Why AIG and Jim Cramer Matter
In the last months, because of the economic crisis a number of stories about the nature of American business have been brought to the attention of many Americans. These anecdotes include not only banks using bailout money for spas, travel and redecorating, CEOs of automobile companies flying on private jets to come to the Washington to ask for bailout money, and the current story of the AIG paying bonuses to top executives while being bailed out by the US government, but also stranger stories such as the ongoing silliness, to be generous, of business journalism and the bizarre television feud between Jim Cramer and Jon Stewart.
While it is true that the money spent on corporate jets, lavish retreats and undeserved bonuses is only a drop in the bucket of the broader financial crisis, these anecdotes have power that is more than entirely symbolic in nature. These abuses speak to both the substantial existing disconnect between the business elite and the rest of America, as well as the nagging inability of the former to understand what is going on and what the current economic crisis actually means. This is particularly damaging, because these leaders of the finance sector are being entrusted with a great deal of the work and responsibility for solving the current crisis. Their ongoing insistence on their own financial gain hardly inspires confidence in the rest of America.
Similarly, the Jon Stewart-Jim Cramer interaction which seemed to be all but ubiquitous on the internet last week spoke to something deeper in the American zeitgeist. On one level it was hard not to feel sorry for Jim Cramer who looked, for all the world, like the man who just cornered the market on selling knockoffs of the emperor's new threads, only to learn that some little kid over on Comedy Central had just announced to the whole world that, in fact, the emperor was wearing nothing more than his birthday suit. However, Cramer's sincere defenses of himself and his trade were not so much wrong headed as evidence that the world has changed and he, like many others, still doesn't understand what that means.
Of course, lavish bonuses, perks and other forms of compensation for well paid people working in finance are nothing new. Neither is obsequious business journalism or erratic and often wrong advice from supposed stock experts. Perhaps the current crisis has made some of this feel particularly obscene, but the issues themselves have been around for years. Because of the economic crisis, it is now, for the first time in a while, possible to discuss these matters without being shouted down from both sides of the aisle.
The question of whether AIG should be distributing bonuses while it is being bailed out by the US government is something of a straw man. AIG's position on this issue is essentially indefensible; and they will only hurt themselves even more by trying to defend this position. However, for AIG, and others like them, these bonuses are an integral part of the myth they have created that the work they do is uniquely specialized and requires sufficient expertise that the only way they can function is if, in good times or bad, with taxpayer money or their own, they pay these enormous bonuses. If that implausible construct is challenged at this moment, the whole financial sector will change. For many Americans this change would be welcome, but for those on the receiving end of the bonuses, not so much.
If the outcome of the current crisis is that we manage to get back on our economic feet and return to an economy like the one we had three to five years ago, we will have not only missed an extraordinary opportunity, but fundamentally failed to solve our real economic problems. Even before the current downturn, our economy had genuine problems of personal debt, stagnant real wages, low personal saving rates and devastatingly high costs for health care and education. We also had an economy where the government too often partnered with the wealthiest in their efforts to both enrich themselves and avoid paying their share in taxes.
A more thorough solution to the current economic problems will require us to address these problems as well as the immediate problems of growing unemployment, consumer and investor confidence and plummeting stock and real estate values. This is where the Jim Cramer's and the AIG's become important. In truth, of course, the bonuses for AIG executives are financially irrelevant, but the economic constructs for which they have become a surrogate are deeply important. Similarly, Jim Cramer is something of a financial clown, ranting about what to buy and what to sell, and perhaps even giving good advice with some regularity, but he is also a surrogate for a form of journalism that does little investigation, less criticism and an awful lot of cheerleading. The new economy, the one that not only gets us out of this crisis, but keeps us out of the next, will not have a place for either AIG type bonuses or Jim Cramer type journalism.
