Editore"s Note
Tilting at Windmills

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March 17, 2009
By: Hilzoy

Do You Feel Lucky, AIG? Well, Do You?

I don't think that the Wall Street types have any idea at all how angry people are at them. We were angry before, but the business about the AIG bonuses -- which is fairly small potatoes in the grand scheme of things -- just sums things up perfectly.

If I were an investment banker making millions of dollars a year, I would be trying to convince the people around me to simply take the hit for a couple of years, the better to preserve our ability to go on raking it in in the future. I would seriously consider getting together a bunch of people to buy off the members of AIG's Financial Products Division who are holding out for bonuses, on the grounds that their actions will only harm us all (where us all, in this example, means: all us fantastically overpaid people in financial services.) The alternative will be much worse for them. Better to exercise some restraint.

Unfortunately, there's no sign of that. Au contraire:

"In response to expected bonus restrictions, officials at Citigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. (...)

Most traders and bankers on Wall Street get a base salary of anywhere from $200,000 for managing directors to $1.5 million for a chief executive. But the lion's share of their pay comes in the form of a bonus, a tradition that began when most firms were private partnerships and partners shared directly in the annual income of the firm.

As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation."

Dear Wall Street: bonuses are more politically radioactive than other kinds of compensation. You see, many people don't understand that on Wall Street, bonuses are essentially part of your salaries. They imagine that bonuses have something to do with, well, performance. You can see how the idea that your recent performance deserves to be rewarded might rub people the wrong way, especially since so many of you are planning to reward yourselves with their money.

But the real issue isn't bonuses. It's your compensation, period. It's the fact that, after doing your very best to wreck the world economy, you regard yourselves as entitled to levels of compensation that people who actually make things can only fantasize about. The bonus part is just the icing on the cake.

Oddly, though, the idea that bonuses have something to do with performance isn't limited to us outsiders. The WSJ article also contains this gem:

"Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street's culpability for the recession and credit crisis."

Oh noes! We can't have the notion of pay for performance turned on its head! Not on Wall Street!

Honestly: what planet are these alleged "compensation experts" living on? An industry in which it is possible for people to go on raking in enormous sums of money when their companies have for all intents and purposes gone bankrupt, and in which CEOs get golden parachutes negotiated in advance, and payable independent of performance, is hardly in a position to go all dewy-eyed about pay for performance. That horse left the barn several decades ago.

As someone who thinks that levels of compensation in the US are absurdly unequal, and that this is bad for the country, it's tempting to say: oh, go ahead, you idiots. Keep your sense of entitlement to other people's money. Make people come after you with pikes and tumbrils. See if I care.

The thing is, I don't think that rage normally leads to good policy. (Though, as I've said before, I really believe that it would help a lot with moral hazard if people found the experience of having the government bail out their firms profoundly unpleasant.) And I'm sure that my inner policy wonk will shortly regain control. Still, at the moment, it's awfully tempting. I think of people I've known who have worked hard all their lives for not very much money, only to be completely bankrupted by unforeseen medical catastrophes, and I imagine these people being asked to support investment bankers in the style to which they have become accustomed, and fury feels like exactly the right response.

Hilzoy 2:12 AM Permalink | Trackbacks | Comments (48)

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I have worked on Wall St. much of the last 20 years (Goldman, Barclays, Morgan), and this current sense of entitlement at AIG and elsewhere is dumbfounding to me. It is true that some firms have a low-base, high-bonus form of compensation: but it was always emphasized to me that my bonus depended on the entire firm's profitability, my group's profitability, and my individual performance.

I have been comparing notes with some of my friends on Wall St., and we're all kind of baffled by the "contracts" that are referred to in various news articles. Sure, a person might have a guaranteed bonus when they started, and I even knew of a few that were for two years.

But in general, there was no "contract" for bonuses. Maybe the term refers to deferred compensation from previous years, contractually promised to be delivered now? Since I have long wanted clawbacks for bonuses, I certainly couldn't object to not paying out bonuses for work that helped to wreck an international economy, required taxpayer bailouts, and devastated millions of individual lives.

Yes, yes, those details wasn't mentioned in your 2007 review, but the rain falls on the just and unjust alike.

Posted by: Grizzled Finance Guy on March 17, 2009 at 2:35 AM | PERMALINK

I agree completely with Hilzoy.

First, that rules making based on public rage generally leads to bad policy. Second, that rage still feels like the right response in this case.

We really are dealing with entrenched interests whose desires are being backed by a whole bunch of other people that are worried they could be next. Public rage could be the only thing that breaks through the logjam and starts to bring sanity to executive compensation in general.

