Thursday, 19 March 2009

Payback time

At the moment, I'm trying to keep track of two different financial meltdowns -- and frankly, I'm not sure if that is such a good idea. I may need to seek counseling for excessive media exposure.

On the one land we've got Sir Fred Goodwin, and on the other, we have the AIG bonus reapers. And although both stories have been bubbling along since the early fall, the pots (of gold, that is) have bubbled over this week.

For those of you not entirely familiar with Sir Fred, he is the guy who nearly bankrupted the Royal Bank of Scotland through his aggressive bank (and debt) acquisition. The UK government may soon own a 95% stake in the bank, having used billions of tax-payers' pounds to shore up the substantial losses. On his way out last fall, Goodwin made good on his name -- and somehow managed to win an infamous £693,000-a-year pension. More salt in the collective public wound? He gets to draw it, starting now, at age 50 -- for life, and despite the fact that he only worked for the bank for 10 years. Although our Prime Minister has repeatedly asked the deposed banker to give back some of his ill-gotten gains, Sir Fred has declined to do so. (Perhaps he is planning on decamping to the Cayman Islands or the Bahamas sometime soon?) Apparently, he doesn't even need a tax haven -- because the latest word is that he has withdrawn 3 million pounds from his pension pot AND RBS (i.e, the taxpayer) has paid the 40% tax on it for him. Somehow, I find that bit most galling. He gets the full 3 million, while it costs the government twice over. If he does leave Great Britain, it will probably be because of all of the people, little and large, baying for his blood. The man is going to need a fortress of self-justification to protect him. I do wonder if he feels like a glorious picnic was spread before him, only to be ruined by swarms of midges.

In American news, AIG has finally managed to unite the Democrats and Republicans -- who are falling over themselves to condemn the recent bonus pay-out of 165 million dollars. Although this amount is mere chump change compared to the overall 200 billion bail-out given to the American International Group, it has become the lightning rod for collective anger. Two main points, really: the 165 million was distributed amongst only 418 people, 52 of which had already left the company; and, it was said to be a "retention bonus" for certain employees in the financial products unit -- the very unit whose dicey derivative deals brought the company down. As Maureen Dowd put it so pithily, Isn’t that like giving bonuses to the arsonists who started a fire because they alone know what kind of accelerants they used to start it?

Although various people are still going on about the sacredness of contracts, Sigmund was taking the firm view (in our kitchen last night) that the time has come to renege. Surely bankruptcy changes the rules a bit? Thomas Friedman suggests, in a very measured The New York Times editorial, that the best way out is for the A.I.G. bankers to take one for the country and give up their bonuses. But is that likely? Are the bankers suddenly going to discover a conscience and do the right thing? Do they actually think they've earned this money, or are they so deep into "wealth without work" thinking that they have lost of all concept of "fairness" and "equality?" Auto workers and teachers -- surely modestly paid professions, at best -- are now agreeing to compromise their individual contractual rights in order to benefit the greater whole, but the rich are looking mighty reluctant to come off their gilded perches. Mrs. Madoff, I'm talking to you. The gulf between Haves and Have-nots has grown apace -- and not been helped a bit by that showy new category: Have-mores. Has our society become so skewed that we are beyond anything but the survival of the most selfish?

There was an interesting editorial in this weekend's paper: Look no further than inequality for the source of all our ills. Author Will Hutton suggests that "more unequal societies are socially dysfuntional across the board." Drawing from a recently published book called The Spirit Level, Hutton suggests that human beings are "social creatures" foremost: the "esteem of others is central to our well-being" and "we have a deep inbuilt sense of fairness." When the rich are beyond regarding the poor, the poor become less inclined to want to play along with any kind of social contract. The conspicuous consumption of the rich and the knife crime of the poor are two sides of the same coin. Or, put another way, is there any real difference between a rich man's tax dodge and a poor man's benefit fraud?

