A.I.G. bonuses

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.

Comments

Will the SEC be getting paid this year? Will congress? Barry Obama? Outrage! Blah, blah, blah.

On a related front, should we distinguish between counterparties who had CDS for insurance and those who had it for speculation?

I think this is completely wrong-headed. There may be a problem with politicization, but that isn't the problem here. The problem is that manifestly undeserving people are being paid bonuses to which they may be legally entitled because we propped up AIG without taking them through bankruptcy or a close substitute.

I believe I know the arguments as to why that was not done, and I do not find them persuasive, because the alternative (what we have now) is worse.

You should only support these institutions AFTER bankruptcy, not before.

I thought bonuses were about rewarding talent for their oustanding performances. I guess I was wrong, legally wrong.

True nationalization would have have voided the bonus contracts and the bonuses would not have been paid.

This issue is an argument for true nationalization rather than half measures.

Yes, what a disaster politizising would be, now that the free market has showed us how fantastic it works. Wow, what an argument.

The day the banks/AIG turned to government for bailouts, THEY politizied everything. To suggest otherwise is baffling.

Also, on rewriting contracts. AIG wrote contracts to pay billions it never had. Is that fraud?

Those of us who service the web might have been up a few hours (or all night) ;-)

So long as we revisit forcing the UAW to rewrite their contracts with the US automakers, I'm open to letting AIG's executives and managers keep their bonuses. That assumes that we give back the pay cuts and other concessions that we demanded of the UAW. The UAW didn't run the Big 3 into the ground. Their management did. But AIG's managers, who did trash their company, are getting bonuses while the UAW's members are talking paycuts. I don't see the fairness in that arrangement.

The real outrage should be directed at the Fed for bailing out AIG in the first place. That said, here a couple of things that make me go "Hmmmmmm".

Is it just a coincidence that this bonus story came up just as AIG finally released the names and amounts of the real beneficiaries of the bailout, headed by Goldman Sachs and a bunch of European banks? News coverage of AIG is now all about the bonuses, which are three orders of magnitude less than the payouts to Goldman Sachs, European banks, and host of other (non-) worthies.

The idea that Treasury is going to stomp its collective feet and not give AIG (and Goldman, et al) their next feeding at the trough unless they somehow get the money back is laughable. Treasury already owns 80 percent of AIG, so "getting the money back" amounts to transferring money from one Treasury account to another. But the administration is counting on most people being too stupid to notice this.

The correct course is now what is has been for the last six months: Spin off the financial products division and force it into bankruptcy. The other AIG subsidiaries (the legitimate insurance companies, aircraft leasing, and so on) could continue as usual. It is becoming painfully obvious that the reason we're not doing this is that the Fed and the Treasury want to continue funneling money through AIG to Wall Street and the European banks without giving the Congress a chance to intervene.

Aside from the anger issues, this is a perfect example of the magnitude of complexity and potential for screwups associated with this Administration's massive government intervention in the economy.

The fact that no one in the Administration anticipated the bonus issue (they're now talking about recouping it via the terms of later cash infusions) highlights how tough it is to see even the most obvious negative ramifications, much less the much more subtle (and dangerous) long-term ones.

Isn't the loan modificatoin program with cramdown proposed by the governmenent a form of contract abrogation?

I have a more cynical take here. The government is fixing to save the car industry again. Hence the AIG outrage is a way of building a parallel case for the actions for the auto industry. We must pay AIG people, so we must pay the auto people

Needless to say, telling a company that it's "too big to fail" is not a great negotiating tactic. It's like telling someone whose house you're planning to buy, "I must have your house at any cost!"

1) I think the bonuses aren't really that much money in the great scheme of things.
2) I don't have a lot of respect for the people who receive the bonuses. They really should donate the money to charity. The fact is they aren't so smart or so good at their job that they deserve money. The main difference between them and a lot of people who are as smart as them and went on to become surgeons or scientists or engineers is that they are more interested in making money than anything else. Avarice isn't merit.
3) I don't get the don't pay congress crowd. Lawmakers and the president are not paid lavishly. More importantly while their lack of oversight probably contributed it was not the primary cause not even close and many of the people responsible are already voted out of office or replaced.
4) The stimulus and bailout might be working (in the sense of mitigating an even worse situation). We aren't going to have any counterfactuals and it's too dark to see. It's fine if you disagree with the policy, I myself am unconvinced, but it's much too early to say whether the policy you disagree with is a failure.
5) People are outraged because the situation is outrageous. The people being rewarded aren't just unlucky. They aren't just incompetent. They were reckless because they profited through recklessness. If a group of mad scientists accidentally unleashed an EMP blast that had similar economic effects I'm sure they wouldn't get their bonuses. Finance enjoys the rare privilege of being more poorly understood than science.

