalize, so they misread what the so-called "Bonus" payments are for. The media consist of essentially incompetent reporters and shills selling investment products. It's a frigging game to the media. Jon Bennet Ramsey is gone, there hasn't been a murdered white girl to sensationalize for months,and OJ Simpson has gone to prison after all, so they have latched on to this. They have nothing else to pile on to. The Republicans are egging them on because they are incompetent, losing as politicians, and venal. Republicans are aiding and abetting in large part because they are almost universally negative talking assholes.
Oh, and the managers are back-office administrative technicians. They supported the sales turkeys after the sales people sold the products. Period. The managers do not sell product, nor do they generate revenue. AIG fired all those sales people in January 2008 when they started to shut the FP division down. The sales people were the decision makers who created those products that turned out to be so toxic. The bundle managers manage nothing except their own staff who are responsible for on-going monitoring of the existing contract bundles.
Bonus payments? Forget it folks. There's simply no real story there.
OT
No more Kevin Drum for me. This site locks up my computer for several minutes each time I go to it. Goodbye and good luck.
Bonuses for accountants and quants?
Rick B claims the technicians are getting the bonuses to keep them on while they wind down AIG FP's exposure.
Since when do technicians get bonuses of $1 million to $5 million or more?
I'd like to see some substantiation that the bonuses aren't just going to the suits. I find it hard to believe AIG FP ever paid accountants and quants this kind of money.