I don't think that the Wall Street types have any idea at all how angry people are at them. We were angry before, but the business about the AIG bonuses -- which is fairly small potatoes in the grand scheme of things -- just sums things up perfectly.
If I were an investment banker making millions of dollars a year, I would be trying to convince the people around me to simply take the hit for a couple of years, the better to preserve our ability to go on raking it in in the future. I would seriously consider getting together a bunch of people to buy off the members of AIG's Financial Products Division who are holding out for bonuses, on the grounds that their actions will only harm us all (where us all, in this example, means: all us fantastically overpaid people in financial services.) The alternative will be much worse for them. Better to exercise some restraint.
"In response to expected bonus restrictions, officials at Citigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. (...)
Most traders and bankers on Wall Street get a base salary of anywhere from $200,000 for managing directors to $1.5 million for a chief executive. But the lion's share of their pay comes in the form of a bonus, a tradition that began when most firms were private partnerships and partners shared directly in the annual income of the firm.
As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation."
Dear Wall Street: bonuses are more politically radioactive than other kinds of compensation. You see, many people don't understand that on Wall Street, bonuses are essentially part of your salaries. They imagine that bonuses have something to do with, well, performance. You can see how the idea that your recent performance deserves to be rewarded might rub people the wrong way, especially since so many of you are planning to reward yourselves with their money.
But the real issue isn't bonuses. It's your compensation, period. It's the fact that, after doing your very best to wreck the world economy, you regard yourselves as entitled to levels of compensation that people who actually make things can only fantasize about. The bonus part is just the icing on the cake.
Oddly, though, the idea that bonuses have something to do with performance isn't limited to us outsiders. The WSJ article also contains this gem:
"Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street's culpability for the recession and credit crisis."
Oh noes! We can't have the notion of pay for performance turned on its head! Not on Wall Street!
Honestly: what planet are these alleged "compensation experts" living on? An industry in which it is possible for people to go on raking in enormous sums of money when their companies have for all intents and purposes gone bankrupt, and in which CEOs get golden parachutes negotiated in advance, and payable independent of performance, is hardly in a position to go all dewy-eyed about pay for performance. That horse left the barn several decades ago.
As someone who thinks that levels of compensation in the US are absurdly unequal, and that this is bad for the country, it's tempting to say: oh, go ahead, you idiots. Keep your sense of entitlement to other people's money. Make people come after you with pikes and tumbrils. See if I care.
The thing is, I don't think that rage normally leads to good policy. (Though, as I've said before, I really believe that it would help a lot with moral hazard if people found the experience of having the government bail out their firms profoundly unpleasant.) And I'm sure that my inner policy wonk will shortly regain control. Still, at the moment, it's awfully tempting. I think of people I've known who have worked hard all their lives for not very much money, only to be completely bankrupted by unforeseen medical catastrophes, and I imagine these people being asked to support investment bankers in the style to which they have become accustomed, and fury feels like exactly the right response.
European banking collapse -> Total banking collapse -> big time war.
They're keeping it secret because the U.S. is going to pay for it all (at least at first).
Certainly all of the formerly national financial markets are now interdependent, but it's not all true that the US is the only government spending lots of money right now on bailouts.
The greatest danger we face is the isolationist instinct: if countries try to go it alone out of a misguided desire not to "pay for other countries' problems", we're all toast.
Posted by: byrningman | March 18, 2009 at 10:17 AM
Moreover, the isolationist instinct was damaging enough for the USA in the 1930s when it had become the world's greatest creditor. It will certainly be catastrophic now that the the United States has become the world's greatest debtor. It is an odd instinct to rail against foreign financial institutions when you literally depend on them to maintain the day-to-day operations of your government.
Posted by: byrningman | March 18, 2009 at 10:20 AM
russell, the extent of CDS obligations that AIG is liable for is more like $400 billion, with a 'b'.
Yes, that sunk in, eventually. Light dawns on Marblehead.
Thanks slarti!
However, the belief that property has some magic intrinsic value that paper money or any other kind of asset doesn't is precisely the reason for a constant cycle of property booms and busts in most modern economies.
It's hard for me to think about economics other than in concrete terms, so the way that phenomenon looks to me is that it's the value of the money that's kind of 'magic'.
