Must be a virus

by Russ Roberts on March 18, 2009

in Financial Markets

Fannie and Freddie are going to pay bonuses, too. The AP reports (HT: Drudge)

Fannie Mae plans to pay retention bonuses of as much as $611,000 each
to key executives this year as part of a plan to keep hundreds of
employees from leaving the government-controlled company.

Rival mortgage finance company Freddie Mac is planning similar
awards, but has not yet reported on which executives will benefit.

The
two companies, which together own or back more than half of the home
mortgages in the country, have been hobbled by skyrocketing loan
defaults. Fannie recently requested $15 billion in federal aid, while
Freddie has sought a total of almost $45 billion.

Fannie Mae
disclosed its "broad-based" retention program in a recent regulatory
filing with the Securities and Exchange Commission. The company was
only required to disclose the amounts for the top-paid executives, who
will pocket at least $470,000 on top of their base salaries. The
bonuses are more than double last year's, which ranged from $200,000 to
$260,000.

More than double last year's?

Don't these people realize that they should be wearing hairshirts, eating gruel and wearing hand-me-downs? Don't they know there's a recession going on?

Seriously, this isn't going to fly. Not sure the bailouts can withstand the political pressure. What will Geithner say about this one?

Remember that Geithner has been involved since the Bush Administration in the bailout of AIG. Will Obama cut him loose and put Summers in?

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Martin Brock March 18, 2009 at 3:53 pm

Don't these people realize that they should be wearing hairshirts, eating gruel and wearing hand-me-downs?

Why do you think they should be wearing hairshirts, eating gruel and wearing hand-me-downs when the issue is a half million dollar bonus from taxpayers? Let's compromise and settle for not buying my house five times over.

K March 18, 2009 at 4:10 pm

I suppose we will find out the bonuses were already contracted and can't be withheld.

Otherwise, retention bonuses sound like nonsense at a government company where you will not lose your job.

And the argument that bright executives will quit those secure and well paid jobs in today's economy also seems rather odd.

There are always a few Stars that will be in demand and leave for other work. But are there many Stars at Fannie and Freddie right now?

I would like to see Congress order an essay be written and printed about every single retention bonus and what disaster will follow if it is not paid.

Lee Kelly March 18, 2009 at 4:46 pm

Fannie and Freddie were big contributors to both the Democrat and Republican parties. Were AIG?

Christian McClellan March 18, 2009 at 5:01 pm

Barack Obama received $101,332 from American International Group in the form of political contributions according to Opensecrets.org. Second only to Chris Dodd whose passage in the Stimulus bill allowed the bonuses.

Chris O'Leary March 18, 2009 at 5:09 pm

"Rival mortgage finance company Freddie Mac…"

Just picking nits here, but in what way is Freddie a rival of Fannie? They aren't truly competitive substitutes. They are just two facades of the only game in town.

Michael Smith March 18, 2009 at 5:09 pm

The question is, when will the taxpayers have enough?

Today, there was an announcement that the cost of Obama’s "health care reform" is going to top $2 trillion. Obama seems to think he can just pluck a trillion or so out of the economy here to pay for “cap-and-trade“, pluck another two trillion over there to pay for "universal health care", pluck out a trillion and a half or so for "stimulus" bills, pluck another trillion to pay off the education unions, double the minimum wage, require companies to pay 100% of the employee’s health care costs, carry out trade wars with Mexico, Canada and China, raise all sorts of taxes that penalize investors and capital, turn union goons loose to do to the rest of the economy what they did to the Big 3 — and somehow all this will get the economy growing like mad!

Is Obama really that delusional? What are his economic advisors telling him?

Don the libertarian Democrat March 18, 2009 at 5:11 pm

This is off topic, but I just wanted to tell you that your post "What Keynes Really Meant" was excellent.

Lee Kelly March 18, 2009 at 5:13 pm

Perhaps AIG should have invested more in the new administration. Barney Frank et al, have already paid off their debt with the bailouts.

Chris O'Leary March 18, 2009 at 5:26 pm

"Is Obama really that delusional? What are his economic advisors telling him?"

He must have gone on a tour of the treasury and seen all the high speed presses and excess capacity. They can keep up with the demand to print more money.