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George Washington ( yeah THAT one) made the point more than once that one would be a fool to trust other nations ( and by extension people in general) beyond the point of their self-interest. Boards of Directors ( dont get me started on THEM) allowed themselves to be snowed ( and sometimes actively colluded) into setting up compensation structures that rewarded the personal interests of high paid employees ( what a term! employees!!) so there compensation might be in DIRECT conflict with the best interests of the company and its shareholders. The whole D*MN pint of regulation is to discourage such double dealing, such dishonesty from raping the shareholders and the other informal stakeholders like actual working employees and taxpayers and customers and...... I can only attribute bad impulses to deregulatory filth
Paulson designed this 'Ponzi' scheme (TARP). We understand everyone wanting us to buy more stock in order to keep the market up...fix the system...t
And that FIX is simple and oblivious, but everyone seems not to be addressing it directly..
- it's 'Corruptio
ie. special interest groups, earmarks, lobbyist, elimination of rules and regulations, the financial sector having contributed over $5.2B to political campaigns, same people who got us in this mess are now tying to get us out (humanly impossible
Corruption is the 'root' problem here...as it is everywhere. Until that gets fixed first...ev
Fix the 'corruption' - then we'll have 'confidence'.
The solution – 'Transpare
How? Start now Restructuring (nationalize, fix, resell) all the zombie banks - the FDIC does this every day.
Of course it's not the size of the bonus packages that creates the problem. Nor is it the instruments (the credit default swaps). It's the fact that those who employed and peddled the instruments and who receive the bonuses didn't know what they were doing.
The argument from 'talent drain' is ridiculous for this same reason. The problem is professional standards and oversight (yes that requires people working for the governement, since it cannot be incentive based for obvious reasons), as well as the overall level of financial literacy.
Guess what? Now that I've said it, all of a sudden it occurs to me what the real problem is: that you're not supposed to say such things. Ooops. I did it again.
And I'll say it once more: a lot of people in the financial sector have zero clue about what it is that they are doing. Tell me more about talent drain. I so love to hear it.
the more things change the more they stay the same.
the most important lesson in history is the stability of human nature. the irony is that, knowing this, we are constantly surprised when it reveals its darker side.
you may think it should change or will change but nothing changes except the set.
its the most curious aspect of economic forecasting. human nature is the most dependable variable in any model but no one seems able to put a number on it.
The folks who work in finance do have a rather inflated (sorry) opinion of themselves. It reminds me of the way doctors are resistant to health care reform. They act as those they are immensely talented, that we should defer to their judgment, and not do anything to make their jobs harder. But in all fields, if you're incompetent, then you should get out of the way. That's true in medicine and it should be true in finance. Deep down, I think these people who screwed up know they did. They just don't want to admit it.
You raise some good points in your article, however...
"Similarly, Jim Cramer is something of a financial clown, ranting about what to buy and what to sell, and perhaps even giving good advice with some regularity, but he is also a surrogate for a form of journalism that does little investigation, less criticism and an awful lot of cheerleadi
When a financial journalist, involved with a media outlet, engages in conduct that he knows is disingenuous concerning the information he is promoting (as addressed to my understanding in the video clip shown by Stewart concerning short selling), then one must begin to formulate different questions, rather than begin from the premise that Mr. Cramer is a "clown".
The image of a "clown" is not quite what comes to mind, concerning the admissions revealed on that video clip. One must begin to wonder whether the FCC should be investigating it.
This crisis IN NO WAY was created by anyone other than the GREEDY GLOBAL CORPORATE ELITE. Due to the stagnant wages amongst the middle class, Americans have been unable to save in the manner they did during the middle of the last century, instead handing over the profits of their efficiency to the bottomless appetites of the parasitic overpaid executive class gaming the system to gold plate the toilets on their yacht.
The current economic structure is UNFAIR and has been designed to work AGAINST the majority of Americans in order to prop up the Oligarchy sucking off the efficiency of the American Worker like a blood gorged wood tic.