It doesn't take too big a jump from seeing obviously undeserved bonuses being paid out now to realizing that the entire system of multimillion dollar executive compensation packages is equally corrupt.

Posted by: tanstaafl on March 17, 2009 at 2:44 AM | PERMALINK

A fucking men

Posted by: a on March 17, 2009 at 2:52 AM | PERMALINK

How about instead of "rage," righteous indignation?

Posted by: Digger on March 17, 2009 at 2:55 AM | PERMALINK

Although we aren't quite to the point of Bread Riots like those that occurred under Louis XV and Louis XVI in France in the early 1770s, it's a lot easier to understand the seething anger that preceded the French Revolution when AIG and NY banking executives behave as arrogantly as they do. They act like they deserve taxpayer money to compensate for the incredibly stressful lives they lead.

Note to AIG, NY bankers & investors: your lives are about to become a lot more stressful. You don't like regulation? You think 39% is too much income tax to pay? You think passing along toxic mortgage-backed derivatives and conspiring with media hypocrites to short sell companies into the ground is good sport? Just wait . . .

P.S. Sell your condo now -- The end of the Manhattan real estate bubble is nigh!

Posted by: pj in jesusland on March 17, 2009 at 4:13 AM | PERMALINK

..."their pay comes in the form of a bonus, a tradition that began...'

I think it's time for a new tradition.

One where these weasles are sent to jail.

Too bad the youth of today are sitting on their asses watching big screen TV instead of marching with pitchforks.

Posted by: clem on March 17, 2009 at 4:50 AM | PERMALINK

Wait, they're not Going Galt?

Or are we sure they're not some absurd stand in for the evil guys in Atlas Shrugged, reliant on everyone else while actively trying to destroy them?

Posted by: Alex on March 17, 2009 at 5:03 AM | PERMALINK

Yeah, I'm mad too. If the government is going to let AIG, a busted company, honor "contracts" for bonuses they'd better insist on GM, another busted company, honoring autoworkers' contracts for future pension and medical care or I'll be really mad.

Posted by: Richard A on March 17, 2009 at 5:43 AM | PERMALINK

"Pay for performance?" Doesn't that mean they should they be paying money back if the firms they work for have done so poorly? Contrary to Ronald Regan, maybe we'd all be better off if these guys had incentive to work a little less hard and take some time off. Perhaps a 90% marginal rate on income in excess of $1 million would get them to kick off early, head to the Hamptons and spend less time wrecking the economy.

They've been a bit too clever - it's time for us to get the cleaver.

Posted by: Bob on March 17, 2009 at 5:56 AM | PERMALINK

Here's the plan:

At yesterday's price one share of AIG can be had for 83 cents. It might cost a few bucks more for a discount brokerage fee to buy your share. Any shareholder can go to the annual meeting and usually sign up to speak. If 100,000 angry shareholders showed up at the next annual meeting they might get the message.

Posted by: Richard A on March 17, 2009 at 6:08 AM | PERMALINK

One more thing. Cut them off.

In know what you're probably thinking, and it's not an entirely bad idea, but I'm referring to their power to trade. These guys, and most are still men, need to be licensed by the SEC to trade - don't they?

Make fixing the problem a condition of not yanking their licenses and NEVER being able to work on Wall Street again ala Boesky and Milken. That's the only thing these guys will respect. It'll get their attention.

Posted by: Bob on March 17, 2009 at 6:09 AM | PERMALINK

What's most disturbing about this to me is that the AIG people have no qualms about demanding to be paid more for a year's utter failures than many Americans will make in a lifetime of doing their jobs well. Their arrogance and amoral sense of entitlement is of a piece with other "financial wizards" cautioning against over regulation and government micromanagement.

Posted by: Dennis-SGMM on March 17, 2009 at 6:27 AM | PERMALINK

I'm waiting for some AMT fix defender to argue, "You know, four million dollars a year isn't as much as you think it is if you're stuck living on the Upper East Side."

Posted by: Danp on March 17, 2009 at 6:53 AM | PERMALINK

What a shame for the government!

Posted by: Nom d'un chien on March 17, 2009 at 7:06 AM | PERMALINK

Just what is it that these people DO that makes them so irreplaceable?

Never mind their world class screw ups of the last few years or so, what is it that they have that any Wharton/Harvard MBA can't acquire in a couple of years of on the job training?

Greed kills.

Eat the Rich.

Posted by: DAY on March 17, 2009 at 7:10 AM | PERMALINK




...crickets chirp...


...tumbleweeds drift down Wall Street in an I-do-not-care-if-you-die-a-thousand-agonizing-deaths-and-rot-in-the-infernal-regions-for-all-time manner....