To Main Street, it seems like Wall Street is living in a parallel world with delusions of grandeur. They are so special, so "talented," that even when they lose 40 billion dollars they must not lose their bonuses, because those people who lost all that money are just too damn smart. It seems akin to the UAW and GM/Chrysler, who think that the equivalent of $70/hour should come their way because they have a union card.

Meanwhile, the typical American has either lost his job or been under a salary freeze, if not an outright pay cut. Not to mention that the average American's long-term balance sheet has gotten worse from all the debt to pay for these bailouts.

Sorry for all the populist rhetoric, but the sheer magnitude of AIG's losses is just a deal-breaker for me. If no more bailout money is needed in the future, I would be okay with Citi or BofA handing out similar bonuses, but not AIG. The magnitude of their error was so unbelievably grave and their insane CDS writing allowed much of the housing excess.

Any company that is healthy enough to pay out bonuses is far too healthy to be bailed out.

As for the "unbreakable contract" baloney, every bankruptcy court has the authority to break (includes home mortgages) or renegotiate (except for home mortgages) any contract. This is prime proof that AIG should have been "allowed" to end up in bankruptcy. As for the alleged economic crisis this would cause? I no longer care. The behavior of the criminals at AIG is so bad, so evil, that destroying AIG is the first and only thing that we should be doing. AIG has done more damage to the US than Al Qeda has, and we haven't declared war on AIG yet.

The Fed's treatment of the law has been very flexible ever since the Fed subsidized JP Morgan's takeover of Bear. I'm not saying their bailout have been wrong, but Bernake's Sunday night rescues have been at the edge of the law, to say the least. Not that I'm against financial bailouts, but it's hard to appeal to the law and contracts now after everything that has been done.

A salary freeze and no bonuses should have been part of "special" government assistance packages in the first place (as opposed to indiscriminate TARP capital injections). Every one of these employees would not be receiving a salary, much less a bonus, if AIG went Chapter 7.

Actually, I don't get the big uproar over the payments to counterparties. Isn't that, well, the whole point of the bailout? Banks like Goldman Sachs thought they had managed risk though CDS's with AIG, or they bet correctly against the housing market. They just didn't figure the possibility of AIG failing into their risk portfolio, just as depositors in 1929 didn't figure their banks would go under so quickly.

Guess you could say shame on GS, that they should be warming their hands in a street by a fire for leveraging themselves so much. The only problem is we would be right there with them.

Outrage is perhaps too strong a word, but this quote gave me pause:

“The jobs are terrible,† said Robert M. Sedgwick, an executive compensation lawyer at Morrison Cohen who represents a number of employees of banks that have taken government money. “You have to read about yourself in the paper every day. These people are leaving as soon as they can.†

Really? $3 million/year on top of a base salary probably 3 or more times median US income is not enough to deal with a little embarrassing cocktail party chatter when my name shows up in the paper? Here I'll make you a deal, you can run my name and picture on the front page of the New York Times, and Wall Street Journal and Newsweek or whatever print media outlets you want, captioned with "worst person in the world" as long as you're willing to pay me $10,000 every day you do so. Somehow I think I can handle the pain.

As for the sanctity of contracts. Two thing spring to mind, the first is the value of contracts negotiated asymmetrically, I've actually had some interesting conversations with investment bankers, albeit low level ones, about whether such contracts should be regarded as cast in stone when it becomes obvious that one of the parties was at a significant information disadvantage. This was in the context of resource extraction and military hardware sales contracts with developing world governments, but the general issue remains the same, the non-bank party, or non-corporate in this particular case, is signing a contract many of whose penalties will be born by people who had little idea of the liabilities they had taken. Secondly, as far as these traders being essential, it should have been a matter of course as part of the bailout to write non-compete clauses into their contracts preventing them from arbitraging their knowledge by leaving AIG for another firm. They made the mess and should be responsible for helping to clean it up, if they are unwilling they can join the ranks of the unemployed or be under supervision such that any new jobs they take up don't interfere with the efforts of those who have to deal with unwinding AIG's problem positions. This happens all the time in the technology industry.

