Tuesday, March 17, 2009

If You Don't Like the AIG Bonuses.... You're Part of an Angry Mob!

I may have to stop reading the news for a day or two.

Ruth Marcus believes she has an insight here:
Could we put down the pitchforks for just a moment and have a reasonable discussion about the bonuses at American International Group?

I get the outrage. It's galling to pay $165 million to a bunch of wealthy traders to clean up a mess that they, or at least their company, made.

I get the political fix in which President Obama finds himself. The sums are staggering - if not to Wall Street, then to everyone else who's ever worked for a living. The public is worked up, increasingly convinced that its money is being flung around recklessly, to a gang of extortionists at AIG and at European banks, without any hint that the fundamental problem is being fixed.
Yes, obviously, these bonuses are inspiring rage disproportionate to their amount, which I've already observed is miniscule compared to the bailout. (CWD likes to remind me of the quip, "$10 million here, $10 million there, pretty soon we're talking about real money." If only we were talking in figures that "small".) But Marcus conveniently forgets how much the taxpayer has had to swallow. If this were the first scandal over outrageous bonuses, well, we can roll with it. If it were the second, well, we can't just let the system collapse, right? But at a certain point we, the taxpayers, have every right to say "enough". Contrary to Marcus's suggestion I think, if anything, U.S. taxpayers have been very patient and understanding.

But Marcus continues to chide anybody, even the President, who questions the wisdom of these bonuses. She thinks they're justified:
Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective.
This combines two contentions about the bonuses that I have previously seen presented in isolation, and to my surprise Marcus manages to somehow reconcile them - at least in her own mind:
  • The people who put these deals together are the only ones who can undo them; so we have no choice but to pay them ridiculous amounts of money so that they'll stay and clean up their mess; and

  • All the bad people are gone and have been replaced with good people, who shouldn't be punished for the fact that the people they replaced did bad things.

Obviously, if it was possible to replace all of the bad people in the space of a few months such that only good people remain, and those good people are competent to fix the problems created by the bad people, it can't be that difficult to find new, quality employees who can understand and fix the mess.

Beyond that, her justifications make no sense.
  • These people used to earn more before their peers brought down the economy? Well, cry my a river. So did a lot of people who aren't getting six figure salaries and seven figure bonuses.

  • New top management isn't taking bonuses? Then we're to assume that they're no good and are incompetent to fix the problems, because nobody qualified would take those jobs without huge bonuses?

  • Taking back the bonuses will cost the government more than paying them? Care to explain how?

In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government - even when that is in the national interest. This is similarly counterproductive.
No wait, really. You're telling us that AIG wouldn't have agreed to be bailed out if it considered there to be a possibility that the government might try to reign in salaries? Even if we pretend they had a choice, didn't you just get through telling us that the new senior management voluntarily gave up bonuses? You think that was because they had no clue that the government would be concerned about excessive compensation? More to the point, where's your outrage about Ford and G.M. being instructed to shred their union contracts?

Marcus repeats some of the nonsense I've addressed in prior posts - for example, these bonuses were negotiated a year ago, before AIG received government money (but no question, let alone an answer, on whether these bonuses were negotiated, and enshrined in these extraordinarily bulletproof contracts, in anticipation of a government bailout. And that these bonuses have been common knowledge for over a year - she had best remind Geithner of that, because he begs to differ. And of course, this carries on into the "sanctity of contracts" nonsense argued even less persuasively by Sorkin.

Like Sorkin, Marcus also attempts to dance around her hypocrisy on the sanctity of contracts:
But, you ask, what about autoworkers who are being squeezed to renegotiate their contracts? Those renegotiations mostly involve the future terms of employment, though, it is true, they also could affect retiree health benefits. If an autoworker doesn't want to show up on the assembly line under the terms of a new deal, he or she doesn't have to. That's different from telling AIG employees they're not getting the amount on which they agreed for work they've already performed.
Horse puckey. If I negotiate a three year contract at a specific wage, and you tell me half-way through the contract that we're shredding it but "that's okay because it only affects my future wages," do I really need to explain to you that the wage structure of the entire contract was premised upon its three year term? Even if I ignore such things as earned retiree benefits, that Marcus dismisses as a footnote?

Further, this isn't compensation for work performed. That's called a "salary" This is a "bonus" - money paid in addition to salary. Typically, bonuses might be paid for this thing called "performance" - but no performance was required for these bonuses. These bonuses have been described as "retention bonuses" - payment to keep people in their jobs at AIG when they might otherwise quit. Except then, why are millions of dollars being paid to employees who have already left AIG? Marcus would tell us that the wage provisions of the UAW contracts can be renegotiated, but not the bonus provisions in those UAW contracts - aren't those "different", as well? What would it take to make Marcus cry "Shenanigans"?

Marcus continues by distinguishing this from bankruptcy - you know, where companies are in the same situation but taxpayers don't bail them out and pay their employees' salaries and bonuses, and the employees end up on the street:
This is more analogous, but bankruptcy is a legal mechanism designed precisely for the abrogation of contracts. It is intellectually consistent to support expanding the power of bankruptcy courts to rewrite mortgages on primary homes - as they can with vacation property - but balk at reneging on the AIG contracts.
Great. Now we're getting somewhere. Okay, Ms. Marcus, let's hear it - explain your intellectual consistency: Why it's okay for this very type of contract to go unpaid when a company goes bankrupt, but not when the only thing that keeps it out of bankruptcy is a taxpayer bailout, unprecedented in size?

Oh... You say you ran out of space before you could do that? How... unfortunate.
Once the pitchforks are out, it's awfully hard to convince the mob to put them down.
Don't worry, you're a Washington Post columnist and, at least so far, the angry mob hasn't turned on the village idiots.

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