Posted by Marc Hodak on March 18, 2009 under Politics, Scandal | 
Congressional inquiry of AIG retention payments
I put “bonuses” in quotes for two reasons. The first is a technical objection. This use of the word bonuses is quite different from the idea of bonuses as most people are used to hearing it. My mother-in-law in Missouri says it’s ridiculous for people who destroyed a company to be rewarded for doing so. That’s an understandable interpretation of what is happening here, if one simply takes the headlines literally. The story would be a lot less compelling if the headline were, “Executives collecting fixed payments from old contracts.” Those are payments from contracts, by the way, that the government has known about, and protected in the recent stimulus law.
The second reason for the scare quotes is that this frothing by the government has nothing to do with bonuses, however they’re characterized. This has to do with fear. Congress is afraid that if they are seen as bad stewards of our money, the public will become less willing to let them grab another trillion of it. Obama is afraid that if his administration is seen as rewarding failure, then his popularity will suffer, which will endanger the rest of his agenda. In other words, our goverment officials are afraid the people will know the truth about what they are really doing.
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Posted by Marc Hodak on March 16, 2009 under Revealed preference |
“How do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama asked. “This isn’t just a matter of dollars and cents. It’s about our fundamental values.”
That’s President Obama on his increasingly hysterical strident attempt to force AIG to renege on its contract to it managers.
For me, this the most telling moment in Mr. Obama’s presidency. Here is where he gets to show us his fundamental stripes. This is his teaching moment to the nation. His choice is as simple as it is inescapable: A or Not A:
A: The AIG executives whose irresponsible, short-sighted behavior pushed their firm to the brink of insolvency, and who forced our nation to bail them out at an unconscionable cost, are now in a position to reap the rewards of a contract that was put into place long before anyone suspected that their mistakes would lead to disaster. The media has been calling the payments from this contract a “bonus.” It is not a bonus. A bonus is something you earn for performing. It is, in theory, forfeitable if you fail to earn it. This contract guarantees payment. This is like salary that has been deferred, to be paid in installments. Calling it a bonus twists the word beyond recognition, and serves to needlessly inflame passions.
As distasteful as it to see these people receive this payment, whatever it’s called, this nation is built on people honoring their agreements. Children learn about the basic requirements of civilization on the playground when they are rebuked for reneging on their promises, or welching on a deal. Americans don’t welch. Americans don’t look for excuses to welch. We know how easy it is to find them. Americans don’t encourage welching.
Besides, we don’t need to encourage the abrogation of a legitimate contract, no matter how ill-conceived or inopportune, in order to restore a sense of fairness in this particular situation. The CEO of AIG, a man appointed after its collapse to help bring things under control, has determined that the people in this group, the group that destroyed the company, have many non-contractual elements to their pay. The non-contractual elements do not have to be paid. For the 25 top executives, their salaries, ranging from $270 thousand to $500 thousand, will be reduced to $1, largely counteracting the value of their bonuses. Every other manager in the group will have their bonuses largely counteracted by a 10 percent reduction in their salaries. These managers are free to leave, whereby they will forfeit their remaining bonuses. Or they may stay on, to try to apply their talents to remedy the destruction their unit has wrought, and be paid a fair wage for doing so.
Not A: We don’t want the company to pay these people, regardless of any agreements. We’re angry. We can’t let individuals who have harmed us hide behind a contract. Paying these people would offend our sensibilities. We will use all our power to prevent it.
A is the rule of law. Not A is the rule of men. This, Mr. President, is where you clarify for the young people who supported you what kind of country you want them to inherit. Which is it?
UPDATE: This morning I added a little to his “A” speech. He won’t mind. We just feed it into the teleprompter…
One of the more unfortunate slurs heaped upon our Native Americans is the term “Indian giver,” which is opprobrium for someone who takes back what they give or promise to another. It is particularly ironic that we apply it to a group to whom we have violently broken so many promises, using their rebellion and occasional crimes as an excuse, and taking shameful advantage of their political vulnerability.
Posted by Marc Hodak on under Executive compensation, Scandal |
You have to hand it to AIG. I teach a History of Scandal class to warn my dear MBA charges how to learn from past mistakes, avoid trouble, sidestep the pitfalls. It’s as if AIG senior executives took my class, then reversed all of the lessons in order to more efficiently get embroiled. Today, they find themselves on the front pages for not one, but two separate scandals. One of them has to do with bonuses:
President Barack Obama voiced outrage on Monday over large bonus payments awarded to top employees of insurer AIG and ordered his treasury secretary to legally block them if possible.
I understand the outrage, really, even though I cleanly lost the race of first to be angry, partly because my understanding of “bonus” doesn’t include guaranteed, fixed compensation, which appears to be the subject of this report.