That's right stick to DENIAL. Always point the finger somewhere else. The problem in my opinion has just as much to do the the American Public as it does with the companies and new outlets. Americans have been speding like pigs at a feeding trough, most of which has been on credit cards. Gotta have an lcd hd flatscreen, gotta have an SUV, gotta have a great vacation, trendy clothes, lattes and cappucinos, dinner out.....an
DENIAL.
The stories of what people have been giving up during the recession is a COMPLETE JOKE. Sacrifice my arse. 99% wouldn't know sacrifice if it bit them in the arse!! Try giving everything except bills, food and basics for a few years and then you will be qualified to talk. Until then get outta my face.
Wow, are you ever full of it. Follow the trail of money, and you'll find the bank robber. Our economy depends on consumers buying things; it does NOT depend on a bunch of greedy insiders cooking the books and inventing financial tricks that allow them to profit by gambling with OUR MONEY. You are either naive or complicit: I'll leave that for others to decide.
Denial is a river in Egypt. BTW to suggest that Americans who buy flatscreens and clothes are bringing down the economy is moronic on your part.
now, i know this comment will get buried quickly, maybe one person will read it...
but i have to say: all of us regular folks like to act all huffy over this, BUT if any of "us" were an AIG executive, we would have done absolutely NOTHING differently. "we" would still be in this bad situation because "they" are human, just like us, and individuals are greedy, and our culture rewards greed - whether it is in banking or megachurches, we reward greed, and how silly to protest after the fact...
You are right that it is in human nature to grab it all, and that is exactly why clear regulations must be put in place to stop the abuses. There can be plenty of opportunities and even incentives for success within the corporate regulatory environment without compromising the public's safety. We need the right end-goal in mind and sufficient transparency that the will and intent of the people are met going forward.
No. Many people earn far less than they could. There are higher-paying jobs for which they have the aptitude, but they find those jobs ethically questionable, or they find satisfaction in the good they can do in their jobs. Math teachers get paid less than engineers with the same degrees. Even top-notch engineers in turn don't get as much money as middle-of-the-pack "quants" on Wall Street. Researchers trying to cure cancer work for less than similarly-qualified people trying to convince doctors to use name-brand drugs instead of generics. And so on. Yet there still are lots of teachers and researchers.
Of course, it's very unlikely for such a person to wind up in the position of an AIG executive.
I don't agree with you much at all,,, These people are not just looking out for themselves, this is MENINGEAL GREED...Li
I had a chance 15 years ago to pocket 2 million in the Cayman Islands and did not do it...Today facing a bleak retirement i would... and that is also why I have never put myself in the place of temptation since then...
My uncle taught me about temptation, he was a great teacher and his wife was my wonderful aunt and he said it was as simple as not allowing yourself to be put in the way of temptation
I think with Wall Street, it is kind of situational, in that they are all doing it and their families are enjoying the enrichment
Hopefully the new paradigm does involve getting to the root of issues. We've been living on a flat earth for too long.
I think a lot of this comes from the envy that baseball, basketball, actors etc ect... entertainers do make these huge salaries ( do the math, they do earn them ) and these people running banks, insurance companies etc etc ... are thinking that they are smarter better educated etc etc... and so deserve that much money. SORRY YOU ARE NOT THE UNIQUE and can be replaced by thousands of people who don't have your connections.
or software.
This is simpler than it seems. We've been here before. New Deal regulations were written by smart people to keep smart people from selling economic snake oil. We dismantled it, because smart people promised votes in exchange for snake oil. To everyone, Dems and Repugs combined.
What's worse is the destruction of employee and shareholders, including but not limited to unions, that removed the self-interest of the company from the equation. Who sets executive compensation? Human Resources? Shareholders? Nope. Executive Compensation Committees. Staffed not by members of the company but by other executives from a group of companies, all of whom have the motivation to inflate their own value, because they're next in line.
America does not have, and does not want, a King or Cabal to run our economy or our society. Instead, we put checks and balances into law. We don't trust each other. We never have. And we never should. Our system is based on self-interest. We can't let firms selling investments rate and finance their own investments. We can't let executives set their own salaries. You want to be King? Fine. Start a business. Your own business. You call the shots. But we should never allow anybody to be "hired" into an executive position and act like it's their company.
