Inkless Wells

Paul Wells on all the latest out of Ottawa—along with the occasional post about jazz. Follow Paul on Twitter: @InklessPW

Categories: Capital Read, Inkless Wells

Charles Krauthammer is making a lot of sense

by Paul Wells on Friday, March 20, 2009 8:09am - 45 Comments

Now there’s a sentence I don’t often write. See for yourself. He puts the AIG bonuses into perspective – far too late, one suspects – and finds Congress still jerking its knee on protectionism.

UPDATE: On a different order of significance, Peggy Noonan is worried too. Yes, she worked for Republican presidents and she’s writing at the unreformed Wall Street Journal editorial pages, but she has been an admirer of this president and I think she’s on to something. The AIG bonuses aren’t the economy, they’re not even the banking system, and until the banking system is fixed I believe there are limits to the luxury of multi-tasking.

Le Figaro had an item yesterday about Jacques Chirac receiving a letter from Barack Obama. That would be Jacques Chirac, retired former president of France, the very definition of yesterday’s man. Maybe whoever drafted that letter for the president’s signature could head over to Treasury, because apparently Tim Geithner could use some help.

Tags: Barack Obama, Charles Krauthammer, even a stopped clock

More by Paul Wells

http://myblahg.com Robert McClelland

AIG has become the symbol of what is wrong with the financial sector and the focus of the country’s anger. Any politician who fails to realize that should begin preparing their resume.

Paul Wells

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/19/AR2009031902887.html

Bill Simpson

Media talking heads and under-exposed politicians whip up a lynch mob at the corner and head down the street with pitchforks and torches for AIG and then represent themselves as leaders of a popular uprising against greedy bankers. A pretty depressing response.

Good for Krauthammer.
http://myblahg.com Robert McClelland

The pitchfork wielding mob won’t listen, Paul. Blood is the only thing that will calm them and if they don’t get it from the AIG execs they’ll take it from any politician who didn’t wield a pitchfork alongside them.
Wotcher?

The events which become flashpoints, touching off reactions out of proportion to the events themselves are often quite minor in the grand scale. I would agree with Robert that they are symbolic. Was the assassination of Archduke Ferdinand worth all of Europe going to war over?

Delano

It’s going to be delightful when, six months or a year from now, he has Bush-2007-like approval ratings, and has no idea why.

http://www.jackmitchell.ca Jack Mitchell

Really, you think he’ll invade Namibia?

Mikee

Apparently the AIG stimulus package specifically allowed the bonuses to be paid. Senators are being somewhat disingenuous to oppose them now!
archangel

“Now there’s a sentence I don’t often write.” Here’s mine: It boggles the mind.
http://carnewsandviews.com jwl

Obama’s ‘anger’ towards AIG bonuses is a phony as it gets. It was Obama’s $780 billion stimulus bill that enabled these bonus payments:

“The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.”

And if Dodd is to be believed, the initial provision was to ban payment of all bonuses but the White House, through Geithner and Summer, lobbied Dodd to eliminate bonuses going forward but to allow payment of bonuses already agreed. Obama admin is positively Nixonian in going after private citizens, or it’s enemies, through the IRS. Class warfare, here we come.

First Brooks, now Noonan. Two supposed cons who played footsies with Obama last autumn but now having regrets. No wonder many regular cons, who knew what Obama was all about right from the start, loathe the supposed con talking heads.
MB

I guess given enough time, we all slowly become like our parents.
Its just too bad that the U.S. house of reps’ “dad” was George III.
Bill Simpson

Paul – whenever I despair of our own government and political class, I only have to look south to get my perspective back. Obama’s stock is sliding fast and congress is behaving worse than ever; beside that mess, Harper and the Commons looks not so bad!
Wascally Wabbit

Ah yes – Peggy Noonan – whose musing – eyelashes fluttering at the ceiling – with other illustrious pontificators on such news shows as George Stephanopoulos – usually has her thoughts finished for her by others just to reduce the amount of dead air….
Wasn’t impressed with her then (back in the Reagan days) and even less impressed right now!
As for Obama – he responded vigourously to his critics in a televised Town Hall meeting in California yesterday – pointing out that Joe Public doesn’t have a choice whether to pay his portgage or buy food for the table – he has to do both – and as Obama says – HE doesn’t have the choice either!
Actually he danced particularly well – having praised his host Governator Ahnuld – as well as California’s public servants – most of whom would like to lynch Ahnuld – for his games of threatening them with minimum wages – and currently applying Ahnuld “Rae days” to them!

edward r. murrow

You “weren’t impressed with her then (back in the Reagan days)”, huh? Because you ran into her at the White House all the time, I bet.

archangel

WW didn’t, but I did, posthumously of course.