So, when the President of the United States says he doesn’t want you to get your money, what does that mean? The article was careful to include “legally block them if possible,” which suggests that Big O, who taught constitutional law, is a bit more mindful of the subtleties of this situation than, say, the average Kos commenter. But no one wants the president gunning for them. The government simply has bigger guns and a hair trigger.
Now, people will note that if the government gives you money, they have a right to call the shots. Sure, but they still don’t have the right to break a contract. Especially when they don’t have to (see UPDATE) in order to obtain a fair solution.
Alas, one of the things I let my students know is that once your private situation blows up into a public scandal, the mob will have their own idea of fairness.
Posted by Marc Hodak on March 14, 2009 under Executive compensation, Scandal |
That’s right. The tax dollar whirlpool known as AIG will pay employees of its Financial Products group over $400 million in “retention” bonuses, a group of people that arguably no one else would hire.
The outrage about “Epic fail = Huge bonuses” is understandable. But this isn’t really about bonuses. It’s about guaranteed payments that the media insists on calling “bonuses” when, in fact, they are deferred obligations from contracts that may predate the crisis and current management. Unfortunately for a certain lonely Treasury official, it may not predate his involvement. He is desperately waving the media spotlight off to any another direction.
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Posted by Marc Hodak on March 13, 2009 under Collectivist instinct |
The Swiss are a peaceful, congenial people. They don’t like to ruffle feathers. They would just as soon be left alone to run their own affairs and stay out of others. And they are much too polite to tell the Americans where they should take their requests for access to Swiss accounts.
Here is how I think they would respond if they weren’t so politic:
Dear Barack Obama, Timothy Geithner, Harry Reid, Nancy Pelosi, and Kim Jong-Il:
We understand your problem. You want to tax your citizens where ever they are. If they are taking dollars or won on which they have already been taxed, placing them in foreign banks that are investing them in foreign companies, getting back euros or yen or rubles from places that don’t benefit from your institutions of justice, defense, or infrastructure, you want a cut of that, too. Fair enough.
Nevertheless, the Swiss government is not an arm of your governments. Our banks are not subsidiaries of your tax collection units. We are perfectly willing to cooperate in apprehending suspected criminals when you have provided specific evidence that conform with our extradition treaties. However, we see no reason to indulge your political prosecutions with fishing trips through our confidential files in the hope of finding new people to indict. We don’t, as your youngsters say, roll that way.
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Posted by Marc Hodak on March 10, 2009 under Uncategorized |
Remember the withering criticism of retention awards for the Smith Barney brokers? You can get reminders here, here, here, …
The gist of the critiques was nothing so sophisticated as the need to actually retain people. It was more on the order of grunts about “greed,” “pay for failure,” and “taxpayer theft,” etc.
At the higher end of this discussion were comments like this:
Where the heck are they going to go, if no bonuses (excuse me, rewards) are paid? I am talking about the “great” talent of Wall St that created such a nice and once-in-a-lifetime crisis. OK, some will leave, whatever. Most won’t. We are in a deep recession and even such “great” talent may not find alternatives easy.
So, how big of a retention risk did Smith Barney really have? Well, this big. SB has lost hundreds of brokers, to UBS, Wachovia, Raymond James, Oppenheimer, etc.–539 financial advisors so far this year. The ones they lost included the best-performing, and relatively best rewarded people. Most of the ones who remain had gotten no retention awards. They will get used to that as they find themselves working for a government entity.
Posted by Marc Hodak on March 9, 2009 under Reporting on pay |
An article appeared today titled “Top-exec pay train runs full steam ahead.” Apparently, companies are paying fat bonuses to their CEOs even though their firms failed to achieve their targets.
“Executive pay is the ultimate shell game,” says Richard Ferlauto, a longtime critic of corporate compensation practices and director of pension investment policy at the American Federation of State, County and Municipal Employees. “Boards come up with all sorts of new ways to pay people whose performance shows they don’t deserve it.”
That Dick Ferlauto, he’s always good for a soundbite. He also says, “What does ‘pay for performance’ mean if you ignore performance?” Yeah!
But wait. Another article today said that “CEO bonuses are falling fast: study.” That story says that bonuses for CEOs fell over 19 percent last year, and that was after a 4.5 percent decline from the year before. What gives? Both headlines can’t be right, can they?
It turns out that the first story was written based on exactly three examples. Somehow, all three of those examples illustrated the promise of the headline. Actually, one of the three stories doesn’t even do that–the company paying the bonus actually performed well. The complaint about the third company was that they awarded their CEO a golden coffin benefit. The headline in the first article implies that that “Top-exec pay train” applies to a entire class of executives, a significant number of people. The fact that it doesn’t, that applies to just three people, kind of makes that headline suspect, to say the least.
