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 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 $400 million in “retention” bonuses, a group of people that arguably no one else would hire.
The outrage about “Epic fail = Huge bonuses” is understandable. But this isn’t really about bonuses. It’s about guaranteed payments that the media insists on calling “bonuses” when, in fact, they are deferred obligations from contracts that may predate the crisis and current management. Unfortunately for a certain lonely Treasury official, it may not predate his involvement. He is desperately waving the media spotlight off to any another direction.
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Posted by Marc Hodak on March 4, 2009 under Executive compensation, Scandal |
The big report today on the cover of the W$J and Reuter’s feed was that Merrill’s top ten paid executives earned $209 million for 2008.
The story (Version 1 – Wall Street Journal): 2008 was a horrible year for nearly everyone; big banks like Merrill were responsible; they would have failed, but they got bailed out by us (taxpayers); their top executives, far from suffering like the rest of us, made millions, or tens of millions (from us!). But the NY AG is investigating the bonuses, so they may be made to pay for their greed. The moral of the story? Greed is alive and well on Wall Street, and we’re getting taken advantage of, except that our valiant public servants may set things straight.
The un-story (Version 2, teased from the same set of facts): Read more of this article »
Posted by Marc Hodak on February 26, 2009 under Scandal |
The Wall Street Journal continues its descent into tabloid territory. Below a poorly cropped picture of Paul Greenwood mashed up against that of strutting horse was the following caption:
Money manager Paul Greenwood, left, [as if anyone would mistake the horse for a Greenwood] after his arrest Wednesday. Authorities claim he and associate Stephen Walsh spent lavishly on horses, houses, and collectible teddy bears. Right, Mr. Greenwood’s horse farm [because we’re still having trouble differentiating Greenwood from the horse] boasts show ponies that can fetch more than $100,000, according to his web site.
Nota bene: the authorities weren’t quoted as claiming that the money used to buy this stuff was robbed from customers. No, they’re being quoted as saying it was spent lavishly. Last time I checked, spending lavishly was not a crime, which brings up an interesting question about scandal reporting: why are authorities being quoted on how the money was spent versus how it was acquired?
To appreciate the answer, one must understand the stages of scandal prosecutions. Every scandal has a target of outrage. That target is tried first in the court of public opinion before being tried in a court of law (if they actually get there). In the court of public opinion, it’s much easier to convict someone for being rich than for being a fraud. The Wall Street Journal is basically pronouncing a verdict without a trial, using pronouncements of “authorities” as its cover to say what it wanted to say.
It is also helping the government prepare for a prosecution. Fortunately, a court of law has slightly higher standards than the court of public opinion. “Too rich to be innocent” is not quite a high enough hurdle. The first Tyco prosecution was almost entirely based on lurid tales of $6,000 shower curtains or umbrella stands, a $2 million birthday party, and various mistresses. I was there, and the incompetent prosecutors resembled chimps banging on pots with their disjointed presentation of loudly irrelevant facts. They ended up confusing the jury, and failed. It took a second, much more streamlined prosecution focused on what the defendants actually did to their shareholders, to get convictions.
But the real trial will come later. First, the public trial and the verdict.
Posted by Marc Hodak on February 25, 2009 under Scandal |
No over-priced pansy auto CEO could be this good.
Posted by Marc Hodak on January 29, 2009 under Politics, Scandal |
1,736,219 people trusted this guy
Gov. Blagojevich asked the Illinois Senate that is acting as jury in his impeachment trial, “How can you throw a governor out of office who is clamoring and begging and pleading with you to give him a chance to bring witnesses in to prove his innocence?”
The answer kind of lies in the question, I think.
Hey, I don’t know if Blago is guilty or not. My prejudice of politicians says, “Of course he tried to use his public office for private gain. What are you thinking?” My prejudice of prosecutors and the press is along the lines of “Sentence first–verdict afterwards.” I’ve been teaching about scandal long enough to know that scandal is a creature driven by raw emotion. Nevertheless, I can’t summon the outrage about his proceedings. He and his accusers are in the profession they have chosen.
The whole spectacle serves as a great civics lesson about the wisdom of the constitutional prohibition on bills of attainder.
Posted by Marc Hodak on December 30, 2008 under Invisible trade-offs, Scandal |
A Reuters reporter created a story that began like this:
Cynthia Goldrick’s daughter is in and out of the hospital for brain surgery, her mother has Stage 4 lung cancer and her father has moved into a home for the elderly.
So when the Goldrick family’s adjustable rate mortgage reset while husband Patrick was off work for a job-related injury, it eliminated the thin margin between their income and the mortgage payment and put them on the road to foreclosure.
While these circumstances may seem extreme — a perfect storm of bad luck — the basic economics of a hike in mortgage rates and a bank’s inability or unwillingness to modify terms have been shared by many Americans over the past year.
Let me see if I got this story right. A family runs into horrible luck with their health. The adjustable rate on their mortgage adjusts. Lots of people saw their adjustable mortgages adjust up. I think what this story is aiming to do is link the hike in the family’s mortgage to their foreclosure, and claim that this is symptomatic of a nationwide problem with mortgages. But this is a strange tale.
