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OutrAIGe

$85 billion on September 16, 2008.  $38 billion on October 8, 2008.  $27 billion in November.  And $30 billion a few days ago.  That’s what insurance-securities giant AIG has been able to coax out of our government over the past 6 months.  A whopping $180 billion in total.  It kinda makes the $165 million AIG paid out in bonuses last week, about which everyone is hyperventilating, look like a drop in the ocean.

New York Attorney General Andrew Cuomo made sure to serve a subpoena on AIG to get all the juicy details.  To wit,  73 individuals received bonuses of $1 million or more, with one recipient getting a bonus of more than $6.4 million.  The bonuses were paid to 418 employees and included $33.6 million for 52 people who have left the failed insurance conglomerate.

I consider this to be a major misstep by both the Bush Administration and the Obama Administration, because neither ensured that common sense provisions were placed in the bailout agreements regarding compensation.  It took Congress months before even considering such provisions.

But the million dollar question is, Where is Tim Geithner?  Has this guy got our back?  I’m having some doubts.

Senator Ron Wyden recently noted that during the crafting of the stimulus package, he and a Republican Senator Olympia Snow from Maine introduced a provision that would have forced bailout recipients to cap their bonuses at $100,000.  Any amount paid above that would have been taxed at 35 percent. The language made it through the Senate, but during conference committee with the House, it was inexplicably removed.  Said Wyden:

The reality is, had that legislation been passed it would have been a very strong disincentive to anybody paying out bonuses in the future.  Earlier, the President had denounced those bonuses that came at the end of the year. And when Senator Snowe and I said it is not enough for those in elected office to say it was wrong, that they have got to have a plan to have them pay it back, we were able to get legislation through the United States Senate. Not a single United States Senator was willing in broad daylight to stand up and oppose our bipartisan amendment… but it died in conference.

But when GM and the other auto companies were asking for money, many in Congress were quick to demand that UAW members, who make a fraction of what bank executives do, take pay cuts — which they eventually did.  Why did Washington never think of the bank execs’ salaries, but crack down hard on the blue-collar workers?

In the final analysis, while there will be a lot of kicking and screaming about this, there’s not much the government can do about it.  It’s a contractual matter and, in my judgment, it would be unwise for the Obama Administration to try to overturn private compensation contracts.  It’s going to be very difficult to make this cat walk backwards.

But what did we expect?  This is the way of doing business on Wall Street. This is the incentive structure.  If you do really well, you get a huge bonus.  Alternatively, if you drive the company into the rocks (dragging the rest of the economy along for shits and giggles), you still get a pretty fat bonus.  The problem is there’s no downside to this proposition.  That’s why the risk-taking was both fantastically pervasive and fantastically wild during the boom.

The problem starts in the business schools.  In the 1970s a “kind of market fundamentalism took hold in business education,” says Rakesh Khurana, a professor at Harvard Business School and author of “From Higher Aims to Hired Hands.” “The new logic of shareholder primacy absolved management of any responsibility for anything other than financial results.”  In other words, students are taught that the stock price is all that matters.  All you have to do drive that price up, somehow, someway, and you are successful by this metric.  The problem is there are a lot of ways to do this, some ethical some not, some legal some not, some disclosed some not.

So which way are you going to choose?  Well, it’s typically not the straight and narrow way, especially in a deregulated environment when no one’s watching.  A study of cheating among graduate students, published in 2006 in the journal Academy of Management Learning & Education, found that 56 percent of all M.B.A. students cheated regularly — more than in any other discipline. The apparent cause was “perceived peer behavior.”  Students cheated because they thought everyone else was.   That gives you an idea of how this kind of thing can gain momentum.

Management should be a profession like law or medicine, with a code of conduct, a grueling certification examination with an ethics and responsibility emphasis, and continuing education.

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