As a final though, the cries of poverty from former high six and seven figure salary employees when their income is curtailed to a mere ten times median income is amusing. Especially since many of these people chortled loudest when stories of high income NBA players pleading distress at lower than expected new contracts came out.

Include me with Fred@8:59. Why am I even reading this blog? Either no bailouts or no bonuses. You can't have it both ways. AIG may have agreed contractually to pay the bonuses, but they don't have the money.

Without the taxpayers, AIG is bankrupt. The taxpayers never agreed to pay any bonuses. This post says more about you than it does about AIG

Sorkin's right -- not paying the bonuses would destroy the financial system. I wouldn't be suprised if AIG's stock price dropped 99%, if massive financial institutions got entirely wiped out, if the global economy plunged into a recession or maybe even a depression. Really scary stuff, and I'm glad that there are some people with common sense and a knowledge of finance who are around to keep populist urges in check.

Can we have more posts about credit snobs please?

I'm sorry Tyler. I usually like your posts, but what the heck is this? If the UAW's contracts are not cast in stone? Why should this be?

Even though I agree with the second point of the nytimes article, but why can't I be outraged? How is that not like ransom? Give me the money or I will blow up the financial system. I might decide it's rational to give them the money, but is my outrage not justified?

Thank you great economic minds,
keep talking about the peanuts given out in bonuses while me and my friends enjoy the tens of billions you keep sending our way! You sheeple are so stupid, even your "intellectual" leaders like Cowen act like this is all legit or part of some effort to "save" your ecnomy.

You deserve to be sheered like the good sheeple you are, because you are too stupid to stop it. We will allow some of you to have children, but they will be our slaves too...they will be paying us for decades, especially when we implement world wide air...I mean carbon taxes!!!! Suckers!

The sanctity of the contract? I didn't know that if I wanted to get away with blatant greed, all I had to do was sign a contract with my own company. That's brilliant. No way of getting around that. It's sacred.

By the way...I respect you Tyler, but great arguments today. Answers everyone's well thought out arguments with 'Blah, blah, blah'. Love the intelligent conversation.

Shame mate. You pay the thieve so he doesn´t steal you?! Come on, more dignity please!

> Shame mate. You pay the thieve so he doesn´t steal you?! Come on, more dignity please!

not quite, you pay the plumber so you don't get shit all over you.

@Sam: I read your comment and I completely agree with you. I don't understand why something so obvious is not shared by every informed reader.

The outrage isn't over the bonuses, its over the very fact that we bailed this failed and fraudulent company - and through it the hedge funding banks - out. And the auto companies.

If the government never got involved, and allowed the market to work - none of these individuals would have received a bonus. Indeed, they would all be looking to collect unemployment right now.

If they want to sue, let them get in line with all the other creditors.

We wonder why in American politics terms become so vague and useless. Obviously anyone suggesting that a bank in troubled times shouldn't pay ANY bonuses doesn't understand how the Wall Street model of "bonuses" are simply a way to implement variable compensation. So many criticizing from their guaranteed, mediocre perches.

I think this is one of those rare times when the mob is reasonable and the cooler heads need to be reigned in.

Look, Felix Salmon is a very talented leftist columnist. But there is simply no sort of "debunking" in that article. A debunking often has numbers so it can the issue can be quantified objectively. Instead, he's just another government apologist, saying 1)wow, things were really bad at AIG!, and 2)from my entitled perch, I doubt the employees at AIG are as talented as they say they are, so let's not pay them! I wonder if Felix is similarly dispassionate in his relationship with the bleeding Portfolio.

I say no bonuses-when these managers turn the company around and make it profitable, then we can talk bonuses. Conservatives talk about personal responsibility, why don't these managers take some and fix the company before taking bonuses?

HAHAHAHAHAHA:

"Instead, the administration said it will use a $30 billion installment of bailout funds approved March 2, to bring some pressure to bear on AIG. The official said before AIG can draw down funds from the $30 billion, new rules would be written into AIG's contract to ensure no government money goes toward paying financial-products division bonuses. The cost of bonuses already paid would be recouped for the taxpayer."

- "Political Heat Sears AIG", Wall Street Journal, March 17, 2009

"All these comments, so soon in the morning. Outrage, outrage, blah, blah, blah, etc.!'