The second story was, as implied by the headline, based on a study. In fact, it was based on a random sample of 173 companies in an Equilar analysis. In other words, this story was based on empirical research that ended up countering the anecdotally supported claims.
If two points make a trend, I would say the lesson here is to ignore any story that does not include a study to back up the anectdotal claims implied by selected examples.
For better or worse, though, headlines are an art, not a science. Their art is purely and simply to get you to literally buy the story. If I were half as liberal as the average reporter in the mainstream media, I might suggest that the government mandate that stories be labeled “anectdotal” vs. “study” so I could save some of time reading time. But I understand regulatory behavior enough to know that as soon as I create that distinction, the market will work furiously to blur it as completely as possible, so paper can continue selling their sometimes false stories under often false pretenses.
Posted by Marc Hodak on under Executive compensation, Invisible trade-offs |
When I saw the headline, “Activists Push for Lid on ‘Golden Coffin’ Death Benefits,’ I immediately thought, oh God, what manner of micromanagement are the activists trying to impose on hapless boards now?
Golden coffin is the perjorative term, loved by unions and the media, for a form of tax-efficient deferred compensation. They are somewhat complicated structures, but they have two two salient properties: (1) they can sometimes be low-cost ways of providing senior executives with certain estate-planning or tax benefits that they greatly value, and (2) they provide a stream of payments, instead of a lump-sum, to the beneficiaries–what one might call a form of guaranteed pay.
Boards and the executives they hire clearly like the first property. They probably would be just as happy to provide this perk in the form of a straight salary, but the tax code makes that the most expensive way of delivering marginal compensation to the top five executives. Boards and managers, looking for a more tax efficient way, came up with this deferred compensation method.
Critics are fixated on the second property. Read more of this article »
Posted by Marc Hodak on March 8, 2009 under Movie reviews, Patterns without intention |
Don't mess with the naked blue guy
Notwithstanding the provenance of this film, there are no cartoon characters in Watchmen. They were drawn much more richly and intricately than people you’d find in your average mass-market flick. That alone would differentiate Watchmen from the ordinary pap emanating from Hollywood. And being adapted from a graphic novel, its characters are drawn against a lush background, both literally and figuratively.
The counterfactual element of this background should be interesting for fans of political economy. In the story, the first gen Watchmen appear around the 1940s, when the U.S. was looking for heroes. The public welcomed the “Minutemen” (as they were then called) who fought crime at home and inspired victory abroad.
Alas, no one remains a media darling forever, especially if you’re fallible and powerful. The backlash coalesced around the slogan “Who will watch the Watchmen?” The answer of course was, “the government,” which led to something quite predictable in our world–licensing and regulation. In order to be allowed to continue their heroics, they would have to register with the authorities. The public choice mavens among you would no doubt ask, “Who will watch the people watching the Watchmen?”
So, Dr. Manhattan, the one Watchman with supernatural, almost god-like powers, becomes a civil servant tasked with preventing a nuclear holocaust. He eventually becomes so detached and melancholy that he ends up hardly caring if the whole human race dies. Don’t you get that feeling from the folks behind the counter at the Post Office?
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Posted by Marc Hodak on under Executive compensation, Unintended consequences |
So, is it an “irregularity” or a “misunderstanding?” Those were the terms offered by the BofA and a currency trader, respectively, to describe that trader’s suspected $400M trading loss that had been previously reported as a $120M gain when this operation was still part of an independent Merrill.
Recall that shortly before BofA closed their acquisition of Merrill at the end of ’08, Merrill had paid significant bonuses to certain of its senior executives. One of its $10M men was David Gu, who headed up Merrill’s rates and currency operations. If this report turns out to be more than a misunderstanding, or even an irregularity, this $520M turnaround in the paper fortunes of Mr. Gu’s operations will significantly cut into the profits for which Mr. Gu was rewarded.
Such a turn would bring up the question of clawbacks. How much of a bonus would Mr. Gu have gotten if this unit’s profits were lower by $520M? Will Mr. Gu be on the hook for any of that difference?
A more fundamental question is what Mr. Gu’s complicity might have been in the bogus profit number. I doubt that Gu would have actively participated in fraud on his employer, or even tolerated fraud if he knew about it. But the numbers coming up from his unit are ultimately his responsibility, as are the systems and accounting controls that guarantee the integrity of his reporting. Is it possible that Mr. Gu had less reason to scrutinize the excellent numbers coming from his London currency trading desk than from, say, some poorly performing desks in other areas?
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