Why are People Defending the Bonuses?
Ever since the AIG bonus fiasco, a surprisingly large group of observers in the media and elsewhere, with gravely sagacious overtones, have assured us that bonuses in themselves are at the heart of American capitalism. Being rewarded for a job well done -- and sometimes getting rich -- is as American as it gets.
Not the way Wall Street doled bonuses out, however.
In general, well before government bailouts, few if any of these giant bonuses had truly been deserved. And I think most Americans know that. They know their bosses are not that smart. And let's stop calling all these young impresarios "wizards" because they can do some arithmetic. None of them invented calculus.
First, the bonus system led to tragically bad decisions. There was no risk management on Wall Street. There was mostly excessive risk-taking. And it was largely due to outsized bonuses that rewarded risky banking and trading while penalizing anyone minimally for losses. Workers should not be paid this way. Economists even have a name for it: an agency problem. Too bad more of them didn't speak up and complain a lot sooner. (Thank goodness, Ben Bernanke is at last saying this publicly.)
Second, bonuses at the old levels were never deserved. They were paid as some percentage of profits, as if these magicians created these profits entirely themselves. This is nonsense. It's a bit like saying the president of the United States deserves ¼ percent of any rise in the GDP when he is in office because he made a few right decisions.
Profits can be created in the near term by any given trade. But that profitability is made possible because of the existence of an enormous financial infrastructure that has nothing to do with the efforts of today's bonus babies. A system of opportunity was created by the dint of effort of thousands who came before these rewardees and made enormous innovation in financial markets, communications and so on. The infrastructure was, as importantly, built with intensive government investment in peoples' educations, in transportation, in private property protections, in rules that make markets work, in insurance for savers, in protections against discrimination, and so on.
How many of these "wizard" MBAs got government loans to go to school? How many went to public high schools and state universities?
The industry is also a monopoly -- or an oligopoly, which is many firms acting like a monopoly. Otherwise, why are profits so high and rarely competed away? (Lack of open information and manipulation may also have big parts, of course.)
Oh, you say, what about those athletes' salaries? They, too, depend on an enormous infrastructure. The state even finances new stadiums. But the comparable bonuses on Wall Street went to many more people with, I dare say, less talent. Many on Wall Street made far more, as we know, than Alex Rodgriguez, but they are less indispensable. The profits to be shared are incomparably higher on Wall Street than in baseball, but they would have been made without the top one hundred or two hundred Wall Street earners.
We don't in America put a ceiling on what people make, even if they do so by exploiting a huge loophole in the nation's competitive economy. In other words, by taking a special seat at a monopoly table.
On the other hand, we have every right to limit those earnings if they lead to massive increases in systemic risk -- risk that can bring down a world economy. And this is what they did.
These bonuses are not deserved on the basis of talent or contributions to the economy, and they distort financial markets badly, which severely damages us all.
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I don't see anyone defending whether the AIG folks deserved the bonuses.
That is misleading. It isn't what the argument is about.
The argument is about whether or not AIG should have broke their contracts. (And then go to court, lose, and pay double).
The company went in the crapper. The folks in charge did not do a good job.
But if their contracts state that they are going to be paid this money, then they need to be paid, or the company goes bankrupt. No middle ground.
Either the events occurred that fulfilled the necessary conditions laid out in the contracts, or it didn't.
We are a nation of laws. Not a nation of pitchforks and mobs.
It appears that we revere conspicuous consumption, and this boisterous "I got mine" attitude. From "Lifestyles of the Rich and Famous" to "Cribs" to "Keeping up with Some B Lister Family," Americans have ogled at wealth.
We really need a change in mindset where frugality, modesty and charity are considered virtuous.
But I guess "Lifestyles of the Philanthropic" wouldn't make a good TV show.
The people who defend bonuses remind me of big movie stars who think they deserve $20 million a picture, even when that picture tanks.
Or baseball players who have a .200 batting average who think they're worth all those millions.
Fact: 1959, Tom Watson, CEO of IBM had a salary of $100k per year. Fact: 1954, Y.A. Tittle, San Francisco 49ers quarterback's salary was $20k per year, highest in the NFL.
When Willie Mays moved back to New York in the twilight of his career, he was paid $225,000.
I remember because it was in the headlines back in '72 or '73.
I don't think any pro-athelete is worth millions of dollars, I don't care what their batting avg is.
Bottom line---they play a game. Juiced up. Gimme a break.
Arrogance, self entitlement and greed are old news, the societal sanction around it in the last 20 years is new. The pendulum is swinging back to reality. Nobody deserves multi-million dollar bonuses for "passive" work, I don't care how many hours you put in crunching numbers. I've seen overworked, sleep deprived analysts blindly follow their Managing Director's orders off the financial cliff because they work in a zombie like state pursuing the next bubble in search of a year end bonus. They are like pigs digging for truffles, oblivious of the real world and the societal implications around them.
