This is why I argue we've already nationalized much of the financial sector, at least implicitly:
vowed to try to stop the faltering insurance giant American
International Group from paying out hundreds of millions of dollars in
bonuses to executives, as the administration scrambled to avert a
populist backlash against banks and Wall Street that could complicate
Mr. Obamaâs economic recovery agenda.
âIn the last six months, A.I.G. has received substantial sums from the U.S. Treasury,â Mr. Obama said. He added that he had asked Treasury Secretary Timothy Geithner âto use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole.â
In
strongly-worded remarks delivered in the White House East Room before
small business owners, Mr. Obama called A.I.G. âa corporation that
finds itself in financial distress due to recklessness and greed.â
âUnder
these circumstances, itâs hard to understand how derivative traders at
A.I.G. warranted any bonuses, much less $165 million in extra pay,â Mr.
Obama said. âHow do they justify this outrage to the taxpayers who are
keeping the company afloat?â
Want to bet they'll find a "legal" way to stop those bonuses?
I wish the bonuses would stop, too. I don't believe in rewarding people who destroyed their company. Note to the President: when you stop sending them money, the bonuses will stop.
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The CEO's job is to make the company money. The government created the opportunity for the firm to make money by begging from the government.
The CEO's did their job, they earned that bonus via begging. I'm unhappy about how they were able to earn it, but I'm not unhappy about the bonuses themselves.
CDS insurance, not derivatives trading brought down AIG. AIG hedges its operations with a wide variety of derivatives trades that have nothing to do with insuring CDS.
I agree that the quickest way to stop bonuses is to stop pouring taxpayers' money into the zombie company. However, once that's done, the situation has to be re-assessed in light of that fact. The best traders will simply leave. There's always a bid for people who are capable of making money. What the company will be left with is the underperforming (and now completely unmotivated) dregs – much like the moribund dimwits that end up working for government. How are those people expected to earn enough to make the taxpayer whole?
Which brings me to another point….about half the expense of investment banks and most other financial institutions is compensation because those firms are pretty much all human capital. On Wall Street a bonus can be two things. If you're a trader, salesperson or broker, the bonus is essentially a cut of your profits because you're so close to the point of transaction that it's very easy to assess your personal P&L. For everyone else, it's the variable portion of your compensation. Nobody would EVER work for the base. Paying out most of the compensation of the highest paid employees in variable form is very smart for a company operating in a high risk environment. By eliminating this variable comp because it's called "bonus", banks will now have to increase the non-variable portion of their compensation, increasing fixed costs for a high volatility business model. This almost ensures that the banks will never pay back the "loans" from government and that they will, in fact, need more bailouts in the future.
Here's the problem.
Other than the people in the very upper eschelon; there can be PLENTY of people can meet or exceed PERSONAL performance targets within a company losing money.
If those people leave, that'll be a big help in righting the ship. Right, and Elliot Spitzer was a morally righteous crusader who helped the company when he forced them to oust Hank Greenberg too.
As always, Methinks, very well said.
If you'll permit me, I'd like to expand on this idea. I may just be picking at a nit, but it occurs to me that the company wasn't left with the dimwits after the bailout. They were there long enough to run the company into the ground. The bailout's premise was flawed from the word go. AIG already demonstrated poor management with their P&L; throwing money at them will not miraculously change poor management into great management or even good management.
What's particularly galling is that government officials knew the company wasn't performing well to begin with…and they gave them largess anyway.
If they couldn't make themselves whole, how can anyone expect them to make the tax payers whole?
I guess we will never know how much money is spent to recapture that $165 million. But I for one would not be shocked if the cost were to exceed $165 million.
I don't think it should be easy for governments to retroactively change employment contracts, because such action can only be objectively justified when the company is put into conservatorship or has been nationalized.
Bring on the Commies.
I don't think it should be easy for governments to retroactively change employment contracts…
I would add that such action would only increase the uncertainty that is causing the markets to contract. It's a very dangerous and fascist concept.
Looks as though somebody has already come up with a Rube Goldberg-esque strategy for getting recouping taxpayer money.
http://www.huffingtonpost.com/aaron-zelinsky/larry-summers-stop-the-ai_b_175151.html