The value that real property has that money doesn't have is that you can grow potatoes on real property. That is, in fact, intrinsic value.
During the normal operation of modern economies, that's kind of an academic point. When the modern economy blows up, it can become pretty relevant.
his decision to indulge in vilifying the recipients of these bonuses is deplorable.
My impression is that Obama, and not to his credit, is making Geithner the point man on this.
Posted by: russell | March 18, 2009 at 12:58 PM
"Still – I do get a kick out of the VRWC meme when we have pundit conf calls out of the WH every morning, this list with the (yes) liberal media, and Obama’s millions of minions on his em list… There has never been a more coordinated government response (propaganda) across the pundit class, politicos, and grassroots."
Steve: you list three items to get to your conclusion that "There has never been a more coordinated government response (propaganda)"
The problem here is that:
a) the cited mailing list has as much to do with the government as Obsidian Wings does: nothing.
b) the fact that the former Obama campaign and DNC have mailing lists is no different from the fact that the RNC had and has mailing lists
c) the fact that this White House makes conference calls, and other Democratic groups make conference calls, is no different from the fact that the Bush White House made conference calls, and Republican/conservative groups made conference calls and had meetings (Grover Nordquist, anyone? NRA? Etc.).
So your conclusion simply isn't supported by your cited reasons.
Posted by: Gary Farber | March 18, 2009 at 04:44 PM
More fool you if you do.
Obama:
Come on, Steve, there comes a point when you might want to start questioning your assumptions and sources of news before you use them as a launch pad for outrage.
It's not that I'd be surprised if someone went and committed violence against employees or property of AIGFP. I've said as much before, and frankly what surprises me is that it hasn't happened yet. But trying to blame Obama's words for that, as opposed to the criminal negligence, stupidity and greed of these people, is so far out in East Wingnuttia that I'm amazed that comment didn't have to pass through customs on the way here.
Posted by: Catsy | March 18, 2009 at 05:26 PM
But trying to blame Obama's words for that, as opposed to the criminal negligence, stupidity and greed of these people
And, although it really ought to go without saying, the crazy person who actually commits said violence.
Posted by: Catsy | March 18, 2009 at 05:28 PM
russell, the extent of CDS obligations that AIG is liable for is more like $400 billion, with a 'b'.
Just to kind of close the loop on this particular issue, Liddy has apparently stated that the face value of AIGFP's obligations that have yet to be unwound is about $1.6 trillion.
Which is to say, $400 billion times four.
Not intended to be a pushback specifically at you slarti, just putting the number out there.
How many times the actual value of AIG in it's entirety is $1.6 trillion dollars, byrningman?
AIG doesn't have that much money. They don't have it, and they can't get it. Not in a million years.
They're broke. Busted. Belly up.
Bankrupt. Say it after me. "Bankrupt".
Nobody wants to actually push them into technical, legal insolvency, because then, apparently, the wheels really do come off.
But they are broke.
At the moment, the only party with a snowball's chance in hell of making good on those obligations are the US government.
In financial terms, that translates into me and you.
Get ready to pony up, because we will be paying for a long time to come.
If we are either legally obligated to pay these guys their bonuses, or if that's the only way we can get them to do the right thing and stick around long enough to unravel the bloody f**king mess they've created, then let's just freaking do it.
And as soon as that job is done, I'd like to put my boot so far up their asses that they can shine my shoes with their tongues.
Nothing personal, I just don't like pissing my money away on folks like that.
Posted by: russell | March 18, 2009 at 10:26 PM
yes, I've seen this number recently. It makes me wonder why it's different now than it was back in September, and whether it's going to change by a factor of four again, anytime soon.
It could just be that Reuters had bad information back then, and this is better information.
Posted by: Slartibartfast | March 19, 2009 at 09:38 AM
yes, I've seen this number recently
It certainly is a moving target.
From what I've read since writing my last comment here, it seems like the $1.6 trillion may be other derivatives, not the CDS.
So, maybe the $440B is CDS specifically, and the $1.6T is other products.
Funny to toss numbers like this around, innit?
Posted by: russell | March 19, 2009 at 09:47 AM