Regards,

Walter Winchell

Wascally Wabbit

Because you ran into her at the White House all the time, I bet….

Yes sir…she used to say Good night Mr. Murrow – to which I replied – “Good luck!”

http://www.jackmitchell.ca Jack Mitchell

Of course the AIG ~~bonuses~~ retention packages aren’t the cause of the recession, but they are the symbol of it. Firms like AIG actually are responsible for the recession, which was basically caused by investment executives throwing caution (and accounting) to the wind in order to maximise short-term profits and their own bonuses. In other words, these bonuses are very much part of the problem — in themselves they incentivise short-term thinking and they remove the dread of being fired. If we paid school bus drivers in the same way, our children would be maimed within a week.

Critical Reasoning

I agree with you that bonuses incentivise short term thinking, etc… but how exactly would the children be maimed within a week? Would the school bus drivers invest their bonus money in narcotics and crash the bus?

http://www.jackmitchell.ca Jack Mitchell

Oh, sorry. Analogy was to be school bus drivers being paid on the basis of how quickly they deliver children to school: $1000/day if they deliver them an hour early, $600 for half an hour early, $200 for on-time, etc. I mean that the bonuses destroyed much thought of the company’s medium-term well-being in favour of quick profits and corresponding personal rewards. Thus in effect the executives were pillaging those companies for years, and they simply could not care less that it would result in bankruptcy. Once you’ve got $10 million in the bank, you’ve got nothing to lose.

http://carnewsandviews.com jwl

Jack M – I am in no way defending AIG bonuses, I think it’s pathetic to be paying bonuses to people who bankrupted the firm.

However, your point about “maximise short-term profits and their own bonuses” is interesting. In 1993, Clinton/Congress passed the Revenue Reconciliation Act of 1993 which limited deductibility of salary expenses while ignoring bonuses and other forms of payments. Since then, ‘bonuses’ have sky rocketed and salaries have increased exponentially as well to cover the extra tax on salaries over $1 million. It is an excellent example of unintended consequences and how government policies influence people.

http://www.jackmitchell.ca Jack Mitchell

Couldn’t agree more that the USG was complicit in it. I don’t blame the AIG execs personally — you can’t blame a nihilist for not caring — but rather the whole insane government-financial puppet show we’ve been watching for 10 years (or 15, as you point out). They should erect a guillotine on Wall St. just to remind these fools what the real bottom line is. (No need to use it, mind you.)

Wascally Wabbit

It’s more fundamental than the bonuses Jack.
These are insurance companies after all – risk is their business – managing risk such that one can make a profit out of it is what actuaries do!
Re-insurance is what they do to further spread the individual risks…..AIG was the biggest reinsurer in the world.
Trouble is – somewhere – someone said – we have spread the risk so wide that there is no risk left!
Fundamentally not true! The residual risk is still there – agglomerated into one huge basket – that in itself compounds the risk as far as I am concerned and as we have discovered in reality.

Not to worry you folks – but – because they are very big – some of the largest private sector companies – utilities / banks and pretty well all governments – self insure – they assume their own risks.

The way that some governments have been running themselves the last decade or so – and especially the last few weeks and months – we should be very very worried!

archangel

Governments elected with corporate dollars. Nothing will change.

Bill Simpson

Jack,
But this supposes that AIG and its executives are in any business but making as much money as they can for themselves. Profits are always short term, and everyone involved – workers, executives, shareholders etc. – are all quite reasonably in the business of maximizing profit any legal way they can. Why should the CEO of AIG care about the state of the company in 10 years time? Why should he care about the economy? Why should he be blamed for the recession?

These are private enterprises, not social services. Only by injecting tax-payer money have they been turned into such. Of course AIG welcomed the bailouts. Why not? If your business is on the rocks, you will look for help wherever you can find it. But that doesn’t mean that you have adopted a whole lot of obligations to some public good. You have just taken on some additional financial and legal obligations.

And as for the executives themselves, why should they give up their legal entitlements? They signed a contract, delivered their side and now should be able to collect.

I have worked with bonus schemes for years, both giving and receiving. Done right, they get results and people are happy. But if they are found to be wrong after the fact, it is manifestly unjust to not pay them or, as this lynch mob proposes, take them back.

And the amount is not important – there is a good reason that these numbers seem obscene; it is because we have no idea what it takes to create the sort of value to get them. That value looked great a couple of years ago, not so much now. 20-20 hindsight and now we can see that their risk calculations were wrong, but that doesn’t give us the right to take back the money they earned.

http://www.jackmitchell.ca Jack Mitchell

Shareholders are not in the business of maximising profit at the future expense of their holdings. That’s the folly here, that executives should pay themselves to pillage the company and not be called out on it. It’s collective folly.

Why should we care if the lynch mob lynches them? That’s market economics too, Bill. Cause and effect, risk and . . . reward.

