Outrage, outrage, blah, blah, blah, etc. Often I feel that some topics are too obvious to blog.
The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.
Here is a good post on why the bonuses should be paid.
Outrage, outrage, blah, blah, blah, etc.
Addendum: Vanya comments:
If you don't think a massive transfer of wealth from one segment of the
population to a small elite based solely on political influence, not
value creation, is an outrage then you're not much of a human being
Tyler.
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How can a company going bankrupt pay anyone a bonus with welfare money? How is that possible? Any contract previously made should be null and void if the company was really out of money. If it wasn’t going bankrupt and the execs. earned their bonuses by keeping the company in the black, why the need for a federal bailout? Sounds like fraud to me.
How can a company going bankrupt pay anyone a bonus with welfare money? How is that possible? Any contract previously made should be null and void if the company was really out of money. If it wasn’t going bankrupt and the execs. earned their bonuses by keeping the company in the black, why the need for a federal bailout? Sounds like fraud to me.
How can a company going bankrupt pay anyone a bonus with welfare money? How is that possible? Any contract previously made should be null and void if the company was really out of money. If it wasn’t going bankrupt and the execs. earned their bonuses by keeping the company in the black, why the need for a federal bailout? Sounds like fraud to me.
and some perspecitve on what fully liable could mean: Siemens had a huge corruption and bribery affair. As a result it lost billions: as penalty payments, for expenses for a lawfirm to check to hole company, lost future contracts. Two former CEOs – von Pierer and Kleinfeld – are sued in a german court because they negligently didn’t take enough anti-corruption procedures or activities. As a result they would be fully personally liable. But von Pierer is sued for only 6 Million Euros. A quite modest amount. I guess it wouldn’ot be much different in the US. Personal liabiltiy would not mean a total loss of their livelihood.
Obama should have known better than to thoughtlessly follow his old political instincts from his community organizing days. It’s one thing to stir up a hornet’s nest of populist pandering and demagoguery when nothing but local politics is at stake; quite another when the fate of the global financial system lies in the balance.
Some of the comments made today by members of Congress are simply unbelievable, and this is part of a much larger problem that has implications far beyond AIG. Among other things, this circus atmosphere brewing in Washington will surely convince anyone who was still seriously thinking of applying for a deputy Treasury secretary position to wash their hands and just walk away. Who wants to take a pay cut just to get berated by grandstanding gasbags? These clowns don’t exactly hold the moral high ground, not after holding up emergency financial rescue and stimulus packages in order to stuff them with hundreds of billions of dollars worth of pork. If anyone needs to commit harikiri, it’s the idiot who added that tax break for makers of wooden arrows.
At this point, even AIG staff who would have stayed even without a bonus will now be leaving in droves because of the stigma. And if Sorkin is right, how ironic that it would be the second time in a row that AIG blows up and causes a (further) global meltdown because someone grossly misevaluated a long-tail risk. In hindsight, when trillions of dollars are at stake, a $165 million insurance premium would have been cheap. Sometimes you set a thief to catch a thief, for the greater good. We need dispassionate, pragmatic fixes, not cheap penny-wise-pound-foolish emotionalism.
I bet Tyler is laughing his ass off at all the outrage in here.
“…some topics are too obvious to blog.” Anyone? Anyone?
@5:27:03
Re: Tax break for wooden arrows.
Go look up the details of that ‘tax break’. It was a correction. A previous bill introduced a tax on arrows. That tax was worded in such a way that it also covered ‘arrows’ for children’s toys and so on. So the ‘tax break’ exempted arrows of less than (if memory serves) 1/16th in. diameter. Otherwise the tax (a flat value) was a couple hundred percent of the cost of the object itself.
Job history:
Assistant and Associate Professor of Economics,
University of California, Irvine, 1987-1989
Professor of Economics, George Mason University 1989-
General Director: Mercatus Center 1998-
James M. Buchanan Center for Political Economy 1998-
Holbert C. Harris Chair of Economics 2000-
Associate Editor, Southern Economic Journal 1999
You’re generally a sharp guy Tyler, but your resume says a lot, including that you evidently have zero real world business experience. Only somebody who existed in an academic fantasy cocoon could ignore the reality that contracts are renegotiated all the time – hell, the article you link discusses that very thing re the UAW (granted, the author inexplicably says “but that’s different”). Take a sabbatical and get a real job. You’re wrong on this one.
If I tried to find a less insightful blogger, I would scarcely know where to look.
Goodbye.
I just unsubscribed to your blog.