I'm not outraged. I was just pointing out your analysis is invalid.

The outrage directed at AIG happened because of bailouts, not nationalization.

Looking at the issue more broadly, an important consideration in the effectiveness of a policy is if there is public support to implement it.

The problems with muddling through are that it will appear things are not improving (because of incremental injections of aid) and also that those who caused the problems are being rewarded for it.

Having a plan to deal with these problems is vital to designing policies that can help the economy.

That is why Obama is making sure he is in front of the outrage.

"On average the government employees are earning above average wages and getting perks that US the taxpayer are having support" -Bil

Have you ever seen how much government jobs pay? It's peanuts compared to what someone with the same skills could make in the private sector.

To all the AIG bonus takers. I think that when the Government or Media list everyone of your names on the internet, or on the news. You should have decided to return the money. I don't think I would want to have to look over my shoulder the rest of my short life. Just think about it, you have pissed off hard working tax paying Americans. Who have lost their jobs, and their retirement because of you greed and stupidly and now you have taken a bonus from them. Not very smart.

Hey why not pay off the people's houses which pay back the banks and simulates the economy. This is a complete win for everybody. Why save the criminals (companies) when it's the people who are suffering?By bailing out the people we bail out the greeding companies too. Has no one thought of this???????????

i think they deserve the bonuses because they tricked someone else (the american taxpayer) into taking a lot of the downside risk. this is surely worth a lot to AIG. it just looks bad because we are in the bad AIG world and not the good AIG world :)

OK, let me get this straight. Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to opensecrets.org.

Nothing is said about that -Meanwhile, pollyticians who always claim to be for the workers, fair wages and job security want EMPLOYMENT contracts summarily voided-but don’t seem indignant that AIG was paying lobbyists or giving money away to charities with taxpayer funds? Worse, among elected officials there wasn’t a word about the the perks of the UAW, whose employers were ALSO bailed out.

But wait. Why are AIG employees paid contractually guaranteed bonuses? Oh its because the last time the jackass party has free reign on interfering with the economy, it passed Sec. 162(m) of the tax code which prohibits the deduction as an expense, wages in excess of one million dollars, unless, among other things, they are performance based

Lets be honest this is exactly what's wrong with politics. The grand theater of the absurd says people who met or exceeded their personal performance standards shouldn't be paid the agreed upon wage and one of the point men on this public charade of conservancy of public treasure is a TAX CHEAT who was one of the engineers of “bailout nation†.

I’m guessing that fat slob Michael Moorer won’t be following Raines, Dodd, Frank, Paulson or Geinther with some ginned up indignation.

What? There are bonuses in the financial industry? Outrageous! Blah blah blah.

Who wrote the contract with AIG for the bailout money? Why, little Geithner, of course. Is he outraged? Blah blah blah.

And who hired little Geithner? Why, Obama, of course. Is he outraged? Blah blah blah.

Maybe they should look themselves in the mirror. They might see someone pointing a finger and going blah blah blah.

The top recipient received more than $6.4 million;
The top seven bonus recipients received more than $4 million each;
The top ten bonus recipients received a combined $42 million;
22 individuals received bonuses of $2 million or more, and combined they received more than $72 million;
73 individuals received bonuses of $1 million or more;
Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

Re: Vanya...right, and that's why Tyler has the right attitude. A massive transfer of wealth from me to protect the bondholders and counterparties of AIG is wrong and why bankruptcy was the moral option. Whether any one should get bonuses, how the hell can we know? I have an relative who got paid an astromical sum per year more than a decade ago by an insurance company to continue working at an insurance company to unwind derivatives contracts for a couple years after they shut the department down as a failed operation. That's between him and their shareholders--presumably, they thought paying the last guy standing to ensure nothing unwound in a catastrophic manner the least cost option. Maybe that's the case here; or maybe it's looting. Now that the government is involved and it's no longer between the shareholders and mgmt, why does any one imagine they can figure out what's actually efficient or even moral.

From the article you linked:

But the fact is, the real moneymakers in finance always have a place to go.

Yes because you know all the real moneymakers in finance made so many strong decisions over the last few years that they made us all"real" money and managed to avert highly leveraged risky investments so that the global financial system didn't nearly collapse. Or not.

