You must be joking. It’s been understood for a while that Gaussian distributions can be decent descriptions of normal market behavior, but that every 5 years or so we get events (emergencies) that are not so well approximated. Technically, the kurtosis of these distributions are way beyond 3. But by necessity the data describing these extreme event tends to be spotty.
After the failure of Long Term Capital Management in the 1990s, this should have been obvious.
No, what’s going on is that bankers and financiers are not culpable if they make the same errors as everybody else. However, if they underperform the market by 1% in a good year, that can get you fired. So herd behavior is encouraged as is the taking on of massive systemic risk. After all, it’s the shareholders and taxpayers who will take the hit in the end, while the quants just walk away.
I would like some sort of mechanism that assures that the least wealthy will be paid first, that the poor schmuck who’s dreams of a modestly comfortable retirement were rendered into toilet paper…he’s the guy we bail out. If there is any left after that, we can disperse it amongst the investing class. After we tax the living shit out of it, of course.
Optimizing locally means putting the interest of your division above the interests of the firm as a whole. In practice it means taking on opaque risk: you hit your quarterly targets during good times and let somebody else clean up the mess when markets nosedive, as they do periodically.
The rationale for withholding retention bonuses, i.e. payments for just showing up at work, is quite simple: AIG is functionally bankrupt. Let the incompetent fools in AIG’s Financial Products division threaten to sue for their bonuses. The Obama Administration can then just force AIG into bankruptcy. These bonus boobies certainly aren’t secured creditors; let them stand it line with everyone to get their money.
Well… I doubt whether such an effort would work out well. It’s understood for example that some people will maintain undiversified portfolios and place everything in the stock market or with crooks like Madoff. But that’s why we have social security and medicare.
Heh. Remember how modern conservatives wanted to have social security invest in the stock market some years back? Where are they now? (There were some respectable proposals that involved a degree of equity investment, but there were also some rather blinkered arguments presented at the highest levels of government.)
IME with sales people of any flavor, its far more likely someone figured out a way to game the bonus system in such a way that was not long term feasible. Then stood there with their hand out hoping to get their check before the house of cards collapsed on them.
Running margins of 30 or 40 to 1 is not higher mathematics. It is exposed risk. Then selling swaps on the same products just elevated the risk a few more levels. It was greed with risk taking on a new scale.
The problem was that people were allowed to risk their own money before. Now financial leaders shoot craps with the companies they worked for at stake. That is not the basis for a sound economy. The beauty is that the execs walk away rich and safe.
gonzomax: Nice point about leverage. Separately, I’ll add that the vulnerabilities of the money market fund model have been known for years as well.
Today’s Republicans are saying that. Then again, many of their proposals are actually more extreme that Herbert Hoover, who bungled the country into the Great Depression during the 1929-March 1933 era. (It wasn’t Hoover’s fault though, since the first decent model of a whole economy was only described in 1936).
Playing hardball with financiers is one thing. Playing hardball with the economy is another. We went down that path during the Great Contraction (1929-33): unemployment eventually topped 20%. We don’t need to repeat that.
There’s a bad side to that, though. Writing bonuses with too much contingency on company performance can cause the company to “adjust” corporate performance so as to avoid paying bonuses. Having worked for a company like that, I can tell you it deson’t feel good to know they’re cooking the books to hump you out of your money.
I don’t feel bad for the rich guy getting richer, but let’s not screw some schmoe out of money he could use to put his kid through college - money he’s fairly owed.
Sleazy McFuckup, Sr Undertaker –er Sr Underwriter
2000-2009 AIG Financial Products Division
• Sold over $1 billion of credit default swaps
• Personably responsible for losses of more than $10 billion
• Earned over $6.5 million in bonuses even as division brought AIG, Inc to the point of bankruptcy
Personal References
The Jim Cramer of CNBC called Sleazy McFuckup, “A leader in the collapse of the American financial system.”
I guess, in this particular case, it just seems that there are AIG employees who can’t be considered fuckups, and who did their job as required, but who, in doing so, actually exacerbated the very situation that has led to AIG’s problems.
The people in the Financial Products division might have been doing their jobs well, by the standards set for them. They might have been hard workers, following a plan set out by their bosses for selling their products. But can you not see why, even if those bonuses are contractually mandated, some folks might look askance at rewarding people (even hard-working, honest people) with wads of government money for carrying out the very practices that put AIG (and the economy) in the shit in the first place?
I’m not arguing that you’re wrong about the legal obligations. I’m simply saying that the general dismay and outrage at these bonuses is completely understandable, given the circumstances in which they were earned.
In the post I originally quoted, you said most of AIG’s talent is already gone. So who is left to be receiving these bonuses? I certainly hope they aren’t paying these millions (necessary for retention) to people who have already left.
If they are legally required to pay these bonuses, fine, pay them. But I find it hard to believe so many employees met their performance targets in a company that failed so spectacularly. (More below.)
For that matter, where are all these AIG people going to? Competent people are having a hard time finding work these days. Who would hire someone jumping ship from a company that has been driven into the ground?
Exactly right. Maybe the company is fucked but the fine print in the employment contracts says they’re due for a bonus. Whoever wrote that fine print should have his head on a plate. Business as usual is just not good enough anymore. If people earned bonuses, give them bonuses, but this company has lost billions. Find the people who screwed up and cut them loose. Unless they invested last year’s bonus with Bernie Madoff, they’ll probably survive.
So there is precedent that models fail. All the more reason that they shouldn’t have bet the farm on the one they had.
I wasn’t clear, apparently. Its by way of asking why the bonus arrangement was done this particular way. Now, maybe this isn’t the case, but it seems as though a bonus agreement centered around the well-being of the company would be the “standard”, and this sort of agreement would be an exception.
Now, if that is the case (and I don’t know that it is) then the question naturally arises as to why the exception was made. On whose behalf, on who’s authority. That sort of thing.
Is there any stipulations about delivery method? Could the bonuses be delivered encrusted in something nasty? Deposited anally with a pitchfork in quarters?
The sad part is you know they had to see this backlash coming and didn’t even *try *to spin it before word got out. If nothing else, they could come out upfront and say that they don’t want to pay the bonuses but contractually have to, fake looking chagrined and contrite and at least pretend that their plan is not to screw us while they laugh all the way to the bank.