Numbers and history provide much-needed perspective on populist outrage
If I had said just two weeks ago that the most riveting headlines in America would include Eric Cantor agreeing with Nancy Pelosi and Harry Reid on one side of a hotly contested debate while Mitt Romney and Fred Thompson agree with Barack Obama on the other side, you’d have thought I was insane. But that’s exactly what has happened, and it’s precisely where we stand on the question of how to handle the populist feeding frenzy that is the AIG bailout fiasco.
And, it’s a good measure of how much confusion surrounds this controversial issue.
December 1, 2007 – AIG Employee Retention Plan goes into effect. This is the contract that specified the bonuses AIG employees would receive in 2009 for the 2008 calendar year.
September 16, 2008 – Timothy Geithner provides $85 billion in bailout funds for AIG from the Federal Reserve Bank of New York. Government gets a 79.9% stake in AIG.
October 9, 2008 – Timothy Geithner hands AIG another $37.8 billion dollars.
February 12, 2008 – “Stimulus” bill passed with restrictions on executive pay and an exemption for AIG from those restrictions placed in the bill by Sen. Chris Dodd at the urging of the Treasury Department. Dodd claims the Treasury department twisted his arm and that there was an implicit veto threat from Obama, but as Dodd topped the list as the No. 1 recipient of contributions from AIG, little arm twisting was likely required. It should be noted that Barack Obama was No. 2.
March 2, 2009 – AIG reports quarterly losses of more than $60 billion. (Yes, quarterly losses.) Timothy Geithner–now in the Treasury Department instead of the Federal Reserve Bank of New York–promises a further $30 billion.
March 15, 2009 – News leaks that AIG is handing out $165 million in bonuses for executives. Larry Summers and Timothy Geithner both claim the administration’s hands are tied.
March 16, 2009 – President Obama tells Summers and Geithner to figure out a way to untie their hands.
March 17, 2009 – Legislators go into a frenzy proposing bills that would use the tax code to claw back the money from AIG executives by taxing their bonuses at 90 percent (the House version) or 70 percent (the Senate version). These bills garnered the support of Democrats who were afraid that this mess will end up on their doorstep, and of Republicans who wanted to capitalize on the populist tsunami.
March 20, 2009 – Obama says none of this is his fault. Starts to speak out against the clawback after all. He apparently prefers hands tied. He is joined by conservatives like Fred Thompson and Mitt Romney.
Before March 15th, the American public had never heard of the Employee Retention Plan. Since March 15th, however, Congress and the American people have rushed headlong towards mobocracy. Before anything truly stupid and permanent is done, it’s time to consider two fundamental questions:
1. How bad are those bonuses?
2. How bad is the proposed solution?
Besides, between TARP, TALF, appropriations bills, budgets and the “stimulus” package, between $787 billion in one place, $275 billion, $410 billion and $1 trillion in another, Americans as a whole are beginning to get understandably and quite uncomfortably numb.
Numb or not, market strategist Barry Ritholtz provides one way to envision the size of the current bailout (which he estimated at $4.6165 trillion in November of 2008). First, you take:
- The Marshall Plan
- The Louisiana Purchase
- The Race to the Moon
- The Savings & Loan Crisis
- The Korean War
- The New Deal
- The Invasion of Iraq
- The Vietnam War
Then, you take the costs of each one of those, adjust for inflation, and add them together. You get $3.92 trillion. That’s the shopping spree we could have gone on with the money we’ve thrown at our economic crisis. Considering the bailout philosophy appears to be an attempt to restore America to a sense of prosperity that was never real to begin with, that’s probably what Americans should be enraged about. Or at least mildly concerned over.
Now that we’ve got a rough appreciation for the total bailout size, let’s put the AIG bonuses in perspective. The first thing I’ll do is follow artist Randall Munroe’s advice and pick just one unit to use: billions. So we’re talking about $4,615 billion in bailout, and $0.165 in AIG bonuses.
Here’s what that looks like graphically:
We can also zoom-in on the top-left corner — just the AIG bailout money ($152.8 billion so far):
The orange square representing the bonus money is a bit easier to see in this version. For the folks who like numbers, $0.165 billion is about 0.1 percent of the total AIG bailout money, and it’s .0004 percent of the total bailout price tag. So, that being said — are we being distracted from the real issues?
We can also put the AIG bonuses in perspective with what similarly failing financial companies are handing out. AIG, which locked their bonuses in back in December 2007 before the market tanked, is paying at least $1 million dollars to more than seventy executives. Fannie Mae and Freddie Mac are awarding retention bonuses of between $470,000 and $611,000 this year. They are also being bailed out–to the tune of as much as $200 billion each–by the federal government. Furthermore, troubled financial giant Citigroup recently spun off their Smith Barney unit which, in turn, has merged in a joint venture with Morgan Stanley. According to The Wall Street Journal and Fox Business, this new business plans to spend $3 billion–that’s $3,000 million to compare to AIGs $165 million, by the way–in retention bonuses this year.