Is it me or is this guy looking more and more like a 3rd world dictator, what with the hyperinflation and all that?

Martin Brock March 18, 2009 at 6:21 pm

… turn union goons loose …

If I take your rhetoric for granted, all the union goons report up to Obama, yet you can't name a single official in his cabinet rising from the ranks of organized labor. At the same time, Larry Summers was general manager of a hedge fund before joining the Obama administration and opensecrets.org will tell that Goldman Sachs was Obama's biggest contributor, but you don't imagine all the "Wall Street goons" reporting up to him.

What a lot of simplistic, political nonsense.

J. Cuttance March 18, 2009 at 6:33 pm

After brilliantly screwing the system and taxpayer to the tune of billions these guys are WORTH millions in bonuses.

I'm tempted to head-hunt them.

Jason March 18, 2009 at 6:37 pm

I don't understand why everybody is getting so fired up over all these bonuses being paid to the execs that mismanaged these companies into the current mess.

Surely these guys who caused the problem _deserve_ large bonuses. They have brought billions of dollars into the companies by their behavior. Surely such things should be rewarded.

It seems a tad unreasonable to give these companies billions and then complain when the company is rewarding the people that brought the billions in with a much smaller slice of the pie.

Martin Brock March 18, 2009 at 7:13 pm

It seems a tad unreasonable to give these companies billions and then complain when the company is rewarding the people that brought the billions in with a much smaller slice of the pie.

Sooo … why not a billion dollar bonus for Barack? Hell, why not a hundred billion?

Jason March 18, 2009 at 7:26 pm

Sorry, my post was a little tongue in cheek.

I'm just noting that the people getting the bonuses are the people that ran the company in such a way that the government decided, in its InfiniteWisdom(TM), to hand over large chunks of cash to prevent their collapse.

Given that these billions wouldn't have poured into the company without their mismanagement surely they deserve to be rewarded for it.

It was really intended as a comment on the perverse incentives the bailouts have set up.

As for a hundred billion dollar bonus for the socialist in chief, well why not. The way he is going that amount will only buy a couple of loafs of bread soon ;)

Joel March 18, 2009 at 7:33 pm

I'm only wondering, if this country to much influences the economic system – it's gonna be a bad precedent to our capitalism, since many socialisme did that with its instrument called politbiro

Greg Ransom March 18, 2009 at 7:38 pm

When the Fed inflates the currency and credit the bankers who first get to use the money get a huge and immediate "bonus" via relative purchasing power over non-bankers who then pay relative higher prices and see the new money last or never, with their wealth reduced and purchasing power cut at the knees.

jl March 18, 2009 at 7:52 pm

It is often considered helpful to kept discourse focused on facts rather than illusion, regardless of how emotionally satisfying it might be.

There is no reason whatever to believe that the retention payments at AIG are being granted to the people who caused its demise. Retention payments are typically made to those whose continued involvement in the firm is considered critical to its survival as a going concern. That generally involves a great number of people at levels well below those who made the decisions that landed AIG in trouble. We're talking about front, middle and back-office staff whose knowledge and experience are needed to manage AIG's books.

Perhaps someone would like to explain why those people should have their compensation stolen from them or, a'la Barney Frank, be beaten or killed?

Michael Smith March 18, 2009 at 10:09 pm

Martin Brock wrote:

If I take your rhetoric for granted, all the union goons report up to Obama, yet you can't name a single official in his cabinet rising from the ranks of organized labor.

The union goons need not report directly to Obama or any of his underlings for his legislation to empower them. Surely you can understand this.

At the same time, Larry Summers was general manager of a hedge fund before joining the Obama administration and opensecrets.org will tell that Goldman Sachs was Obama's biggest contributor, but you don't imagine all the "Wall Street goons" reporting up to him.

I made no claims about who reports to Obama — nor is that relevant for noting the empact of the legislation Obama is pushing.

What a lot of simplistic, political nonsense

If you can refute by logic anything I actually said, I'll gladly hear it. Otherwise your post is just a collection of straw man and non sequitur arguments.