I read this editorial as I was finishing the 2008 Booker Prize winner, The White Tiger, and the fierce and filthy descriptions of the deep inequalities of Indian society seemed to illuminate the points that Hutton was making. The narrator of that story describes himself as a "social entrepeneur." Although he does build up a small business -- in the traditionally entrepeneurial sense -- Balram believes that his true accomplishment is escaping from the mental "Rooster Coop" which enslaves the majority of his countrymen and women. Balram presents his revenge on the social norms as a victory, but the novel does a brilliant job of exposing the perils of living for nothing but extreme self-interest -- no matter what the size of your bank account.

For years, it seemed like we were more or less inured to the increasingly more competitive and surreal bonus culture . . . but now it appears that the bankers, with all of their self-justifications, are looking a bit unclothed. The payouts are leading to paybacks . . . and the bonus reapers better watch theirs.


She said...

Oh, this gives me so much P A U S E!

I will say one thing: Teachers don't do what they do for the money. We do it because we love kids. We also are in a profession where we spend A LOT of our own money on books, supplies, equipment, etc., so that we can do our jobs well. At least that's been my experience. Also, teachers OFTEN (VERY OFTEN) have more than one job so they can make a decent living (also my experience!).

And it doesn't surprise me one bit that those teachers are foregoing their 5% pay increase to make things better for the WHOLE of the community. Not surprised at all!

Thanks again for this thoughtful and thought-provoking post!

Pigtown-Design said...

Honestly, Bee. This just makes me ill. I don't think that those AIG people will give back the $$$. And some of them left the day after they received their retention money.

The place where I work deals with kids on the edges of the juvenile justice system and the one thing that they all lack is any type of empathy for the victims of their "crimes". These big money men are no better than our street kids. (if you've seen The Wire, then you'll understand the population.)

Elizabeth said...

Yes, all this makes one seethe.
A thoughtful post, as ever. Some people's greed is astounding.
Bernie Madoff is the current NY bete noir. Luckily, they are keeping him in jail.
However, I do feel that the people --whoever they are--who were meant to be keeping an eye on all this rather fell down on the job.
I'm a sort of left-over socialist and would levy huge taxes on large incomes.
Maybe the outcome of all this will be a more equitable society? Here's hoping......
Happy weekend.

Beth said...

The greed and sense of entitlement of the few amidst a financial crisis of this proportion is morally repugnant. The legal consequences of not honouring contracts be damned – where is the honour of those who would take without having earned?
Retention bonuses or bonuses based on a company’s performance? Hands down – performance based bonuses.

Some of the conditions existing today remind me of those that flourished prior to The French Revolution – history repeating itself? The “haves” might take note of this.

Delwyn said...

Good morning Bee
thanks for a very concise precis of these examples of 'wealth without work' based sins as Mahatma Gandhi, called them.

The financial crisis has put a few examples on centre stage but they are only symptomatic of an entire social genre within western society where people create wealth at the expense of others.

No integrity, no honour...

Just a Plane Ride Away said...

That's some deep kitchen conversation! Thanks for letting us be flies on the wall. Some days I can't bear to read the news.

Sig said...

I need to protect my reputation. I didn't suggest reneging. I proposed renegotiating and reinterpreting the contract. It happens ALL the time. Why do people think industrial tribunals and courts are full of employment cases ?

And Goodwin didn't almost bankrupt the bank. He did bankrupt the bank. Without our cash they would be out of business that's why we own it. Technically they didn't collapse because we didn't want everyone they do business with to go belly-up too.

Imagine that outrage - pensioners and savers lose their hard earn nest-egg and Sir Fred has £3 million tax free + £700,000k pension.

The very top management of these finance houses need firing straight-away. They argue to RETAIN these over-paid fools that cannot recognise a risk and that bankrupted the compay AND pay them obscene sums ? Any ordinary industrial business would immediately start clearing out the executive team not encouraging them to stay.

There is integrity in business. I am an executive in a very healthy company but with lots of ordinary customers. We took a pay freeze just to recognise the difficulty of our customers. Only the executive team are frozen. The lower paid got inflation rises - not much. Nobody complained but then we all feel we are well paid and others are less fortunate.

The City is living on another planet and they need a very big dose of reality NOW before they do it all again. Ther reality is that they are crap bankers !