I have several problems with the NYT article. First, when where these bonuses negotiated? I assume the board of directors signed off. How much did they know? How much did management know? If they thought the company was going to go in the tank, why give bonuses? I suspect that the answer is the usual corporate executive greed.
Second, what is this great knowledge base that we need to retain? Somebody needs to explain this. Maybe the guys who created the mess aren’t the best ones to deal with it. And we have lots of bankers looking for work.
Finally, I have a problem with invoking the sanctity of contract. If these executives were just feeding at the company trough when they knew things were bad, why should we honor such contracts?
I enjoy your blog. Keep it up.
Ward
If you don’t think a massive transfer of wealth from one segment of the population to a small elite based solely on political influence, not value creation, is an outrage then you’re not much of a human being Tyler.
The transfer of wealth to AIG executives is miniscule compared to the trillions being transferred by the rest of the Obama package. I suggest apportioning your outrage accordingly.
a) Don’t try to make sense of all this – right is what the state says it is. Objectivity and the rule of law are SOO eighteenth century! Just channel the anger! Executions! Reform the system!
b) The Soviets perfected their invective over many decades of blaming others for the failure of socialism to feed its people: “Speculators!” “Enemies of the proletariat!” “Wreckers!” “Anti-Soviet activity!” Our modern Democrats can’t come close!
c) Tyler wrote an article (http://www.nytimes.com/2008/12/28/business/economy/28view.html?_r=2) on the moral hazard of not allowing one particular institution to fail. Mankiw and friends wrote a paper (gated, but see http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?scp=1&sq=looting&st=cse) on the ramifications of implied guarantees, which were also behind the problems at Fannie Mae and Freddie Mac. Fun stuff!
d) Can public choice explain why Washington collectively acts like it’s never heard the phrases “moral hazard” or “public choice?”
Everyone ready? Let’s have a moment of outrage together:
GRRRR!!!! I hate AIG and their greedy executives! Their irresponsibility caused the financial crisis! They should all earn $28,000 a year and live in a barren studio apartment! (and yes, in many cases, I’m sure they deserve to).
Ok, done? Now, let’s actually start thinking.
Sanctity of contract is the most important pillar of a free economy. The government purchased AIG. AIG, by law, has to pay certain amounts of money, called “bonuses”, upon the fulfillment of certain conditions. By assuming ownership of AIG, the government assumed ownership of all of its contractual obligations, including these bonuses. And, contrary to what some posters have said, contractual obligations are not “rewritten all the time”. Contracts are only rewritten when both parties perceive it as to their benefit to do so, such as UAW accepting changes to prevent GM from going under. Otherwise, they’re *not rewritten*. Here, neither the employees, nor presumably the company, wish to rewrite these contracts.
It may be exciting and fulfilling to think of these financial losers’ salaries capped at $40,000 a year. In the real world though, these employees will leave, as they have many firms wishing to have their services at far higher pay. Further, no new talented employees will come, as they can’t guarentee the sanctity of the contracts they’ll be signing. Since the bailout faction deemed AIG’s success critical to the world economy, I’m sure they’ll agree that they need an able management to improve things.
I seem to recall that when a minority of us strongly opposed bailing out AIG and other private companies, because of the horrific spectacle of situations such as these, among other reasons, others argued that taking ownership of AIG was of vital importance. Well it’s time for these people to suck it up and pay the bonuses.
Instead, people seem to suggest that the correct answer is to become an angry mob, breaking the sanctity of contract. I, however, do not wish to live in the United States of Zimbabwe.
I’ve been on the receiving end of this one myself. It’s hard to negate a contract if you’re not in bankruptcy without showing gross negligence, so a judge would have to examine the case of each employee, one by one, to determine whether to negate the contract.
I was in a similar position at the end of the dot-com boom. When we discovered our CFO had screwed things up and left us with few assets, one of the investors and members of the board said to me and the others on our management team, “I have no intention of paying any [contractually obligated] bonuses to a management team that ruined this company”. I was the CTO and had no view into what was happening on the finance side, and I regret to this day not asking him to explain what exactly I did specifically to “ruin this company”.
The Feds took over AIG with these contracts in place; they had to know what they were getting into. If these contracts weren’t there the company would have been worth more, and they would have spent more in the takeover.
To the point in the NYT article… Suddenly everyone at the top of the financial food chain is fretting over the sanctity of contracts but those same people tend to be the ones howling for UAW contracts to be ripped up and reworked before auto companies get a penny.