Michael Smith March 18, 2009 at 10:19 pm

I must say, I don't understand many of your posts, Martin. Overall, you seem to have a decided hostility to any argument that rests on an appeal to principles — it's as if you are opposed to principles in principle. That, of course, is a precise definition of modern philosophical pragmatism. But is that indeed your position — that any argument based on principles is inherently "simplistic, political nonsense"?

Martin Brock March 18, 2009 at 10:21 pm

"turn union goons loose" is not logic. It's politics.

Chris O'Leary March 18, 2009 at 10:30 pm

"'turn union goons loose' is not logic. It's politics."

It may be, but it's politics because it's also history.

Also, goons don't have to have bulging muscles. They could just be ordinary people who could make someone's life a living hell if they go against the union.

Bob D March 18, 2009 at 10:48 pm

There's no way Summers is going to be Treasury Sec. because he would have to testify to congress. He might have to answer why in 1997, he, his boss Robert Rubin, Alan Greenspan, Bill Clinton and Arthur Levitt stopped efforts by Broksley Born head of the CFTC who expressed fear of possible problems with derivatives. Summers wrote to Born and said interfering in the derivatives markets could cause a financial collapse. Look it up! NY Times article.

JPIrving March 18, 2009 at 10:59 pm

What is the multiplier on an executive bonus? We wouldn't want to stop economic stimulation!

Lee Kelly March 19, 2009 at 12:22 am

Let's just call him Alan Greenscam from now on.

T L Holaday March 19, 2009 at 12:34 am

You're tipping your hat to Drudge?

Babinich March 19, 2009 at 5:38 am

Obama & Dodd get considerable contributions from AIG. Dodd now admits he and the administration added language which afforded AIG some leeway to grant the bonuses.

Geithner runs around claiming he had no idea that Dodd added such language.

A ship of fools…

Unfortunately, the citizenry of this country are a bigger bunch of fools for buying in to the Tabula Rasa's populism.

Maybe if the prez had more of an interest in the health care of the veterans of this country that he does the 2009 NCAA Mens Basketball tournament…

Oh, but that wouldn't be cool or hip…

Martin Brock March 19, 2009 at 7:18 am

They could just be ordinary people who could make someone's life a living hell if they go against the X.

That's obviously a non-unique argument, particularly in this context. Furthermore, it's irrelevant, since your assertion is that all the "union goons" report up to Obama, who then "sends them out", while you completely ignore the fact that other capitalists are Obama's own team members and his bread and butter.

John March 19, 2009 at 7:30 am

I think that we're now seeing the real reason for the bailouts. Salary control. With bumper sticker sayings going around like "The rich are getting richer and the poor are getting poorer" there's a lot of popular demand to punish the rich for being rich.
Now they've got an excuse to do exactly that, and to take control over how much money certain people are allowed to make.
They already control how much of your money you are allowed to keep, how long before the government dictates how much money you are allowed to make?

Martin Brock March 19, 2009 at 8:19 am

… how long before the government dictates how much money you are allowed to make?

The government already forbids counterfeiting.

We're specifically discussing people in the banking and closely related businesses. These people are monetary authorities. We don't want them entitled to author reams of money while lining their pockets with "negligible" bits of it that nonetheless constitute entitlements to build castles.

Yesterday, I heard again one of my favorite lectures from Mises.org, Ralph Raico's "Classical-Liberal Roots of Marxist Class Analysis". He discusses the history of a classically liberal critique of the "script aristocracy", long before Marx or state socialism existed. If Randy is reading, I think he'll particularly like Raico.

Randy March 19, 2009 at 9:03 am

I am reading, Martin. And thanks for the pointer, I'll check it out.

John March 19, 2009 at 9:16 am

I suppose I should have used the word "earn" instead of "make".
While I do think that it is disgusting for AIG to give these bonuses to people who lost billions of dollars for the company, I find Congress enacting taxes to confiscate money from specific people to be even more troubling.
We're allowing, or rather demanding, that our government set salary and bonus caps for certain individuals. Along comes the slippery slope where our government starts finding more people who "make too much money" and set caps on their salaries as well.
Right now it's only companies who received bailouts, but what's to stop such legislation against any company that does, or had done, business with the government?

Martin Brock March 19, 2009 at 9:21 am

Here's a link by the way.