Precisely what business is it of the stupid government by what means and how much somebody get's paid? If running the company is the pre-condition of the bailout, that's fine. Otherwise, I suggest you mind your own business.
I'd suggest that if a company accepts bail-out money to a tune that accounts for over half their worth, that determining how much someone makes becomes the stupid business of the bailout-er. It's pompous arrogance that the bailout-ee would suggest the bailout-er has no say in the future running of a such a company.
That's not rocket science, overdog1, it's common sense and human nature. If the company wants to continue 'running the company', it needs to say, LOUD and CLEAR, "Thanks for the offer, but No THANKS," and pass over the monetary help.
You may not be aware of it, but many banks said, "No, thanks" but were told they HAD TO accept the money. JP Morgan is a case in point.
It may not be the governments business how much somebody gets paid, FROM A PRIVATE COMPANY, but a public company is a whole nother matter. The government has a responsibility to protect the public interest and where a company is publically held....the interest of those owners should be protected....thus REGULATION is needed. Its just comman sense. Would you loan money to a stranger? Is is the business of government and it is long overdue.
I am amazed this morning to learn that TARP recipients are donating to both Democratic and Republican law makers. Wake up America! You have something that you could learn from Canada. It is now illegal in Canada for any business or private organization to contribute to political campaigns or to politicians. Only individuals can make personal political contributions and those contributions are very limited (around $1,200 total per year) I believe. In this way political favors cannot be bought (well openly that is). Very interesting outcome of this is that Conservatives (Republicans) give much much more than Liberals (Democrats). I believe that the average Canadian gives around $200 to political parties. All donations must be made by check or by a secure (Pay-pal) system. No cash donations are allowed. All donations must be recorded and properly receipted for tax purposes, with official Revenue Canada tax receipts issued. Every system can be manipulated, but on the surface, it is a very open and transparent system. If you believe this could happen in America, I have some swamp land in Florida I can sell you!
Bribery!
If these people who are less talented than a used car salesman is worth 1 million dollars month. Then someone who has contributed much more to society through science was overlooked, and I should be pulling in at least a BILLION DOLLARS a month. I guess overlooking talented minorities is part the system? I forgot it's democracy-F.A.K.E.
www.bccmeteorites.com
Because the rich wrote the rulebook?
The whole "bonus" issue is a mess that defies reason in multiple ways. It appears that the country is engaging in a post-facto "how things should be" evaluation of the whole situation - and it is difficult to uncover very many of the old "stubborn" facts -- like, are these truly performance based "bonuses" -or- were they, as I have read elsewhere, actually fixed amounts of compensation that were specified in agreements set up in 2007? - If they were really "fixed amounts of agreed upon compensation" for selling some really stupid financial instruments that became essentially worthless, well...on one hand it becomes outrageous to see these dollars paid out - on the other hand, it is dicey when agreements can be selectively invalidated based on how irritating they may be. Yes, I think that from the very beginning, the ridiculous commission / incentives paid to the folks who sold these dopey instruments were stupid, stupid, stupid...but I am also a bit uncomfortable with selectively instituting -after-the-fact taxes in response to all of this. If these were truly "bonuses" that tied to company performance it would seem that the company should have said "things are bad this year - so No bonuses" - but if these were fixed agreements, it may be a bit of a different story.
No it odes not defy reason. It doesn't really matter how you parse the original contract. The instant ownership vested in the taxpayers the original contract is unenforceable. Those promises were wiped away because a new contract takes precedence over the defective contract which reflects the new financial condition. The problem is that the government let them write their own contract under old premises which no longer exited. This is like a merger. The ailing company has to acquiesce to contractual arrangements from the healthier buyer. The taxpayer, or let them sink, which in my view would be for the betterment of the economy.
- obligations to pay are not wiped out simply by a change in ownership. In a merger, or acquisition, the acquiring company has to shoulder the valid obligation of the acquired company - or do some serious negotiation with the individuals who are owed. The acquiring entity cannot just selectively toss out agreements. If AIG had entered into a really dumb - but legally valid - agreement to pay a certain amount of money to someone, a change in control of AIG would not eliminate this obligation.
Background:
I am somebody you would live down the street from, whose income would go from just over the limit pre-tax to sub-$50,000 post-tax. My group creates conservative investment, which have performed especially well during the financial troubles in 2008. I am responding out of both self-interest and concern for the declining character of my country.
America is currently under the grip of hysteria after the publication of the AIG bonuses. Clearly what happened in this case deserves great scrutiny. But, how can our leaders move from taking responsible investigative action to enacting indiscriminate punitive legislation? My work has nothing to do with the housing crisis. It has nothing to do with AIG. I help those Americans with savings to find safe ways to invest their money. Yet, my compensation for a job well done is being confiscated as if I stole something. The indiscriminate nature of the House action yesterday represents dramatic prejudice.