Where’s the outcry?
Moreover, as long as we’re talking about people padding their wallets with taxpayer money, what about Fox Business Network’s Neil Cavuto, who thought we should ask about government pensions:
So it’s OK for government workers to often retire for life on a pension higher than they ever earned in their working life? The San Francisco police chief retiring on $200,000 a year. The Rhode Island judge retiring on $138,000 a year — a bargain because had he waited another couple of years, it could have been $184,000? The New York train conductor leaving at $120,000 — each year for the rest of his life.
How many millions or billions are we doling out this way? Where is the media coverage?
Now that we’ve got some perspective, it makes sense to start asking about blame. Are we blaming the right folks? In this case, the folks most culpable are the AIG employees in the Financial Products division. They sold contracts that made AIG counterparty to mortgage-backed security insurance. If the securities went bust, AIG paid up. That’s where the billions in bailout money are going: straight through AIG into big-name US and European financial institutions that are cashing in on their insurance policies.
How much blame should go to AIG’s employees for being on the losing end of the same bet that plenty of other firms were taking? No one is asking. But it gets worse — A lot of sectors of the AIG business are actually profitable. Those employees did nothing wrong. Yet how many of them are going to lose their bonuses anyway? No one seems to care. Then, there’s the AIG employees who aren’t even receiving bonuses — why should they have to fear for the safety? No one seems concerned. And most disturbing of all are the death threats against the spouses and children of AIG executives who may have had nothing to do with the financial disaster. There’s a big, fat, bright line between going after rogue executives and terrifying their children, but I’m not reading about any outrage over those despicable acts.
As a final point – the word “bonus” itself can be misleading. It brings to mind free money that wasn’t expected. These bonuses were locked in back in December. Does that make them bonuses, or salaries?
None of these issues–the scale of the bonuses, who exactly gets them, and whether we should really call them “bonuses”–absolves the reckless AIG execs who put our financial system at risk. That’s not the point. The point is to simply ask the American people: “Are we paying attention to the real problem here? Or is this a sideshow?”
Look at those graphs again. Consider Rick Saunders’ piece yesterday regarding our looming debt. And ask yourself: $0.165 billion, or $9,300 billion? Which do you think is more significant?
It may not be the biggest problem we’re facing, but handing out small fortunes to the guys who wrecked our economy is definitely not a good thing. It’s a bad thing. The sort of thing you want to avoid or–failing that–punish. But not enough people are taking the time to ask how much all this punishment is going to cost us.
To start off with, it’s going to cost us a good chunk of our Constitution. Since when, after all, did the federal government have the right to nullify lawful contracts between individuals? The whole purpose of rule of law is that the same laws apply to everyone all the time. You don’t get to pick and choose when to be restrained by the Constitution, and when to ignore it. If Congress decides to just nullify some contract now because people are really, really mad, what’s the purpose in having a republic at all? Why not just crumple the Constitution up and toss it in the trash can?
Of course, the United States won’t instantly morph from a free country into a police state the day this law is passed, but from that day on our freedoms will be based on habit rather than law. Like an amputee who swears he can scratch away that itch on a leg long ago turned to dust — how long until he looks down, wakes up, and realizes that it’s not there?
The more immediate precedent we will set is the use of the tax code as a weapon of political warfare. First, we used the tax code to go after AIG execs. Who’s next? My guess would be global-warming deniers. Why charge a mileage tax, after all, when you can just identify everyone who owns a vehicle that gets less than 25mpg highway and jack up their income taxes? Maybe next could be a sliding scale tax on goods dependent upon how biodegradeable that product is. With a sufficiently creative mind, there’s no telling where it will lead.
By and large, businessmen and businesswomen are not stupid. They are watching with quiet trepidation what is happening at AIG, and they are making their plans accordingly. They have good reason to fear. The Obama administration on Saturday called for “increased oversight of executive pay at all banks.” Perhaps now would be a good time for that career change?
We’re not just running a risk of talent flight — we’re all but guaranteeing it. This means that we will pay for the bailout with taxpayer money only to ensure that companies most in need of help have the fewest resources to get it. As a result, we’re going to pay again, either through additional bailouts or the economic fallout when these business collapse despite the bailouts. There is simply no way you can run a complex financial institution if you chase every qualified professional out of the company.
But wait — there’s more! The Obama Treasury has announced a new plan to buy toxic assets (I know, I know, sounds like the old plan).
To get this thing to work, they need involvement from private firms. It’s a clever plan that relies on market forces. If the government bought all the assets and then tried to sell them, nobody would know what they were worth, but by allowing companies to compete for them (and providing leverage) there’s a good chance of being able to clear the market of some of these assets.
Now all we need is for some profitable businesses–the kind who haven’t had to take government bailout money yet–to step forward and start doing business with the federal government. Who’s first?
[Sound of crickets chirping.]