Bill Simpson

Well, as usual the Board of Directors is AWOL. But we don’t hold shares forever. AIG was a money machine for a lot of people for a long time.

I don’t feel sorry for the executives who may miss out on their bonuses – I am simply disgusted at the hypocrisy being displayed by Washington on the subject and the general ethical confusion on the subject.

sf

I don’t think there is ANY ethical confusion. Sure, go ahead, pay bonuses any way you like. But when you receive taxpayer money, which is money that has been involuntarily taken from taxpayers, and this money was meant to prevent the company from imploding, and had it not been for this money the employees would no longer be receiving any paycheques whatsoever…. then there is no way in heck the bonuses should have been paid. And both AIG and Congress are to blame for this fiasco.

I really don’t like to see the government meddling in the private sector either. But now that they have… the folks at AIG better damn well start behaving.

Jack is right on this one. Executives have paid themselves to pillage the company and they should be lynched.

“that doesn’t give us the right to take back the money they earned”

Earned?!! That’s insane. The company had a crater of debt – they earned absolutely nothing with their performance last year, there was no profits, and there was no hope for the company to survive. These people should be working for free right now.

Craig

Right, ’cause the Fed and Freddie and Fannie had zero to do this mess. Not the government’s fault. Just those evil capitalists.

http://www.jackmitchell.ca Jack Mitchell

It’s a terrific conspiracy theory, don’t let them take it away from you.

PolJunkie

I don’t understand the comment about Chirac. Is your point that Obama has too many things on his agenda?

archangel

Or perhaps too few people attending to the real priorities.

knick

The ‘bonus’ hysteria arose because no one, including the President, made clear that the recipients were not receiving performance bonuses, but rather, as Liddy explained the other day in his testimony, retention payments to AIG employees to stay with the firm long enough to properly wind down their ‘book’. It may have been a poor decision to make these payments, and it may have been possible to hire people from outside AIG to properly wind down the various books, but the worst decision was to ignore the optics of calling them bonuses.
Sisyphus

It’s just your basic “grandfather” clause where conditions are changed that alter previously agreed upon obligations to a defined group of people. It’s usually considered unfair to change in mid-stream a set of rules that people have already used to make plans effecting their future. Unless, of course they are retired unionized auto workers.

To me, it’s the idea that people are given bonuses for Doing Their Job that is the idiocy underlying the whole issue.
That, and the temptations inherent in awarding stock options to the executive class with the capacity to manipulate stock prices in their own interest under the folly of “alignment of interests” with stockholders in general. Madness.
sf

I find it disturbing that in the bailout package there was not provision to prevent AIG from depositing the bailout money in their employees back accounts.

This Congress must be the worst in history.

archangel

See ‘complicit’ in any dictionary.

sf

??? Do you have a point?

archangel

I am, sort of, agreeing with you, by suggesting many in the U.S. Congress could be ‘complicit’ in this whole fiasco. For example, did AIG donate to Sen Dodd’s campaign? Read this:

http://news.yahoo.com/s/ap/20090320/ap_on_go_co/dodd_on_thin_ice

Bill Simpson

Well, presumably they expected that AIG employees will still be paid, some of which may be in bonuses. Should congress be trawling through AIG’s payroll looking for unearned raises, excessive bonuses, unreasonable expenses? Is this what the bailout has come to?

This is nuts!

Canuckistanian

“Should congress be trawling through AIG’s payroll looking for unearned raises, excessive bonuses, unreasonable expenses?”

no, that should probably be done by Treasury (you know, the shareholder of 80% of AIG)

Greywall

Paul, I’ve been waiting for weeks now for the inevitable comparison to Sarkozy? Come on… its the subject of you’re next column right?

Paul Wells

It was going to be, but that’s been delayed. Column after next, maybe. There have been a couple of fleeting blog comparisons to Sarkozy…you mean you haven’t been reading me obsessively? Sadness.

archangel

Paul Krugman today on AIG (9:05 post):

http://krugman.blogs.nytimes.com/
sf

Fantastic Krauthammer column.

I think the bonuses were a fiasco, but the column is dead-on.
Ed B

The mistake was to refer to the payouts as bonuses. If indeed they were written into a contract, they can hardly be considered bonuses. Everything ws known before the bailout was executed, so it is the height of hypocrisy now to see the US lawmakers fall over themselves in condemnation, especially when you consider the cost of the 9,000 earmarks. It’s clear the stimulation efforts of the adminstration and congress are failing and the bonus outcry is just a smokescreen.
Chris

This is sadly reminiscent of how Canadian journalists and politicians went nuts about some trivial $40MM cuts to a cultural budget in the last Canadian election, while the liquidity crisis was in full swing and being ignored.