Obama gives AIG the smackdown
The Obama administration is ordering bailout-receiving companies to cut compensation to their highest paid execs at an average of 90 percent from last year. That’s a pretty big deal.
For example, per the New York Times:
At the financial products division of A.I.G., the locus of problems that plagued the large insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, a stunning decline from previous years in which the unit produced many wealthy executives and traders.
$200,000 in compensation, by the way, is the same amount the average fourth-year lawyer makes at a top-tier firm. It’s less than just about any teensy-tiny studio apartment you can buy in New York City, for comparison’s sake. And, according to economists, approximately $200,000 in spending on services creates or sustains a job paying $50,000.
Now, I’m not saying that overpaid executives who used taxpayer money to fund their private jet travel and beachside massages don’t deserve some kind of punishment. The only problem is, remember the trickle-down effect of wealth? That masseuse has to get paid by somebody. Or she’s not working, either.
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I do remember the “trickle-down effect” – mainly that it’s worthless. Well, for anything besides creating a servile class of caterers, butlers, and chauffeurs that contribute little to the economy at large other than whim-catering. Like the parasitic speculation that pays the bills, it’s an incredibly unstable and unsustainable foundation to build an economy on. The sooner we can detach from Richistan, the better.
Amen, Joseph. The trickle-down effect? That’s a good thing? What we need is an economy in which real goods are produced, not one where a bunch of plebs survive by serving the needs of a few wealthy people.
Ms. Doll,
Bigger pies for them means more cums for us?
I don’t think it’s unreasonable to consider the impact of less money coming from these folks and flowing into the economy to purveyors of “real” and other goods—money that’s already been limited in this recession. Whether or not the trickle-down effect is good or bad or bullshit, less money in the economy is less money in the economy, no? I’m just saying, there are two sides to every recession-affected coin.
At any rate, maybe there will be a few less college grads desperate to become i-bankers in the coming years.
While I believe an examination of the possible economic impact, not to mention legality, of any bonus limitation is laudable, I just don’t think it’s enough of a reason to 86 the plan.
There are a few issues here, actually.
1) The money is not in any real way “disappearing” from the economy. AIG will still have the funds. Obama’s not confiscating profits, after all. The company will just have to put those funds towards either hiring new employees, investment, or capital reserves. I’m no economist, but those all sound like more fiscally sound uses of millions of dollars than handing it all to an already obscenely wealthy individual.
2) There are economists who think that those obscene bonuses are a bad idea in general. They create perverse incentives to take wild risks in the short term, regardless of the damage they may do to the company in the long term.
3) Not to mention there are signs that the companies are, inexplicably, once again making billions from risky derivatives. Any sub-economy based on their consumption is as prone to having its bubble burst as it was the first time. I’m not saying those jobs are any less ‘real’ than any other job. I’m just saying they’re sitting on a house of cards, i.e. the casino called modern day Wall Street.
In response to another comment. See in context »Hi Joseph,
I’m definitely no economist either. Given the response to this post, I thought I should talk to someone who is. I called Darryl McLeod, economics professor at Fordham U., who was gracious enough to chat with me on his commute home.
“The problem with pay cuts is that they’ll cost the taxpayer more than they save,” he said. “People have to put themselves in the position of an owner or board of directors trying to turn around a company that’s in trouble. You need exceptional people to turn companies around.”
So with regard to point one, the money might indeed disappear (and the companies may ultimately fail) if talented people aren’t around to make it. If you were one of the top earners at AIG, for example, and you found that your salary was being cut by 90 percent and you were tasked with saving a potentially dying company, would you stay? Or if you were a top earner at another company without those caps and being recruited to help turn around AIG, would you go? And if AIG is then forced to hire cheaper, presumably “lesser” talent, will they be able to recoup the damages done?
“Capping the salaries at a few big companies will only create a more concentrated industry, and then you have a less vital car industry or financial sector…you’ve crippled the key players,” he said. “If the profits and incomes were fixed, you could hire 100 people at 1/10th the salary of one, and you’d generate jobs. But the revenues of the companies depend on the decisions that the companies make. The Treasury understands this, but people are out for blood. I think it’s political, not that it makes sense economically.”
