Yes.
Certainly, handing out a bonus package running in the hundreds of millions of dollars during a recession seems like poor form. Especially so when the firm involved played a big role in bringing the house of cards down. However, the public vitriol over this mess has taken on a disturbing character.
A recent open resignation letter by a former AIG VP printed in the New York Times does a pretty good job of laying out the argument. Basically:
(1) Salaries at AIG are low and most people make money through bonuses.
(2) The people responsible for the failure of AIG are no longer working there. The contended bonuses weren't meant to be given out to people in unrelated divisions doing unrelated things.
(3) The bonuses were part of a contractual obligation to get good workers to stay on during tough times. But more fundamentally, the bonuses were part of a compensation package promised to employees before AIG became the demon.
My beef with the whole row hinges on (3). It's ridiculous for people to demand the bonuses to be paid back (or to try and tax these at the rate of 90% or something like this). Nobody should be able to meddle with contracts retroactively. This is because this kind of activity could discourage people from generating real wealth during these tough times: why would anyone try to make money in this climate if they believe they are going to be demonized and that the government will try to take their money away. The bonuses row could serve as a huge disincentive for undertaking the kind of economic activities that we desperately need now.
Reason (2) also deserves some attention. While I don't see it as the best argument against the retroactive penalities (the whole company as a team argument), we need to think about how a few people could derail an entire financial system despite being around a majority of people who were engaged in activities that ostensibly generated real wealth. Perhaps the Geithner regulatory plan, to be announced sometime soon, will address this in a constructive way that doesn't hamper wealth creation.
Whatever the case may be, it is time to put down the pitchforks and start thinking about these issues in a more constructive (and less obviously destructive) manner.
4 comments:
2 comments: I agree with you that demanding the bonuses back retrospectively through taxes or any other means is plain stupid. On the other hand why should these people be sheltered or protected to get their wages even in tough times when thousands and thousands of other working in different sectors of the economy are not guaranteed anything?
Take care,
Elli
This reminds me of something I read by Becker about the financial crisis. I think he had a pretty strong argument that the government is partly at fault these days, because when they make inconsistent decisions (particularly their differential treatment of different investment banks) it adds increased risk into markets, generally. Its probably true.
Elli - thanks for the thoughtful comment. your point reminds of another issue of note in all of this: were the salaries of bankers and other financial professionals "too high" (i.e., large in comparison to their marginal product) prior to the financial crisis? Once the sector transitions to a new equilibrium, I wonder how the payment structure will shake out. Certainly, the era of huge bonuses to 23 year old just out of college kids is likely over...
Jeremy - Good call. This is what I was trying to say and you did it in three sentences!
Atheendar, thanks for your response. I believe you are absolutely right there. People working in financial sector will most likely have to learn to earn their wages just like everyone else. Me as a Toronto Realtorhave seen huge commissions paid out on very bad mortgages. I hope this practise is over now.
Take care,
Elli
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