Randy March 19, 2009 at 9:28 am

"On the Continent, however, the term "bourgeoisie" has no such necessary connection with the market: it can just as easily mean the class of "civil servants"
and rentiers off the public debt as the class of businessmen involved in the process of social production. That these former classes and their allies are engaged in the systematic exploitation of society was a commonplace of 19th century social thought, somehow mysteriously lost sight of as these same classes have risen to greater prominence in the Englishspeaking nations.

Precisely. I'll read the rest later.

Akos Beres March 19, 2009 at 9:29 am

I thought the labor market were pretty thight these days. What are these companies affraid of – their employees seeking on unemployment benefits?

Martin Brock March 19, 2009 at 9:30 am

While I do think that it is disgusting for AIG to give these bonuses to people who lost billions of dollars for the company, I find Congress enacting taxes to confiscate money from specific people to be even more troubling.

Same dollars. Twice as troubling.

We're allowing, or rather demanding, that our government set salary and bonus caps for certain individuals.

We do the same thing with millions of government employees. The state now owns 80% of this company. These bonuses are being paid out of tax dollars. I didn't support his nationalization, and I don't support limits on "private sector" compensation, but we're blurring the line between "public" and "private" incredibly here.

I do support a marginal consumption tax limiting the entitlement of wealthy lords, who are always inextricably linked to the state, to build castles and other monuments to themselves. I don't want a few statesmen organizing the labors of thousands of other men to produce goods consumed exclusively by the statesmen.

Joey Smythe March 19, 2009 at 10:00 am

Here is an example of even WORSE government waste. A Dept. of Energy funded music video on how to safely walk up stairs.

http://www.youtube.com/watch?v=rDsTc2oWGSI

Randy March 19, 2009 at 10:16 am

Martin,

Watching the hearings yesterday, the point that congressman after congressman kept making was, "we own you". The thought that kept running through my head was, "this is no way to run a business".

Randy March 19, 2009 at 10:19 am

…and come to think of it, its not much of a way to run a government either.

Martin Brock March 19, 2009 at 10:37 am

Here is an example of even WORSE government waste. A Dept. of Energy funded music video on how to safely walk up stairs.

I don't how you're ordering the waste from "best" to "worst", but I agree that a video on safely walking up stairs is wasteful. I certainly wouldn't pay to rent it.

Methinks March 19, 2009 at 11:19 am

Sooo … why not a billion dollar bonus for Barack? Hell, why not a hundred billion? – Martin

The value of the power he is amassing is far greater.

While I do think that it is disgusting for AIG to give these bonuses to people who lost billions of dollars for the company – John

The issue discussed in the congressional circus yesterday was not bonuses to the people who lost billion for the company. AIG lost billions because it insured too many CDS relative to the capital base. That was an upper management decision and everyone agrees that these people should not receive performance bonuses.

The issue discussed yesterday was the compensation offered to traders to unwind the complex derivatives books as they close down much of that business. These guys are employees who have no hand in making the decisions that brought down AIG. Life at AIG sucks right now and the traders would simply rather not work and spend time with their families since there is no upside for them in staying to unwind the book. I personally know many people who made just that decision over the last few months as the environment and upside deteriorated. The retention bonus compensates them for staying and performing that one task.

As a taxpayer, I would prefer these traders are retained for this task because the alternative is far more costly and I am frankly tired of paying – since I belong to the 50% of the population who pays taxes. I don't know if your realize this, but you're objecting to these people negotiating compensation for their labour by objecting to something called "retention bonus" because it has the word "bonus" in it. In doing this, you give ammunition to the monkeys in congress for the Writ of Attainder and future wage controls.

John March 19, 2009 at 11:41 am

Methinks,
I guess I misunderstood where the bonuses were going, as the impression given by the general media is that these millions are going to the decision makers, not the workers.
I just don't understand what makes these people so darn valuable that companies need to pay them more money in one bonus check than most people will see in their entire life.
That said, I also do not see this to be something to be "fixed" by government, because I have yet to see a government solution that wasn't worse than the original problem.

Randy March 19, 2009 at 11:58 am

John,

My understanding (someone correct me if I'm wrong) is that the bonus amounts were based on prior year bonus amounts. These are not exactly minimum wage types. Yes, it seems like a lot to me too, but then, these guys are managing multi-billion dollar books. It was a risk assessment. The loss if they walked was potentially much higher than the cost of paying to ensure they would stay. Then again, that could just be a line of bullshit. Maybe any yahoo off the street could pickup and manage these books from day one. I suspect not.