And what about the so-called trickle-down, I asked: Will cutting these folks’ salaries hurt the overall economy?
“Places like New York, centers of finance, Detroit…they really need the activity and vitality that these companies provide; they need them to make money. If they don’t, the economy will recover more slowly. The main lesson of this crisis is, even though you hate the banks and firms, if you don’t have them, you’re in trouble. You’re slowing down the recovery.”
I understand how disgusting it is as a regular salaried (or laid-off) employee struggling to make ends meet to see some corporate honcho with a free company limo and multi-million-dollar salary, or even worse, engaging in bad trades that risk our homes and livelihoods just so they can get a bigger bonus. But can we really deny that these firms making money is good for the economy as a whole (including taxpayers), and that capping salaries may have a negative impact on that?
In response to another comment. See in context »Oh noes! Rich people won’t have money to spend so we’ll all suffer!!!
Pfffft, what utter crap.
“You need exceptional people to turn companies around.”
No, not really. Since AIG already received $180 billion in a taxpayer-funded bailout, all the company really needs now is some strong, rigorously enforced government regulation and a couple squadrons of really enthusiastic certified public accountants.
Don’t fall for the myth of exceptional people on Wall Street. We’ve already seen how dangerous that idea is.
I got hung up on McLeod’s statement: “You need exceptional people to turn companies around.” This makes me wonder what all of those exceptional, and exceptionally well-paid individuals have been doing these past few years.
It also makes me think about all of those exceptional school staff and faculty members out there, entrusted with the safety and education of hundreds of children every year, any of whom would be more than happy to take home $200,000 during the 2009-2010 school year. I’m not saying the government should take money from corporations and give it to schools, but what does it say about our priorities that an executive at an established company that has taken taxpayer money to avoid bankruptcy can have her/his wages cut 90% and still make 500% what a first year teacher makes in most states?
Jen Doll, when you write: “…if you were a top earner at another company without [those] caps and being recruited to help turn around AIG, would you go?” it brings to mind the urgency of wartime, but your point is that no one worth a damn would put her/his neck on the line for a mere $200,000 a year. What then, of the young soldiers fighting under the US flag in foreign countries for less than a teacher’s pay?
A final thought: You may not be an economist, but you had remarkably good luck finding one who supported the premise of your initial argument. And I guess not too much luck finding any others? For me, what has always meant more, and been more reliable is the fact that human beings are inconsistent creatures who often surprise.
It seems to me that the point of this presidency, and of these times, is that we’re not just playing at responsibility. We may have to figure things out on the way, but we are going to figure things out – or else we aren’t. I come down on the side of FDR, who said:
“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.”
In the same 1932 speech, he concluded:
We need enthusiasm, imagination and the ability to face facts, even unpleasant ones, bravely. We need to correct, by drastic means if necessary, the faults in our economic system from which we now suffer. We need the courage of the young. Yours is not the task of making your way in the world, but the task of remaking the world which you will find before you. May every one of us be granted the courage, the faith and the vision to give the best that is in us to that remaking!
At least until now, bankers get paid more because they make more. If you’re bringing millions of dollars into a company or a nation, you’re getting paid in a ratio that relates to that. If you’re an actor bringing in millions of dollars from the people who go to see your movies, you can command a higher rate per film. Supply and demand, right? (Teachers and soldiers, while doing absolutely honorable and commendable things, have never gotten paid in those ratios, yet they went into those careers anyway, knowing that.)
I think the difference is, a banker’s job is to make money. A teacher or soldier’s is to do something very different. Just like we probably wouldn’t want our teachers to be focused on their salaries over helping children to learn, would we want our bankers to NOT want to make money, not only for themselves but for their companies and beyond? Isn’t that desire fundamental to the job?
Beyond that, if we’re willing to pay it, they’re certainly willing to take it. (Career counselors abound who tell you how to ask for more money, negotiate for more perks, etc., before taking a job—although with less available jobs, we’ve seen less of that.) Perhaps America is not willing to pay bankers the amounts they’ve commanded up to now because we’re saying they’ve failed. Which is an assessment that we’re allowed to make—but I don’t think it negates the point that if those banks aren’t making money, or aren’t able to make money, we will ultimately feel that too.
