Of AIG, Popeye Snopes, and the New Feudalism
posted by Frank Pasquale
First, I want to congratulate co-blogger Lawrence Cunningham on his appearance on the New York Times editorial page (he provides a superb analysis of the AIG bonus dispute there). The NYT has also featured law bloggers Frank Snyder and Glenn Greenwald on its “Room for Debate” feature on the issue. Without questioning the validity or value of any of their work, I just want to take a step back and consider the stakes of the bailouts as public disgust with them grows.
Sam Pizzigati of the Institute for Policy Studies has argued that AIG is but a bit player in Wall Street’s drama of overcompensation:
Congressional action to recoup these bonuses through taxes would be a positive step, but merely undoing the AIG bonuses will leave in place tens of billions of dollars in taxpayer subsidies for banks and corporations that routinely overcompensate their executives. [There are many] taxypayer subsidies for executive excess and . . . various reforms now pending in Congress that speak to these problems.
Given this background, it is hard to understand the fuss about the AIG bonuses. Rather than a rancid discontinuity from the recent past of Wall Street moneymaking, they appear to express its distilled essence. As Robert O’Harrow’s and Brady Dennis’s excellent Washington Post series on AIG reported, the company constantly benefited from Washington’s helping hand–including the conscious decision by regulators not even to try to understand what its Financial Products division was doing:
Financial Products unleashed techniques that others on Wall Street rushed to emulate, creating vast, interlocking deals that bound together financial institutions in ways that no one fully understood and contributed to the demise of its parent company as a private enterprise. In the panic of mid-September’s crash, the Bush administration said that AIG had grown too intertwined with the global economy to fail and made the extraordinary decision to take over the reeling giant. The bailout stands at $152 billion and counting [as of Dec. 29, 2008] — almost 10 times as large as the rescue for the American auto industry.
Like Captain Renault in Casablanca, “shocked, shocked to find that gambling is going on in here,” the Geithner-Summers-Bernanke crew now feigns surprise that AIG execs would make one more dive for the trough.
In William Faulkner’s novel Sanctuary, Popeye Snopes is a blackguard who, after a life of violence and exploitation, ends up hanged for a crime he didn’t even commit. Karmically congruent with Snopes, AIG now finds itself in the crosshairs of public opinion for a money-grab trivial in comparison with the systemic risk it recklessly foisted upon us all.
When we think about how much money has already flowed to Wall Street’s masters of the universe, what’s another $165 million? According to NY Atty General Andrew Cuomo, “A.I.G. made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout. Something is deeply wrong with this outcome.” But certainly their culpability didn’t start in 2008. These arrangements grew over a long period of time, and people like O’Neal, Fuld, Thain, et al. are still luxuriating in the tens of millions in “incentive pay” their phantom paper profits generated.
I think the outrage over the AIG bonuses has a deeper root, one unconnected to economic analysis of the “real value” of executives and traders. Americans have a sick feeling that even after repudiating the most fatcat-friendly regime in our history, “Change We Can Believe In” has turned into continuity we can’t stand. Consider Senator Ron Wyden’s comment on the Dodd-Geithner contretemps over who really put in the bonus-friendly language in the bailout:
“I pulled out all the stops,” Wyden [said], “to convince the president’s economic team that [an eliminated anti-bonus amendment] was vital to the White House for two reasons: 1) the president had spoken out against bonuses; 2) fury about bonuses would kneecap confidence in the president’s entire economic policy.”
But no one inside the president’s economic team was in favor of it. As Wyden put it: “If the White House economic team had made it clear that this was important, this provision would never have been removed. I don’t believe the president has been well-served on the bonus issue by his economic team.”
A couple months ago, I thought that President Obama’s strategic decision to defer to “safe hands” like Geithner and Summers on macroeconomic matters was wise. I even held out hope that the government would use some of its leverage over the banks to induce them to invest in our future–projects such as green energy, universal broadband, and health information technology that will be perennially neglected by investors obsessed with quarterly earnings.