A Modern Mother said...

Obviously the re-set button doesn't work on everyone. Cringe.

Bee said...

She - I have just been reading an article in New Scientist called "Why money messes with your mind." When people work in jobs that "revolve around money and competition" it creates a mindset and a way of score-keeping that is all about the individual . . . and it is ruinous for a society that depends on cooperation. The bonus culture rewarded individual performance and it encouraged people to "cheat" -- to undermine the health of the business as a whole.

Teachers have a completely different set of motivations. And you make such a good point: not only do teachers spend lots of their money on supplies (I certainly did), but I've known so many examples of teachers going way out of their way -- in emotional and financial ways -- to help out their kids.

Pigtown-Design - I just don't understand why they don't feel guilty about pocketing this money! That mental "hardening" is so similar to what you describe in the juvenile "delinquents." I have heard so much about The Wire . . . we've got to put it on the must-see list.

Elizabeth - I hope that we will move towards a more equitable society, too. I think that the bonus culture needs to be dismantled. All of these people are very well-paid anyway! As for taxes, I have more mixed feelings. (Perhaps that is the American in me?) I think that 40% income tax is a lot to pay for people who make 34,600 a year. The worrying thing is that the top-earners always manage to get out of paying a lot of their tax, and it really squeezes the middle class to have really high taxes.

Beth - Yes, it's the sense of entitlement that makes a person feel so crazy! A lot of these money people believed in their myths -- that they had special knowledge and/or abilities -- and it just wasn't true. I have thought of the French Revolution many, many times as I have been reading up on the current financial news!

Delwyn - You are absolutely right. Wealth without work has become a way of life for many people -- but these examples are such outrageous symbols of an out-of-control selfish mindset.

JAPRA - Sig works with bankers/traders all the time and he gets outraged by how little they now about the industries they are manipulating/betting on or against.

Sig - Well, I remember you saying reneging -- and, ah, some other strong language! But the anger was high and wine had been drunk. Thanks for clarifying some points here. (And thanks for sending me some of those hilarious Daily Show links . . .)

A Modern Mother - Do you think that some people are beyond a mental re-set?

Audrey said...

I, too, have been following this issue closely but the problem for me lies not with the bonuses themselves but the fact that when they were negotiating the bail out why didn't this issue come up then? In other words, who the hell agreed to this in the first place? Goodwin's retirement package is obscene but what's more obsene is the people who aGREED to it.

I think that once you have a contract your are obliged to fulfill it and be reneging, as Sig proposes, eviserates the rule of law. What should come out of all this is carefully considered clauses in the futre that allow for reneging should the institution fail.

I also think there is something really irrational about this whole issue. The NYT's article: from yesterday mentions that a lot of these AIG executives are returning their bonuses but are under increased security and some have even had death threats. What's up with that? There is a real witch-hunt mentality out there that is very scary. Demonising indiduals is not the answer. The answer is that we are all responsible for a degree of complacency that allowed our house prices to rise in a crazy way without asking ourselves why that may be. We are all AIG executives in some ways.

Bee said...

Audrey - You're right; a lot of people (whether in government or on the company boards) signed off on these bonuses. There is a really complicated culture of back-scratching going on here, and governmental agents in both countries are now trying to claim that they didn't have full knowledge. Bernanke and Geithner are both really compromised, I think -- and Geithner is so understaffed that I don't know he can monitor anything . . . much less these really complex deals.

We were in Houston when Enron melted down, and all of these problems (in accounting and awarding risky behavior, just to name two) were identifed then -- but nothing was learned.

I know that Liddy has said that some employees are willing to give their bonuses back, but the latest news of the last couple of days just reveals more rottenness. Ultimately, the bonuses aren't even the biggest thing or the worst thing -- but they were guaranteed "performance" bonuses (pegged at a minumum or 100% salary) no matter what. Steven Davidoff at The New York Times has written some really interesting editorials explaining just how little personal risk, and how much personal reward, was involved in these particular bonuses.