As for talent, I can’t speak to a bunch of mid-level accountants stepping in for the top earners at AIG. I don’t know the industry well enough, but I’m dubious that it would have the same effect. In industries I do know, there are varying degrees of talent, and money is proportional to that. And usually, the most talented people can command the greater pay, and they do, and companies are better for it.
As for finding an economist who supported the premise, I reached out randomly and it turned out that he did. I’ve asked a few others as well and will certainly report any additional points of view. Economists, just like journalists, just like people, are all allowed their opinions, and I’m sure they differ widely.
One thing that Mr. McLeod said was that when the government takes over a company, they should change the management. That might have helped a lot in terms of the distrust and anger that’s built over these employees.
Matthew, I absolutely agree with you in terms of trying, and having enthusiasm and courage. My purpose in making this argument is not to say that I even completely disagree with what Obama is doing (although I’m finding myself falling pretty hard on the side of unhindered capitalism over governmental regulation) but to say that these moves, while popular to a lot of the people who are angry about the bailouts and corporate excess, may have another side, and it may not be exactly what we hoped for.
In response to another comment. See in context »You may consider paying attention to the economists that are either shunned or politely listened to by the business community; I’m thinking specifically of Dan Ariely who wrote Predictably Irrational, and is becoming the preeminent authority on behavioral economics as a way to explain how the economic system goes pear shaped despite theories like trickle down and the invisible hand. Specifically on the subject of bonuses, Ariely’s researched suggests that the performance benefits of bonuses are often outweighed by the performance deficits arising from the stress of trying to achieve said bonuses, even and perhaps especially in the case of astronomical bonuses enjoyed by the top levels of firms such as AIG. Long story short, it increasingly seems to be an economic old wives tale that exorbitant bonuses pay for themselves, but the firms for whatever reason are staunchly opposed to admitting it.
In response to another comment. See in context »I would second the skepticism about the “exceptional people”. McLeod, at least in this quote, never addresses the issue of short-term vs. long term incentives nor does he explain how making billions from risky derivatives is a better idea now than it was during the bubble.
He seems to be working backwards towards his conclusion: these people are paid ridiculous sums of money. Therefore, they are the most talented. And therefore, we can’t possibly pay them less. But if the crash taught us anything, it’s that Wall Street’s compensation practices and sound financial strategy have little to do with each other.
McLeod is right that we need to get the economy going again, but surely we can think of better ways than re-inflating the financial services bubble. I’d suggest reading the article The Quiet Coup by Simon Johnson for a look at how the financial sector perverted our politics and our economy. They need to be shrunk, period.
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Ms. Doll,
My initial posting was of course ironic (sarcastic actually) and terse which is all of the comment I had thought was necessary as I had thought that you were not all that serious about your posting. However, given your responses the many posts you are indeed serious. So I will respond in a straight forward and more detailed fashion.
Let us use AIG as an example. First, AIG has laid of a huge number of employees. They are not benefiting from the current “exceptional” leadership. No crumbs off of the table for them. Next, the stockholders are not getting any benefits either as AIG has failed to pay dividends for three quarters. One might argue that at least AIG is making a profit (which is not getting passed along to either the employees or stockholders but a profit nonetheless). Where are these profits coming from? The “exceptional” leadership is selling the companies assets as fast as it can. They sold their Energy & Infrastructure Portfolio for 1.9 BUSD. They are selling their 97.57% share of Nan Shan Life Insurance Company, Ltd. for just over 2.1 BUSD. They selling other holdings for less dramatic sums. So all that the AIG leadership is doing is selling the store keeping the proceeds for themselves in form of bonuses. What happens when there is nothing left to sell? Golden parachutes away! So, the employees have lost their jobs, the stockholders have lost their dividends, and the taxpayers are left holding the bag.
So AIG’s leadership is exceptional, everyone except them is getting screwed.