Reaction:
It is reminiscent of some of the uglier periods of human history. We can point to many times in history when a single group was treated as the cause of society"s problems. This group was indiscriminately blamed for its nation"s economic problems. Members of the group were first subject to ridicule. Then, their property was confiscated. Later, they were subject to the ultimate prejudice. The funny thing is that the single group who should be labeled with the Scarlet Letter are the borrowers who put us in this place.
Had those who had the power to give the retention awards/bonuses out acted like adults instead of greedy 10 year olds, there would be no need for any legislation to clawback the funds.
You need to get away from your desk and get some fresh air. You're out of touch with reality and the real world.
My heart bleeds for you. Perhaps you and your enormous talents should change careers.
Instead of "creating conservative investment," how about teaching an algebra class? Teachers, cops soldiers and sailors, nurses, firefighters. These are the people that really contribute to our society and are really underpaid. Anti union propaganda has been around since before Reagan busted the air traffic controllers and continues today. And all you have is "blame the borrowers?" Please!
Can you, in good faith, indiscriminately confiscate the incentive compensation of all employees of firms who received TARP money? There were many, many actions that led to our nation’s current economic misery. Some actions were well-intended, but mistaken. Others were criminal. These actions were conducted by regulators, politicians, business people, consumers and others. Shall a single group, bankers, be condemned for the myriad acts that placed us in our current position? If so, one must wonder, after indiscriminately confiscating our property, what next?
Solutions:
This will cause a majority of the large TARP banks to stop lending and start saving to payback this year. Personally, I have been contacted by 4 non-TARP financial institutions in 2009 alone. I do not need to stay at my TARP employer, neither does most of my team. You will end up driving away the top revenue producing talent from the same companies you are invested in. Think about your investment, because there are plenty of places for me to go to earn my compensation. MBA/CFA/Ivy league talent will always find employment.
"You will end up driving away the top revenue producing talent from the same companies you are invested in."
You mean the same revenue producing talent that gambled on severely risky hedge funds and plunged their companies, and ultimately the entire world economy into a major recession? As far as the American people go, these people need to be fired or put in jail immediately. Your argument simply holds NO water
Thank you. I say let these "talented" individuals find other jobs. Rather than "talent," I hear and perceive a sense of bloated ego and "entitlement."
I can only speak for the institution that I work for, but the "revenue producing talent" that got us in this place are a)not around any longer and b)not the same ones that are still around. Simply said if you want to keep the talent that is still producing revenue then BACK OFF. Otherwise these teams leave and you are the ones holding the paper bags.
Background:
I am somebody you would live down the street from, whose income would go from just over the limit pre-tax to sub-$50,000 post-tax. My group creates conservative investment, which have performed especially well during the financial troubles in 2008. I am responding out of both self-interest and concern for the declining character of my country.
America is currently under the grip of hysteria after the publication of the AIG bonuses. Clearly what happened in this case deserves great scrutiny. But, how can our leaders move from taking responsible investigative action to enacting indiscriminate punitive legislation? My work has nothing to do with the housing crisis. It has nothing to do with AIG. I help those Americans with savings to find safe ways to invest their money. Yet, my compensation for a job well done is being confiscated as if I stole something. The indiscriminate nature of the House action yesterday represents dramatic prejudice.
Reaction:
It is reminiscent of some of the uglier periods of human history. We can point to many times in history when a single group was treated as the cause of society’s problems. This group was indiscriminately blamed for its nation’s economic problems. Members of the group were first subject to ridicule. Then, their property was confiscated. Later, they were subject to the ultimate prejudice. The funny thing is that the single group who should be labeled with the Scarlet Letter are the borrowers who put us in this place.
So the borrowers all walked into the banks, twisted the arms of the loan officers until they agreed that the bank's money would be put at great risk? In other words, who forced the banks to take such a HUGE risk? No my friend, the poor borrower taking advantage of money practically being rammed down their throats was not the problem. The problem was that everyone that held the mortgage quickly pushed it downstream like some monsterous hot potato and after taking their profit from it.
This article is a pretty convoluted essay. Here, let me simplify.
1) Bonus money was not 'earned'. It is not from profits. It's from taxpayer money. That alone is reason enough not to grant it.
2) It's money used practically to reward bad behavior. The bonuses went to the execs who got us into this trouble in the first place. Not to mention, of course, funds paid as 'retention bonuses' to employees who left the company regardless.
"And let's stop calling all these young impresarios "wizards" because they can do some arithmetic. None of them invented calculus."
Understatement of the century. Actually it's the math that got us into this mess in the first place. These sub-prime loans came from an algorithm developed in 1999 that isn't relevant anymore. These folks were far from wizards -- they were dunces.
So there you have it, an oversimplified reply, but do the points bear repeating? I certainly think so!
Let's not overlook that pro sports get an exemption from anti-trust legislation too. This means such teams often hold their cities hostage for new stadiums, and other perks. Three quarters of Bush43's net worth came from a stadium deal in Arlington Texas.
Meanwhile the City of London has 13 soccer teams, and they're doing quite nicely in entertaining the sports fans.
See David Cay Johnston's "Free Lunch" book for this and other scams.
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