In short: Can we just drag these clowns from their offices, kicking and screaming, into the street and shoot them for global economic treason?

Posted by: Steve W. on March 17, 2009 at 7:58 AM | PERMALINK

"But the real issue isn't bonuses. It's your compensation, period. It's the fact that, after doing your very best to wreck the world economy, you regard yourselves as entitled to levels of compensation that people who actually make things can only fantasize about.
Thank you for putting in to words the outrage I feel at the percieved entitlement of these fat cats.

Posted by: John R on March 17, 2009 at 8:09 AM | PERMALINK

It's the same sense of entitlement as the late Bourbons, matched with the same level of competence.

No wonder the bucket shop that was the AIG London office was able to get away with it; their "superiors" were busy choosing wallpaper, or trying to get Junior into a really good daycare. These people only talk to each other. One day the bill won't be paid and the car won't show up, and they'll have to walk home from the office, and it will feel like a death march for them.

Posted by: Steve Paradis on March 17, 2009 at 8:25 AM | PERMALINK

In a country that fears its population in the sense that they have been known to gather and march in the streets when things are unfair (e.g., see French history), the government tends to do what is right by them.

But we in the States are probably too lazy to march, too busy watching corporate TV. The corporatocracy has nothing to fear from the people here.

Posted by: terraformer on March 17, 2009 at 8:26 AM | PERMALINK

Here's the reality: These people are in the business of paying themselves. Pure and simply, that is the product their companies put out: salaries and bonuses. And they've convinced themselves that this product is absolutely indispensable to the economy.

Posted by: Roddy McCorley on March 17, 2009 at 8:34 AM | PERMALINK

Troubling, though, that the media are at least allowing the planting of the meme that the Obama administration tacitly okayed those bonuses -- or stayed silent about them. The right seems to be doing its best to turn the fury towards gubment.

However, I do think Larry Summers is turning into a major liability.

Posted by: pw on March 17, 2009 at 8:36 AM | PERMALINK

But we in the States are probably too lazy to march, too busy watching corporate TV.

And it will remain ever thus until the HotPocket and Cheetos supply are threatened. Or the grid collapses. If they can no longer get their daily dose of mindless idiocy (is Springer still on?) from the lighted box, they might haul their fat asses out of the butt-dents on the couch and find it in them to rally a protest.

Posted by: Blue Girl on March 17, 2009 at 8:37 AM | PERMALINK

Well, I don't want AIG having the "luck of the Irish" (or maybe, I do want them having the bad luck.) Which reminds me:

Depending on your proclivities, please have a Happy St. Puketricks Day or St. Pooka-tricks Day! Well, to be more straightforward and "normal" (ugh) I could just say "Happy St. Patrick's Day" to everyone. Enjoy/celebrate, don't drink too "liberally" ...

Posted by: Neil O'B on March 17, 2009 at 8:48 AM | PERMALINK

Had on CNBC for a short while last night. They had on a panel that completely agreed that it is horrible for the government to ask for those bonuses back.

WashPost opinion page today has Richard Cohen saying that Jim Cramer is being unfairly critized. And another opinion about Obama being wrong about (another day, another he's wrong about) medical records.

And, of course, the corporate media is playing up public resentment against Obama because of AIG.

Posted by: SadOldVet on March 17, 2009 at 8:52 AM | PERMALINK

I've heard others say things along the lines of Roddy McCorley. The MotU really think they mostly did right, that this situation just wasn't forseeable and increasingly is one of "government interference," that left alone the geniuses would figure a way out of it, and in any case they "earned" the money so they're entitled to it.

(We'll leave aside the near-criminal negligence on the part of Tim Geithner et al. in not forbidding this sort of thing as a condition of the bailout.)

In any case, it certainly undermines the central premise of Geithner's working theory that we need to prop up the financial sector as is, encourage private investment, work with them and not against them (as in today's puff piece by Sorkin), and hope it all works out right for the economy in the end.

It's now clear they don't give a rat's ass, and we should throw them overboard if we think it might lighten the load.

I say, threaten to nationalize AIG (we already own 80% of them anyway), fire all of 'em and start fraud investigations, withhold any remaining compensation and sue to get the bonuses back, and blacklist each and every one of them. And make it very clear to any other trader or bank who tries to howl about it that they're next on the chopping block. Remind them that the government can play ball just as hard as they can, and that it's a much bigger dog.

It would definitely be a political win for Obama, and it could be a policy win, since nationalizing the banks would guarantee their debt and so further stabilize the market. It would have to be called something else -- "protection of the banks by the government, like in Chapter 11" -- and the political ducks would have to be lined up, but it could be done, if it's done quickly.