John March 19, 2009 at 12:15 pm

Randy,
I'm starting to believe that it's just a line of bullshit.
We've got revolving door management at most of these corporations, people who have convinced everyone that they are irreplaceable and must be paid whatever they want to be paid. Meanwhile they make decisions based upon giving short term gains to investors, with a total disregard for the long term stability of the company. What do they care? They have a bad year they leave with a big bonus and get hired next door for a higher salary.
If the company finds that paying upper managers hundreds of millions of dollars instead of reinvesting in the company is a failed business model, the government will bail them out.

Martin Brock March 19, 2009 at 1:04 pm

The value of the power he is amassing is far greater.

To him personally? Probably not. It's probably worth tens or hundreds of millions though. Regardless, you didn't answer the question.

Methinks March 19, 2009 at 1:12 pm

Randy & John,

Randy your initial assessment is correct. Allow me to assure you that this is not a line of bullshit.

John, the reason these traders are paid so much is that they do have other alternatives and they do some very complex things that the majority of people in the industry don't have the skills do do. Supply and demand. The job itself is like working in a pressure cooker – particularly now and particularly at AIG where armed guards are now posted to protect these individuals. A lot of the CDS traders I know have simply opted to quit, spend time with their families and trade their own portfolios or go into another line of business entirely. Interestingly, it is the traders who actually MADE money for the group who decided to quit because they saw no reason to stay since they will not be paid for their performance because other traders in the group are losing money or the firm is losing money in another division. So, the losers stayed and the good traders left to either take an extended vacation, start their own shop or to go where they will be paid a cut of their profits (usually private shops which don't have public shareholders and aren't eligible for TARP).

Further, a yahoo off the street can't just come in and unwind these portfolios. Fixed income derivatives are non-standardized, which means that any new yahoo would have to spend an enormous amount of time familiarizing himself with the details of every deal. Furthermore, how do you expect a bankrupt company which can offer only a trading assistant's comp and death threats to attract the skilled and experienced traders capable of unwinding complex, structured financial products which they had no hand in creating?

Of course, if you guys think that any yahoo off the street can just step up and trade fixed income derivatives, then why aren't you volunteering?

John March 19, 2009 at 1:26 pm

Methinks,
I wasn't talking about the traders, I was talking about management.

Methinks March 19, 2009 at 1:30 pm

Regardless, you didn't answer the question. – Martin

You never asked me one.

It occurs to me that there's much more outrage about paying to temporarily holding on to a few key personnel is far greater than the outrage over the $10MM office renovation Vikram Pandit is planning at Citibank with taxpayer money.

Does that not seem strange?

Methinks March 19, 2009 at 1:42 pm

John,

My mistake. However, we need to make a decision here. Either we're going to let AIG fail and allow a bankruptcy court to sort through who gets what or we need to attract the kind of workers who can bring the company back to profitability.

I favour bankruptcy where profitable businesses can be sold off and set free from the burden of congress-as-manager. But if we're not going to do that, then how are we to expect A level performance when AIG is only allowed to offer F level compensation?

Plus, having thought about it more…even if some management gets some retention bonuses, the whole bonus pool is not even a rounding error on the $200 BILLION AIG bailout. Is this really what we should be devoting our emotional energy to? There's a much larger problem here. Congress increasing its own compensation and handing out my money to every one of its contributers while it claims the country is burning all around them is far more offensive to me.

John March 19, 2009 at 1:49 pm

Methinks,
I've been against all the bailouts from the very beginning. It's nothing but a power grab by Congress. Let these huge corporations fail, let their assets be auctioned off the the highest bidder, and see if new management can make these companies competitive again. Everything the government touches turns to shit, and I'll bet that without exception every company that has received bailout money will be worse off for it.

Randy March 19, 2009 at 1:56 pm

Methinks,

"…then why aren't you volunteering?"

No thanks :)

Perfectly happy working a help desk for median wage. Nor do I begrudge those people one thin dime. If for no other reason than that it isn't my money.

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