That article, and your POV on this issue, comes from such an insiders, we deserve the money we make and continue to do so, head in the sand viewpoint it begs the question - how did that get into the NY Times? Do they feel the need to always give the "other side's view" no matter how stupid? All that does is somehow legitimize the wacked out assumptions the article underlies.

When are those people going to get it? YOU SCREWED UP! THERE ARE NO OTHER BIG FINANCIAL JOBS OUT THERE!!! THE FINANCIAL SYSTEM IS BEING PROPPED UP BY TAXPAYERS!!. GIVE IT UP!!!!!!!!!!!! Enough already - stupid ass backwards rationalizations on why bailout money should maintain your standard of living. Please, all of you quit to "those better jobs." You know to the large corps that haven't received bailout money - oh wait, there aren't any? hmmmm - how to rationalize that? Just pathetic.

correction -the line "But the fact is, the real moneymakers in finance always have a place to go." should have been in quotes.

Tyler, I' would read your blog even if you were an evil time traveling robot (aside).

Raivo Pommer
raimo1@hot.ee

DIE SPANNE

Die Spanne liegt nach Angaben der Frankfurter Finanzberatung FMH aktuell zwischen 6,95 und 14,50 Prozent. "Tatsächlich ist der Dispo ein träger Zinssatz", gibt Christoph Hellmann, Pressesprecher der Kreissparkasse Köln zu. Aber: "Es gibt ja ein buntes Portfolio an Produkten, mit denen sich der Zugriff auf den Dispokredit vermeiden lässt. Außerdem müssen wir jederzeit Liquidität vorhalten", erklärt Hellmann.

Dabei entwickele sich der Dispo auch nach oben langsamer als etwa beim Tagesgeld, wenn das Geld wieder teurer wird, meint er: "Das geht in beide Richtungen." Niemand sei zum Dispo gezwungen, meint Deutsche-Bank-Pressesprecher Mika Schweitzer, und bei richtigen Krediten sei "Fairness hergestellt".

Commerzbank-Sprecher Tobias Strenger verweist dazu auf die Refinanzierungskosten der Banken. Diese leihen sich untereinander Geld zu den Zinssätzen wie Eonia oder Euribor, die sich nicht immer parallel zum Leitzins entwickelten, manchmal sogar höher lägen.

Tendenziell rechne er aber mit sinkenden Refinanzierungskosten in den kommenden Monaten: "Davon werden unsere Kunden profitieren". Reagiert hat jetzt die Sparkasse KölnBonn, die zum 23. März den Dispo-Zins um 0,51 Prozentpunkte auf 13,99 Prozent absenkt und sich damit von der Spitze im unrühmlichen Vergleich der Dispo-Sätze zurückzieht.

AIG ... Today's Terry Schiavo ... on so many levels.

Lol wait.. I love the part about keeping the "talent" at AIG because if we don't keep them well paid, then they will leave. Thereby crumbling the company.

Oddly enough it was this "talent" that got us into this mess. Although I should give them some credit. It takes quite a bit of talent to F things up this bad, then turn around and give America the finger.

Some thoughts from my german perspective. Please excuse my language.

Promising bonuses for a behavior that makes a company bancrupt seems to me absurd: You pay money for being hurt. No sane person, no sane shareholder would do that.
If a manager makes such a contract with the companys employees it's a big fault. If some kind of a supervisory board makes such contracts with the highest managers (CEOs,...) it's a big fault. These people should be liable for their behavior (with their hole personal assets). The business judgment rule doesn't change the result because the error is so enormous. That all supervisory boards or managers made this mistake doesn't matter either: Collectively doing something wrong doesn't make it right (in German you would say: „Eine Unsitte wird nicht durch allgemeine Übung zur Sitte“.) That there was a strange tax incentive as „Superheater at Mar 17, 2009 1:56:07 PM“ wrote doesn't change anything. If you want to pay high salarys no matter what happens (which is normally ok) than you have to accept to pay higher taxes.
Making these persons fully liable would also be a good incentive: These People could lose more than just their payment and their job (as it is now). So they would be more careful in the future, the moral hazard problem of non-proprietary managers of stock companies would be reduced.

Maybe you also could void the contractual obligations to pay the bonuses. You could argue that the bonus recipients knew that they were the opposite of the best interest of the firm. If they didn't know it, maybe it was evident. And a legal system should not demand positive knowledge in such cases of collusion as it is hard to prove. This would again be a good incentive for the future.

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.

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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