Posted by: bleh on March 17, 2009 at 8:54 AM | PERMALINK

Rich Man's Gambling Casino.
Close it.
Jesus would.
Six years of Gambling and making big bucks then

Robber Barons Years=Conservatism

Roll Dem Dice Place Yo Bets Sucker


Posted by: clarence swinney on March 17, 2009 at 8:54 AM | PERMALINK






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Posted by: clarence swinney on March 17, 2009 at 9:00 AM | PERMALINK

Apparently, they all have "Leona Helmsley Syndrome," aka "only the little people pay taxes." Or in this case, "only the little people suffer when the economy goes in the tank."

Maybe they'll get the message when the top tax bracket goes back to the days of Eisenhower, interlocking directorates are abolished and all the big firms are broken up.

Or better yet, when people start yanking their retirement plans (whats left of them) out of the market and EVERYONE boycotts Wall Street.

Posted by: bdop4 on March 17, 2009 at 9:04 AM | PERMALINK

Financial Division lost 41 Billion.

It is blamed for all losses.

A loss of 41B and 150 B + to retain the firm??

Financial Division should get no bonus.

Other divisions, if profitable, should get bonuses.

We let S&L's declare bankruptcy why not Gambling firms.

Posted by: clarence swinney on March 17, 2009 at 9:05 AM | PERMALINK

"Pay for performance" only applies to people making under $50,000. You know, like teachers.

Posted by: Run Up The Score on March 17, 2009 at 9:14 AM | PERMALINK

But, if the pit bosses and dealers are not paid, how will the Hamptons and Ferrari dealerships be saved?

Yeah, Benny Binion ran a more honest joint.

Posted by: berttheclock on March 17, 2009 at 9:20 AM | PERMALINK

What has irked me for years is the promulgated myth that in the "free market" only the most meritorious rise to the top and make pots full of money. The reality is that these people (and I don't mean all people on Wall St., only the greedy ones with enormous senses of entitlement that would put make of Reagan's cadillac driving welfare queens blush) got where they are by being in the right place at the right time, and by knowing the right people. They didn't get there by doing the right thing.

Earth to AIGFP: the fact that you are rich doesn't make you a good or worthy person. It only makes you rich. If union contracts and pensions can be torn up at the drop of a hat, then so can these contracts

Posted by: hodger on March 17, 2009 at 9:37 AM | PERMALINK

Bonuses are for performance pay, but base salary is for.... what?

Are they under the delusion that someone feels less valued if they get a raise rather than a bonus?

THESE are the minds that are trusted with large amounts of capital?

Posted by: toowearyforoutrage on March 17, 2009 at 9:43 AM | PERMALINK

But the lion's share of their pay comes in the form of a bonus, a tradition that began when most firms were private partnerships and partners shared directly in the annual income of the firm.

BTW: They also shared in the risks. Note the important difference.

Do you think any of the investment backs would've been taking large and irresponsible risks when their own, personal capital was at risk? (HINT: No).

Posted by: mars on March 17, 2009 at 9:59 AM | PERMALINK

I just love the idea that their compensation packages are sacrosanct because they're contractual obligations.

You know what else are, ahem, were contractual obligations? Credit default swaps.

AIG was contractually obligated to pay out when the MBS values went into the toilet by replacing them with other assets. AIG failed to maintain sufficient assets to do so. AIG violated the contracts that AIG wrote, which is why the company is now bankrupt in all but name.

You want to make a lawyer laugh? Assert that contracts are inviolable.

The only reason AIG still exists outside of bankrupcy is because the gov't bought 80% of it for... let's see, how many tens of billions are we into it for now?

Screw them sideways.

Posted by: RobW on March 17, 2009 at 10:08 AM | PERMALINK

Speaking of teachers (see above), why are teachers held to much higher standards than bankers, hedge fund and portfolio managers?

No Child Left Behind means that schools close and teachers get fired if they fail to increase the test scores of a constantly shifting student body by a certain percentage each year.

What about a No Investor Left Behind law? Why is our economic well being subject to the vagaries of faceless, three-times-removed investors yet teachers are held directly accountable for their students' performance?

Keep in mind, teachers don't control whether or not a student wants to be in class. They don't control how kids are raised at home, whether or not they speak English or even that they will have the same students to teach from one semester to the next.

On the other hand, investors make conscious choices about investments. They have full information about the companies and financial vehicles they invest in. But when they fail so utterly as they have these last one-two years they throw up their hands and say, "Tough luck, that's the market for ya! Oh, and send my firm a few billion more so I can keep up my club dues at Ardsley."