First of all, this family is faced with losing their home because of a string of factors, mostly health related, with the mortgage adjustment being just one of them. But a story has to have a villain, and they don’t want to blame God. Second, very few people are defaulting because they are suffering anything like bad luck visited on this family. It trivializes their plight to equate this family to the deadbeats who got mortgages they couldn’t afford, often under false pretenses, and the stupid lenders who indulged them.
Likewise, it doesn’t make sense to demonize the banks that gave this family money. Either the family deserved the loan at the time (in 2005), or they didn’t. Either way, the bank gave them the money. Now that this family is unable to pay back the loan, yeah the family risks having to downgrade to a cheaper home, but the bank is also faced with a disappointment that threatens its well-being. It’s hard for me to see how the banks are the bad guys in this story–which is clearly how they are portrayed–for the sin of trying to minimize their losses.
The end of this story includes a note that investors, finally seeing light at the end of the tunnel, are starting to come back into the mortgage market:
But that won’t help the Goldricks, who like many other families are in danger of losing their house and not likely to benefit from the $700 billion that Congress has allocated to Wall Street for bailing out financial institutions.
“I am absolutely bitter,” said Patrick Goldrick, who sees the scandal surrounding investment advisor Bernard Madoff as further evidence of Wall Street wrongdoing. “I am bitter toward Congress and bitter toward the big banks and the creepy billionaires who get away with stealing pensions.”
Bitter toward the big banks? Here is a family that had four major things go horribly wrong (plus the work-related injury, which was presumably temporary and covered by insurance). Of those four things, the only one that they consciously signed up for was the adjustable mortgage. They presumably didn’t want a fixed-rate loan–they wanted a step up from a cheaper rate to a more expensive one. The story doesn’t suggest that their choice about this was uninformed.
In fact, it’s possible that this family did, in fact, take on a loan they couldn’t afford long-term in order to help their sick daughter in the short term. I wouldn’t blame them for such a decision. I would probably make the same choice if it were one of my kids who desperately needed help. But I don’t think I would be bitter at the investors or the banks that gave me the money. The fact that Mr. Goldrick was indicates that he buys into the press’s distortion that the investors or their agents are the bad guys in this story.
I often warn my students that the job of the press is not to provide information–it’s to create stories. Stories sell papers. Facts are simply the building blocks of stories. Some facts are helpful to a particular story, some are not, and much of what makes a story good are the facts that are selected versus not. In this story, the helpful facts are the ones that create sympathy for a family that is hurting, enabling their situation to be crafted into a twisted version of an archetypal morality tale of good versus evil, David vs. Goliath, etc. The unhelpful facts are the ones that create ambiguities among the characters, each with their peculiar interests and incentives, exercising choices that are difficult to characterize along an ethical scale. Unhelpful facts create that noisy sense of life that you and I experience, without the forced overlay of comedy, tragedy, or drama.
Posted by Marc Hodak on December 16, 2008 under Scandal |
He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.
This comes from Lewis’s wonderful article in Portfolio this month.
There’s something primal about our collective affinity for morality plays. Sex scandals can always be blamed on lust or envy. The most interesting murders can often be attributed to pride or wrath. Financial scandals are invariably rooted in greed. Morality tales share their religious roots in a mythical world view that attempts to provide a consistent explanation for every crazy thing that we can neither understand or control. We learned communal prayer and dance as a way of making the rains come, as if we could lash God to our desires by simple utterances and movements.
When the world seems to be falling apart as it is now, we revert to those superstitions, to the archetypes they spawned, and to the cleansing purges of whatever evil we can collectively identify. We instinctively look for the leadership that will save us from the dark forces arrayed against us. Many people seek that leadership from government. (Others of us see that as the dark force.)
It takes a certain geeky distance from reality, some might say a dissociation, to appreciate the chaotic nature of what we’re dealing with when it comes to emergent phenomena, like global economies. It takes a studied deference to uncertainty and the huge realm of ignorance best characterized as “the things we don’t know we don’t know.” It takes a powerful discipline to focus on the negative, hidden, secondary consequences of potential “cures” when the primary beneficiaries of those cures are screaming at you to save them.
One would have to look to Far Eastern cultures to find a suitable mythology for for the unseen benefits of minimal intervention. We simply don’t have that in the West. In the West, we have a relentless search for villains.
Posted by Marc Hodak on September 21, 2008 under Scandal |
I have to admit I’m desperately searching for a good explanation about what went wrong this past month. The problem is complex, and the root(s) of it are, I’m guessing, rather subtler than most people think. But there is one explanation–the most common one out there–that I’m certain is useless: greed.
Blaming the financial crisis on greed is like blaming a raging fire on oxygen. Greed is a pervasive aspect of humanity, visible on both sides of every trade, at every level of society, except perhaps for the guy sleeping in a box near a steaming grate, although I bet he would hungrily grab a better box or squat a warmer grate if he could find it.
I also don’t buy the idea of mass stupidity, complacency, or irrationality. The more likely explanation is perfectly sensible, rational behavior of thousands or millions of people under perverse incentives. The most fruitful line of inquiry is likely to be: What were the incentives? How did they arise? Who did they affect? Why did they manifest the way they did now?
Or, we can shortcut rational inquiry and go for the cheap morality tale and the inevitable witch hunt that follows.
