AIG and the government really messed up the public relations of the bonuses. And since AIG has had their problems after receiving federal bailout money (lavish parties, other big bonuses), it really tapped into the rage people feel about the corporate bail-outs in general. So people promptly went ballistic. Rightly so, I think. But now it’s time to calm down a bit.
I tend to bristle a bit when people talk about populism — real populism, that is (not what’s passing for outrage these days in Congress and in the White House) — condescendingly. Populism is not a dirty word. We have a government that is — or a least supposed to be — of, by, and for the people. People in Washington tend to forget that. And what Congress is trying to do by “clawing back” these bonuses is a lie, like so much else that happens in Washington.
If this whole bonus payment had been better explained to the taxpayers, I don’t think this kind of outcry would have happened. But poor public relations, as I say, has been a hallmark of the bailout, especially by AIG.
What Congress (especially the Democrats) is doing right now is idiotic and disingenuous. They allowed the provision allowing the bonuses to be put into the law. They can’t now claim ignorance and try to piously ride the wave of outrage that’s sweeping the country. Besides, what Congress is trying to do by limiting these bonuses is a knee-jerk reaction and is not well thought out. And, of course, it may be unconstitutional. (Bills of attainder are outlawed in the Constitution.)
As I said earlier this week, this kind of bill seems un-American. We don’t go after people’s money after the fact. Also, as people have pointed out to me this week: The people who caused this mess are no longer at AIG. They’ve been fired. The people who received these bonuses are the ones left behind to try and clean up the mess.
They’ve been unfairly vilified by the outrage, and Congress’s rush to assign blame. From a Washington Post article:
The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.
“They’ve chosen to throw us under the bus,” said a Financial Products executive, one of several who spoke on condition of anonymity, fearing reprisals. “They have vilified us.”
They say what is missing from this week’s hysteria is perspective. The very handsome retention payments they received over the past week were set in motion early last year when the firm’s former president, Joe Cassano, was on his way out the door. Financial Products was already running into trouble on its risky credit bets, and the year ahead looked grim. People were weighing offers from other firms, and AIG executives feared that too many departures could lead to disaster.
So AIG stepped in with an offer to employees of Financial Products. Work through all of 2008, and you’d get a lump payment in March 2009. Stick around through 2009, and you’ll get paid through 2010. Almost all other forms of compensation — bonuses, deferred payments and the like — have vanished.
“People are trying to do the right thing,” the same Financial Products executive said. “Guys have worked their [tails] off to try to get value for the taxpayer. This isn’t money that’s being advanced to us. People have performed the work and done it exactly as we asked them to do.”
Pasciucco cringed at the notion, articulated by many lawmakers and even President Obama, that Financial Products is a firm of nearly 400 reckless and greedy derivatives traders.
It’s clear that AIG has messed up. Repeatedly. It’s also clear that if we’d gotten the above explanation of what these payments were before they were paid, there wouldn’t have been such a hue and cry. This kind of bonus is commonplace in corporate America, and it seems to be quite fair despite the amounts.
I’ve been guilty of feeling the anger that many people are feeling these days. In this case, though, I think it’s time to put down the torches and the pitchforks and get a little perspective, as Steven Pearlstein writes this morning:
At the end of the day, the thing to get outraged about is not the $440 million in bonuses at AIG or the $10 million that Citigroup is spending to redesign its shrunken executive suite. These may seem like princely sums, but they are almost insignificant compared with the real outrage: the hundreds of billion dollars of taxpayer funds that have been put at risk to keep AIG and Citi from failing and taking the whole financial system down with them. Let’s keep our attention on the elephant rather than the pimples on its behind.
I realize that collective expressions of public anger can serve a useful purpose. At times like these, it feels good and is a way for a political system to let off some steam before a more dangerous explosion occurs. More importantly, it builds political momentum for sweeping reform of the regulatory apparatus while scaring the bejeezus out of people on Wall Street, who will now think long and hard the next time they get the urge to take excessive risks with other people’s money.
But there’s a danger in letting this outrage get to the point that it undermines the effort to contain the financial crisis. And with Congress now rushing to pass legislation taxing away the bonuses of every banker at every bank or financial institution that takes government money, that point seems to have been reached.
I fully agree. These bonus claw backs are ill advised. They’ll probably pass, but President Obama should not sign them.
A few things to keep in mind.
First, as I’ve said in the past, this isn’t about fairness. There’s nothing remotely fair about using taxpayer money to rescue a free-market financial system from the mistakes of the financiers. But the reality is that we can punish the bankers or we can save the banking system, but we can’t do both at the same time.
Nor is it fair, as The Great Santelli has declared on CNBC, that homeowners who have paid their bills and have been careful not to take on too much credit are now being asked to provide relief to homeowners who have not. Unfortunately, the price of righteous indignation is a wave of foreclosures, a further decline in home values and billions of dollars of additional loan losses at banks that are already on government life support. Given the financial and economic hits they have already taken, that’s a price that most “innocent” homeowners and taxpayers would probably prefer not to pay.
During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome — a decade-long depression — was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost.
At the moment, the Treasury is working (and working and working) on ways to entice private capital back into the banking and shadow-banking system by offering government financing and guarantees against losses. Every dollar of private capital that can be attracted back into the system is a dollar that the Treasury won’t have to borrow or the Federal Reserve won’t have to print. And only with the return of private capital will the government be able to get back the rescue money it has committed.
But how eager do you think private equity and hedge funds will be to invest those billions of dollars if they fear that their participation will subject them to front-page accusations, congressional inquiries and public outrage over how much they might be paying for bonuses or employee travel or office decoration? Will they participate if they think that Congress, in a moment of populist pique, will try to tax back their profits if they earn more than originally expected?
As the financiers see it, there’s a big difference between the government that sets tough terms for participation in its financial rescue programs and a government that is a fickle and unreliable partner, that tries to micromanage their businesses and changes the rules of the game with every zig and zag of public opinion. That may be an exaggerated view, but it is the financiers’ view and one we need to be mindful of, since at this point we need their money and cooperation as much as they need ours.
We now own AIG (and Citigroup and all the others). We have invested a bunch of money trying to recapitalize these banks. We need them to stay alive to clean up the mess, and then perhaps be broken up. I’m a taxpayer. That money is my money (and my son’s and my grandchildren’s). I want it back.
A final point on outrage: We need to save some of it for ourselves. While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.
Pearlstein’s last point is well taken. American consumers lived far, far beyond their means. Yes, they were aided and abetted by Wall Street, but Wall Street didn’t force people to buy new cars or flat screen televisions. This is the reckoning that is coming from all of those excesses.
So yes. We’re right to be angry about the bailouts and the way they’ve been handled. People in Washington need to remember the power of the people and that populism isn’t a dirty word. But we also need to be angry at ourselves. We helped cause this mess.
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