But these hopes are fading as a neo-feudal reality begins to emerge. Whatever their failures, however reviled they are by the public, the potentates at our leading banks appear to believe themselves entitled by divine right to determine what projects get credit and which are denied. Rather than assert the people’s prerogative to demand investment that builds a better future for us all, our putatively progressive Treasury Department contorts itself to resist the “nationalization” label–even as conservatarians like Lindsey Graham and Alan Greenspan consider it. Like the Rubin-ites who rolled over Robert Reich and Brooksley Born in the Clinton administration to prevent derivatives regulation, these “centrist” Democrats are pushing the Obama administration into a hollow establishment “consensus” that commands the respect of few outside the Beltway Bubble, Greenwich, and the Upper East Side. For these worthies, we are impertinent even to ask about the long-secret destinations of the AIG money.
We live in “a world in which, according to 2006 statistics, one percent of the world’s adults own forty percent of all global assets[,] [t]he richest ten percent own eighty-five percent, while the poorest half own less than one percent.” We should not be surprised when those in that glittering top percentile pull out all the stops to preserve and intensify those inequalities. But we are still inevitably disappointed by an administration that promised so much, and appears more at drift than mastering the financialization that has brought the nation to the brink of ruin. That’s the kernel of truth and sorrow at the core of public outrage over AIG.
March 19, 2009 at 8:30 pm
Posted in: Economic Analysis of Law
Print This Post
Responses (7)
Miriam - March 20, 2009 at 12:30 am
That is exactly right.
Timon - March 20, 2009 at 1:39 am
This is a good moment to reflect on Geithner’s belief that limits on executive compensation will limit banks’ willingness to participate in government programs. He is saying that bank shareholders to not even have the capability to accept free money in exchange for lower expenses and the survival of their businesses and equity, if doing so is distasteful to their highest paid employees. Moment of clarity indeed! This is also the “distilled essence” of current corporate governance.
A.J. Sutter - March 20, 2009 at 3:14 am
Also implicit in the salary contretemps is Geithner’s belief that no competent person would be willing to serve in certain (already well-paying) jobs, and thereby help to right the world’s financial systems, out of a sense of responsibility for having created a mess, or a sense of civic duty. It is a kind of resignation to the notion that we need to rely on a**holes to help us, reflecting Geithner’s naively literal acceptance of Econ 101 ideas of self-interest, deep pessimism about human nature, or both. And a depressing vindication of J.K. Galbraith’s observation that companies are run for the benefit of management.
Diana - March 20, 2009 at 8:45 am
Will ANY heads roll at the White House?
ruleswatch - March 21, 2009 at 10:57 am
“..we are still inevitably disappointed by an administration that promised so much, and appears more at drift than mastering…”
With respect, I say that it’s hard to agree with this and it’s hard to avoid the conclusion that it’s perhaps just the plain wrong kernel and the plain wrong truth that’s been posited here.
Setting aside any controversial implication this post adopts as to where promises may have originated, the error with these bonuses — I hate to say it– if there was one was not, (ouch)cannot be because they were not considered or accounted for, obviously they were: they have legislative protection.
Rather any hypothetical error had to have been in under-rating public reaction to them once, inevitably and fully, they did appear(surely there is no reason to believe that anyone involved believed they would not).
To suggest that the incident betrays fundamental lack of competence in the administration because the public is upset must therefore must be wrong: that was to have been expected.
Surely, if there are compelling, or apparently compelling, reasons for a US administration to act controversially, we should judge the merits of the decision against the apparent choices and not the public dismay at the outcome when it has become known.
To stay with the breakfast analogy: surely, having accepted the decision to make the omlet, we can hardly allow ourselves or allow others to second guess the decision because of inevitable broken eggs. Nor, perhaps, should we allow ourselves the luxury of lining up with those others to do so.
Mike - March 21, 2009 at 11:23 am
I haven’t read Posner’s article regarding executive compensation, but I can’t help wondering whether the past 10-20 years of excess would have happened if we had in place: 1) an real antitrust division at DOJ (megamergers MUST have contributed something to this mess); and, more importantly, 2) better methods of shareholder control over management (whatever happened to shareholder derivative actions?).
James Wimberley - March 21, 2009 at 1:12 pm
The title does feudalism an injustice. With all its faults, feudalism was precisely a régime of accountability. Under kings strong enough tot make it work, like William the Conqueror, Philippe-Auguste, or Henry II, great barons who broke their oath of faithful service found their castles besieged and their lands seized. Please note: Karl Marx, who popularised the term feudalism as shorthand for the generic seigneurial systems of the ancien régime, knew next to nothing about the real thing.
Leave a Reply