No one wants to sign up to any agreements with the government after watching what is happening to AIG right now. AIG had a deal with the government. It was in the stimulus bill. It got passed. It’s law. And the very same House and Senate that passed that bill are doing an end-run around their own votes to go back on what they promised. At precisely the moment when the Obama administration depends on private industry to trust them, government credibility has cratered to an all-time low.
As long as we’re talking about the credibility of the government, it’s time to talk about the credibility of our electorate. It’s a national pasttime to whine and complain about government corruption and a lack of government accountability, and yet here we see a textbook case of knowing exactly who in the government is responsible and failing to hold them accountable. As voters, it’s not our job to wish someone else would hold politicians accountable — it’s our job to go out and do it ourselves
The government should have done the right thing and dealt with the AIG bonuses before they were paid. The automaker bailouts, after all, ideally required the unions to make concessions. That’s how the government can apply pressure to get private parties to renegotiate contracts, and it could have been applied here. But it wasn’t. (Probably because legislators didn’t even read the stimulus bill before they voted on it!) Failing that, there’s no course but to get out of the way and let the bonuses happen.
Our legislators screwed up and, if the republic is going to work, it is our job to dish out the consequence. If we don’t, then the message we are sending to our legislators is that we’re sheep, that they can do whatever they want with trillions and trillions of our dollars and our institutions and our laws as long as they throw us some political theater as a bone now and then.
You want to talk about rewarding failure or corruption? How about voting for the same politicians year in and year out and being surprised when they pull stunts like this?
The ball is in our court, as Americans, to make sure the crooks in Washington, D.C. pay just as much as the crooks in New York City, and the way to do it is to make your voice heard before the general elections. How many of you are voting in your primaries and state conventions? If you’re not . . . get started, or stop complaining.
Make no mistake — what we’ve seen in the days since the AIG bonuses hit the front page is mob rule. The Herald Tribune covered the scorn that AIG executives faced after their personal information was leaked to the press:
An AIG executive who had been nicknamed “Jackpot Jimmy” by a New York tabloid walked up the driveway toward his bay-windowed house in Fairfield, Connecticut, on Thursday. ‘”How do I feel?’” said the executive, James Haas, repeating the question he had just been asked. “I feel horrible. This has been a complete invasion of privacy.”
Mr. Haas walked on, his pink shirt a burst of color on a slate-gray afternoon. The words came haltingly. “You have to understand,” he said, “there are kids involved. There have been death threats. . . .” His voice trailed off. It looked as if he were fighting back tears.
“I didn’t have anything to do with those credit problems. I told Mr. Liddy I would rescind my retention contract,” he said, referring to Edward M. Liddy, the chief executive of AIG.
Now there are bus tours of executives’ homes. AIG has been forced to position guards at their offices, to warn employees not to wear or display anything with an AIG logo as them commute, and to be sure to keep their company photo IDs out of sight whenever they are not in the building.
When we are a nation that sits by silently while innocent secretaries, analysts, and IT workers who just happen to work for AIG have to fear for their safety because of what other people did, what kind of a nation have we become? When we live in a culture where parents–no matter how corrupt or guilty–have to fear for the safety of their children, what kind of a culture do we have?
We have a tradition in this country–both legal and social–that people are innocent until proven guilty. I always felt the constant use of the word “alleged” in stories about people facing criminal charges (even relatively open-shut cases like with Bernie Madoff) was a bit silly, but for the first time in my life I miss it. In all these articles about the AIG executives, where is the assumption of innocence? There is none. Americans have tarred them all with the same brush, and thrown their kids and coworkers in for good measure and it’s just not right. It’s not American.
There is plenty of blame to go around for this financial crisis, and it’s always simpler to find a whipping boy than figure out who really did what. Right now, the AIG executives are the country’s whipping boy. This doesn’t mean that they are innocent, but it does mean that a lot of blame which should be spread around different companies and the halls of government is being heaped on a handful of businessmen and businesswomen — some of whom truly had nothing to do with anything. The entire controversy is distracting from larger problems we face as a nation.
The proposed “solution” to this exaggerated problem is even worse. It makes a mockery of our Constitution and legal traditions, rewards corrupt politicians, and turns us into a nation of mob rule.
Right now, the future of this country is being determined by liberal Democrats who view the economic crisis as a great opportunity to ram their sweeping socialist reforms down our throats, as well as by loud-mouthed Americans with more anger than common sense. Most of our elected Republican representatives are either too distracted or too blinded by political opportunism to stand for their principles. Now is not the time for silence. It’s the time for us to speak out–calmly and rationally, of course–to our friends and neighbors. It’s not the time to meet hysteria with hysteria. It’s time for the silent majority to assert its power and enact its obligation as the voice of reason. The children are making a mess, and it’s time for the adults to step up.
All we can do between now and 2010 is to let our representatives know we expect them to abide by true American principles, by the Constitution of the United States of America. In the meantime, it’s our job to make sure we’re in a position to kick them out at the primary stage in 2010 if our voices are not heard and our messages not heeded.
If we hold on until 2010, we will have our chance to start to take this country back.
Robert Wallace has been writing for America’s Right since December 2008.