The bonus thing is incomprehensible, and conversely, it is something that people CAN understand out of the whole convoluted mess. I'm certainly not calling for a witch-hunt, but this kind of compensation creates all kinds of craziness. Even Jack Welch is now complaining that it put the emphasis on the wrong values!

ArtSparker said...

In the U.S. at least it seems important to get beyond the outrage to try to take the long view for financial regulation. Canada is in relatively good shape due to conservative practices and regulation. Outrage can become a stumbling block (Americans love to speak about their comparative virtue, ie, "you don't see US bombing buildings/serially murdering small children/taking millions of dollars in bonuses"). Ultimately, this public exposure could be a good thing if it doesn't stop at the venting stage.

Reya Mellicker said...

Great post, Bee. Gambling is never a good idea, especially with other people's money, or with money that you don't actually have.

I think it's kind of good that all this is coming out into the light of day. I hear people talking about corporate structure and pay scales - last year at this time I NEVER heard these kinds of conversations.

I believe we are waking up. I hope so anyway.

Anil P said...

The less that folks are in 'touch' with the society they supposedly live in the more they'll be detached from the consequences of their actions.

Didn't someone once say that consience is the ability to distinguish the right from the wrong, and stay away from the wrong?

All morality must necesarily come from the 'good' that one can do to the society one lives in if one has the opportunity to do so. And sometimes the opportunity to do 'good' to the society is by not doing the 'bad'.

Now, who will tell them that?

Sig said...

Defensive again on the Law ! I am a great believer in the Rule of Law. Law is aimed at Ten Commandment stuff and that shoud not be bent (Bush take note on torture). Commercial Law is something else. I am not really talking about full reneging. I am talking about making it very difficult to claim. You know like insurance companies do all the time. Specially US health care and AIG including. "We reread your policy and... we have a different interpretation."

Before we all say, "Well it's in black and white so pay them the millions." Someone should push back. Head of HR ain't going to 'cos his on the scheme. General Counsel ain't going to 'cos he has his bonus to consider and the CEO... Well.

I have had a number of very clear contracts 'disputed' as a prelude to a renegotiation. I have even done it myself. It's a standard tatic.

I suppose every Government lawyer under the sun has looked at these bonus contracts or may be not as they are confidential.

I have lost any trust I had in civil servants to try to do the right thing at all. They seem to have got sucked into City values.

Anonymous said...

This whole thing has me seeing red. VERY ugly happenings. Well written, precise, carefully thought out words to what I can't seem to articulate in my frustration.

Bee said...

ArtSparker - It is almost amusing to watch some of the people who are now taking the moral high ground as this drama unfolds. But I think you are right: if the public outrage can lead to real change then it has served some purpose.

Reya - Hey, waking up can be painful! (I hope you're right, because we've been asleep for a long while now.)

Anil - Too much money creates detachment, I think. When money is the only way to keep score, the conscience gets shut off. There are exceptions, of course. I just read about the Bill and Melinda Gates Foundation and they are doing amazing things for the poorest people in this world.

Sig - Thanks for clarifying some of these points.

The Things We Carried - When I was reading your comment, I suddenly realized that at least we DO have anger. For too long, a sort of apathy has reigned. People haven't felt like there has been the collective will to change things.

Gifted Typist said...

Isn’t that like giving bonuses to the arsonists who started a fire because they alone know what kind of accelerants they used to start it?

Brilliant Bee.
Simply, brilliant.

Lucy said...

Brilliantly written as ever Bee. It just seems utterly criminal. If a similar situation had occurred in Africa or elsewhere with some dictator or tribal chief stealing and rewarding his own lavishly with aid money, for example, it would have been seen as an example of how hopeless such places are when such corruption prevails.

The powerless rage so many people are feeling had got to be bad for the general soul...

Bee said...

Gifted Typist - Those were Maureen Dowd's words. Read her editorial; it is scathingly funny.

Lucy - Yes, all investors have been ripped off. Huge sums of money were siphoned off, and no value WHATSOEVER was added. Of course, it is a bit unseemly (not to mention hypocritical) for the Congressmen (and women) and MPs to be posturing so. The majority of them were either in collusion and/or on the gravy train, too.