At the very least we should consider holding investors to the same professional performance standards as teachers.

Posted by: pj in jesusland on March 17, 2009 at 10:22 AM | PERMALINK

Two words for AIG execs: minimum wage. After all, they appear to have done a minimally competent job.

Unless, of course, their job was specifically and explicitly to wreck the world economy, in which case they did a bang-up job.


Posted by: Zorro on March 17, 2009 at 10:23 AM | PERMALINK

Not only does AGI feel lucky, this morning they won. Obama proved he is putty in the hands of Tim Geithner and Larry Summmers. The Masters of the Universe win again in their relentless effort to rule the world.

Posted by: Ron Byers on March 17, 2009 at 10:47 AM | PERMALINK

If I were an investment banker making millions of dollars a year, I would be trying to convince the people around me to simply take the hit for a couple of years, the better to preserve our ability to go on raking it in in the future.

If these people actually thought this way, we might not be in the mess in which we currently find ourselves. These people eagerly inflated to bubble for temporary gain without considering what would happen when it burst. They are incapable of forethought. So now that the consequences of their recklessness have come, they aren't going to suddenly start looking at the long term. They are going for the immediate fix, prolonging their income level for now without thinking about the effects this has on their long term prospects. And if they manage to get their bonuses this time, but get cut off the next time because of the scrutiny they have brought on themselves as a result, well, they'll just worry about that bridge when they come to it.

Posted by: ibid on March 17, 2009 at 10:49 AM | PERMALINK

I, too, am trying to harness my inner policy wonk and remain calm. It's difficult though. I keep thinking of how I would feel if some average Joe wackadoo capped one or three of these idiots in a rage and the resulting reality check.

It's so, so wrong to even entertain such an idea, but it keeps getting into my brain unbidden.

I'm a terrible person.

Posted by: Roq on March 17, 2009 at 11:19 AM | PERMALINK

Remember when Biden got such criticism from the Right during the campaign because he said Obama would be tested early in his administration??

Who knew that the threat would come from obscene AIG bonuses, not from Muslim terrorists?

How Obama handles this will determine the success of his administration. I think he has to sacrifice Geithner and Summers. They've been dithering about the economic mess, and now they're dithering about AIG bonuses. I'm fed up with it.

Posted by: PTate in MN on March 17, 2009 at 11:24 AM | PERMALINK

Dear Wall Street: bonuses are more politically radioactive than other kinds of compensation. You see, many people don't understand that on Wall Street, bonuses are essentially part of your salaries. They imagine that bonuses have something to do with, well, performance. You can see how the idea that your recent performance deserves to be rewarded might rub people the wrong way, especially since so many of you are planning to reward yourselves with their money.

Hilzoy, that's the very best paragraph on the subject I have read anywhere.

Posted by: Quaker in a Basement on March 17, 2009 at 12:42 PM | PERMALINK

I hope New York AG Andrew Cuomo has figured out that he can be President one day by marching these "masters of the universe" out of their corporate offices in handcuffs. Recovering some of the money would be nice too. Just beware the expensive hookers.

Posted by: Th on March 17, 2009 at 12:57 PM | PERMALINK

The word "bonus" makes everyone angry. One normally thinks of "bonus" as a supplementary payment for successful performance. By this definition, no profit, can't be a bonus. But the word is being used more expansively- the "retention" payments seem to be an amount promised to be paid at the end of a period if you work for the period. I can understand why such a payment (set aside the issue of magnitude) may be necessary even if the company is losing money- that is you may have to pay people to minimize the loss.
I've read statements that say "bonus" payable regardless of performance, it is virtually part of regular salary. This is the part that is mystifying to me- is compensation structured this may for some tax advantage either in US or in UK? This is the way the media seems to be characterizing the AIG bonuses- and it is perplexing- if salary why call it a "bonus"?

Posted by: Johnny Canuck on March 17, 2009 at 2:03 PM | PERMALINK

Pay for performance? Wouldn't that be a negative number?

Posted by: CDW on March 17, 2009 at 2:29 PM | PERMALINK

Insurance is the most evil industry in the world -- more evil than the military and perhaps even more than terrorists. Why? I've seen first hand how they kill and mame our citizens, literally. I've seen lies they've spent hundreds of millions of dollars to defend in order to save profit. I've seen them mercilessly "take out" the brave men and women on the front lines who dare stand up to them. I've seen people die because of their greed and hatred. Not only do these executives need to be fired with NO compensation, their personal assets need to be frozen and they need to be tried for treason and crimes against humanity. Bonus? How about life in prison? Now!

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