Vanya, I know full well that this is exactly what leftists do when confronted with someone making a calm argument; they become outraged and bark spittle that others don’t “feel” as much as they do for whatever moral crusade trumps all consideration this time. Listen, I don’t think making systemic financial decisions should depend on the envy of the deserving or the greed of the undeserving. POLICY isn’t supposed to be about that. But democratic politics is all about that kind of inanity.
Sorry to interrupt your righteous anger, but do you know even understand what the “retention bonus” was supposed to do? It served its purpose in allowing the people up to date with AIG’s huge derivatives book to remain so they could do exactly as the government specified in unwinding AIG’s counterparty trades and selling its subsidiaries. Did you forsee the material changes in the economy or the cascading financial writedowns in early 2008 when these employment contracts were crafted? Most of the erudite pontificating right now can’t even offer a well-specified cause of the crisis, too busy crafting their separate morality tales about the government and Wall Street, left and right alike. Liddy explains the compelling reasons behind the decision in the white paper submitted to the Treasury Secretary, but some people…they just want to see the world burn.
There could have been reasoned debate on the morality and consequences of moral hazard as exemplified by AIG. But Obama chose to employ the techniques of Marxism he has such a confused fondness for and decided to basically decimate the potential for any sort of recovery for AIG and the stipulated goals of the bailout itself.
And I’m kicking myself because it was all easily forseeable.
RZ,
Why would the executives have any shame? Many of them have a no-work stipulation in thier contracts, which means that if they don’t get there bonuses they can not go out and get another job, which means no income for their families. Also, if you preformed your job (even if you preformed it poorly) would you really walk away from Millions of dollars? Be honest now. I for one would not walk away from millions of dollars promised to me by a legal contract for preforming a service already rendered.
tyler,
you are obviously a smart guy, but i didnt think politically driven (per se) why say dont nationalize because of this? the type of nationalization that folks like simon johnson or krugman advocate is not permanent nationalization. it is like FDIC cleanup and re-privatization
or pre-privatization as johnson has called it
i am much more naive than yourself but comments like: ‘The real lesson is that this is another reason not to nationalize banks. ‘ makes you sound ignorant of the process being proposed by pro-nationalizers
Tyler, you are the biggest fucking cocksucking economist this side of the equator
These bonuses are, for the most part, “outrageous” considering the circumstances. However, we do have to understand the contractual agreements that A.I.G. has with the executives. This should show the public how these companies work, and worked mostly successfully before last Fall. Executives in all companies, not just A.I.G. are payed large sums of money through bonuses, most of which have no required merit or achievement. Is this wrong? If such benefits are introduced to this industry, it is impossible for competitors to gain access to the same field of potential executives without nearly matching the contractual bonuses. The tax paying public, who own 80% of A.I.G. (theoretically), do have an obligation to be upset, knowing that even though we have bailed them out, the contracts from prior ownership still stand, just spending our money instead of theirs. Not only that they are giving out bonuses, they are giving it to some of the main players in leading up to their current situation:
“The payouts have roused particular fury because
they went to employees of A.I.G.’s financial
products unit — the part of A.I.G. that dealt in
the credit derivatives that were its downfall.”
(New York Times – “A.I.G. Seeking Return of Half
of Its Bonuses”)
Obviously, this along with future non-merited bailout bonuses will not make it far after seeing the reaction of the congress today.
The bill passed with a 328 – 93 vote, showing the agreement to the real motives of the government, as summed up by Nancy Pelosi:
“We want our money back and we want our money back
now for the taxpayers.”
This does sound good on the news to the public (which has grown to the the main objective of mostly all politicians), but the government has done the same thing with the bail out of these large companies, only on a much larger scale. Seems like cyclical failure to me, or as FEE.org states, “Oh what a tangled web we sprout when first we practice to bail out.” We can only speculate when we will grow up, eat our mistakes, and do it better the next time.
Well…. What did you expect? They are human beings, and eventually they would have made a big mistake that we would insult them for. This would have problably happened to you, me, and to anyone else….
Anyways, I completely agree that this is a outrage, blah, blah, blah, etc. But, remeber people think of themselves more than others. If someone had a billion dollars, would that person keep it to him/herself or give it to the poor? Of course people would try to keep the money themselves. We should’ve expected this bonus to happen. That is why the gov. shouldn’t have had given the bailout in the first place.
And im not supporting the fact that they should get these bonuses at all. so dont get pissed at me.
Why bother cutting the bonuses when life, business and home insurance profits have dropped a whole 23% since 2008? I wonder if the economical crisis has any other surprises in store for us. Tim Buckley Vista bay rehab
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