We have checks and balances in our political system. But what's the equivalent structure for corporate governance? I don't have a satisfactory solution to advocate.
I'm willing to bet this article rings true to most American workers in any corporate environment, big or small. It's the same dynamic played out again and again: bonuses, the be all and the end all. Companies everywhere are losing money (and not necessarily through their own foolishness, like the AIG's); but those at the top never, ever question their entitlement to their bonus no matter how much their company's losing. And maybe it's time to start throwing that perjorative term - entitlements - right in their faces. They surely do hurl it at the rest of us often enough (you know: our "entitlements," like Social Security). Well, their bonuses are their "entitleme
What you describe is the same mental illness that fuels the welfare debate. It's taken as gospel that if someone receives assistance, they won't look for work, won't want more, won't want better for their children, won't seek education, won't seek better jobs.
And it's diametrically opposed to our supposed value of the profit motive. Which is it? Hundreds of millions of Americans have always strived to do better - to work overtime, extra jobs - to go to night school, scrimp to save for the kid's college.
Yet we somehow accept that if executives aren't "guaranteed" or even promised their bonus, they'll suddenly stop working, stop innovating, and be content to live on the dole.
There's nothing wrong with a wage, and we have to force those few among us who've decided otherwise that they're deluded. Easy money at the top does NOT encourage growth. It stifles it. Real entrepeneurs take real risk. Real business people take the losses from their own accounts. If it's not your business, and your own money, you're not entitled to anything at all except a wage for the job you hold. Period.
I think I'm in love with you.
What do you expect from an an approximate 50% of the electorate in this country voted for BUSH because of his intellect-
Our WORLD ranking in education? Below 25 last time I looked!
How many Americans can define a CDS?
You are right in that many of the reactions in our country are superficial. Wagging fingers at AIG is like wagging the dog. If we as individuals do not change our appetites for consumption and do some deep introspection, what happens with AIG or the Jim Cramers of the world will be irrelevant. We need to make a conscious choice to mend our ways and self-correct. It is not the job of government to imbue us with moral and ethical demeanor. It is the same with journalism. If one spews opinions without adequate information or investigative facts, they should not be heard nor read. But this is America and that is unlikely to change. Our challenge is to sober up and look to our own personal accountability.
Good point about the "myth" that these people must be compensated to excess because of some amazing talent that none of us understand. It all comes down to a very simple fact - they are taking more money in compensation than their companies can afford.
Their real talent is that they have mastered a 2 step con game.
step 1: Continually come up with new accounting tricks to hide the true cost of their greed and show "profits" for a few years so no one complains about the excessive compensation.
step 2: When the the house of cards inevitably comes down, get everyone to believe that that it was just some market anomaly that nobody could understand or predict.
The only way to fix this is to tie their compensation to long-term performance. It has to be a bullet-proof plan and apply to all their compensation (including stock options). Put a $500k cap on annual payouts to any individual and everything above gets vested over 20 years and is tied to the company's performance. Then their incentive is for the long term, not to cook the books to show fake profits in one year for a huge bonus.
This should be applied to every publicly traded corporation. If you don't want limitations on comp, you can't sell shares to the public and must finance your company with private capital.
Unfortunately, as the NYT reported last week, this long term thinking is absent in any business school curriculum, where many of these WS geniuses come from. Jack Welch harped for two decades on the concept of increasing share holder value on a quarterly basis - and last week in an interview with the FT he says ""On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy..
The only way to right the system is to set stringent bonus and salary caps across WS - even if it means the Govt .dictating the same with new laws and regulations. Many of the current bunch on WS will leave. So let them. They can retire well on what they have looted already. The country needs new faces, new ideas and a new way of doing things in banking, finance and insurance.
Yes, I will never forget the NYT article showing his top 33 staff people... and this was in 2003..... NOT ONE WOMAN and 1 count em 1 minority..
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