Thursday, March 19, 2009

It's Not Bonus, Stupid (Congress)

I'll probably get stoned for this post. But somebody has to tell the truth to the great unwashed American public. You see, it's not that the great unwashed American public can't afford hot water, but rather some politicians would rather keep them unwashed. It makes their lives so much easier. Dealing with truth is hard.

Bonus, as applied to the financial sector, is a gross misnomer. It has nothing to do with your performance or the firm's. It's strictly related to how strongly your boss wants to keep you around for awhile, which may range from a month to as long as a year. Therefore, "retention payment" is a much more accurate term, despite the spin-doctor overtone after AIG.

OK, you say, give'em nothing and see where they're gonna go!

Plenty of places to go, in fact -- how about another bank?

Wall Street, or financial service sector in much of the developed world in general, has grown very bloated through rapid expansion that had lasted for decades when the crisis started. Most financial service firms have accumulated a lot of, well, less-than-qualified and less-than-essential staff, at all levels and in every department. Yes, most have gone through countless rounds of lay-off since 07. But lay-offs are inherently arbitrary and prone to non-meritocratic factors such as personal politics. It's not the most reliable or fair selection mechanism. In fact, I personally know a few absolutely top-tier people who got laid off over the past year, or indeed all the years. In comparison, worker mobility is much more consistently fair and efficient, even though the hiring process is far from perfect.

The world still needs financial services, in fact more so than ever -- just the "right kind". There're still a lot of Wall Street businesses making money, some quite handsomely and honestly. As such, there's still demand for talent, experience, relationship, and professional devotion. Even winding down a portfolio requires all these qualities; otherwise you end up amplifying the disaster (yes, this is what happened at AIG last quarter, despite the "bonus", but this is a general view, not a defense for any particular company or instance). It's a highly specialized field with a limited supply of well-qualified labor.

I've long argued here that the government should let bad banks fail, let the market force select surviving banks and employees. We would be back in a short time with functional market, effective corporate governance model, sensible compensation structure, and strong and nimble banks. Government could've paid 10 times the amount of "bonus" to every former Wall Street employee and still saved 99.9% of the taxpayers' money that they've wasted and funneled through various bailouts so far.

The amount of "bonus" is so infinitesimally inconsequential in this mess, compared to the real issues such as compensation structure, corporate governance, procyclic systemic risk, and regulatory oversight as well as enforcement. Yet this is the singular focus of the bill passed by the House yesterday. Don't they, paid by taxpayers' money no less, have better things to do?

Apparently not. Here's a quote from a CQPolitics report:

"You disgust us," (House Ways and Means member Earl Pomeroy , D-N.D.) said, “By any measure, you are disgraced professional losers. And, by the way, give us our money back.”

Do political grandstanding and popularist democracy get any cheaper and more pathetic than this?

This bill is so wrong in so many ways it's unquestionably the height of bad legislation.

1. What about consultants working at banks? There's a natural leveling mechanism in compensation between consultants and employees. Now employees get punished, in addition to their past stock options and restricted stocks and 401k's being wiped out, but her consultant colleague walks away scratch free?

2. What about Morgan Stanley who paid their "bonus" before year-end?

3. If Paulson forced TARP on the CEOs mafia style, or even if the CEOs asked for it, why should the employees doing the actual work get punished because of the decision they never had even the slightest possibility of influence in?

4. What about the European banks lucky enough to escape Paulson's mandatory bailout? Is the House trying to push top talents out of US banks?

5. If anything even remotely ressembling this bill passes the Senate and the Supreme Court, the damage to US as a country, an investment and business destiny, a global leader would be broad, permanent, and irreversible. I don't believe it will. But I'm afraid some damage has already been done.

This goes to show that undue government mettling in private business can be more damaging than the worst nightmare of free-market advocates.

No, dear Congress, you disgust me. It was you who sold out to lobbyists and dismantled Glass-Steagall. It was you who set up the fundamentally flawed, schizophrenic GSEs. It was you who set up the greatest Ponzi schemes in human history called Social Security, Medicare and guaranteed pension. It was you who sit idly by throughout the bubble years without exercising your oversight power. It was you who bankrupted American public. You're as guilty in negligence and failing your fudicial duty as the lying Wall Stret CEOs and rogue traders. And now you're feigning outrage, putting up cheap political show after cheap political show of bellowing inconsequential, irrelevant, ignorant questions down on the CEOs?

It's time for the banks to return taxpayers' money and go bankrupt if they must. This political show has lost its purpose. It's become its own purpose and thus a distraction. Let's work on finding the real solutions.


Sandra said...

Great post. I am so glad I found this blog.

It appears that part of the scam that consists of spending money that you don't have and can't get is applying misdirection. That's Congress' role, apparently.

Bo why do you think TIPS are a good investment? Do you really think that true inflation numbers will ever be published by the U.S. Government?

Also - do you see price controls for food coming?

And with respect to commodities, would you look at DBA or RJA, or something else? In oil do you see something other than USO which appears to be a bust as it doesn't track the price of oil (contango, too many contracts, etc).

Thanks - absolutely fantastic blog.

Bo Peng said...

Sandra, glad you like it. I sent this to SeekingAlpha, which publishes most of my submissions, but they didn't publish this one.

You're right, CPI has been a manufactured number for decades. But in today's environment they'd wiggle to the high side, not the usual lowering bias. In any case, TIPS is a better choice than straight treasuries.

If international trade wars break out, which is a distinct possibility, I think we can expect US to play the agriculture card and food/crop in general would rise. But I doubt we'll go as far as food control. US has a lot of leeway in controlling the domestic market. If food prices rise, primary victims would be the third world.

My view on commodities in general is not based on supply and demand, which has been proven increasingly irrelevant in recent years. It's based on inflation. If you believe inflation will rise, then real assets are the safest place to park your money in. But I don't follow commodities in enough depth to recommend anything specific.

I wouldn't be surprised even if housing starts rising soon -- in a year or so. But the net effect of economic bubbles is to redistribute wealth. The great unwashed public gets distracted and ripped off while a few get more.

Foobarista said...

The problem is that Congress has become an insular, entrenched outfit. The American system isn't optimized around finding the best people to run the government - it's supposed to get rid of the bad ones. (One could make a decent argument that China is better governed than the US at the moment.)

We do a decent job with Presidents. I think Obama is an overblown, overrated buffoon with Hugo Chavez-level notions of remodeling the US into some sort of Peronist welfare state. But one can't deny that he isn't different from Bush or McCain, and he'll be gone in 2013 if he doesn't deliver. So, democracy "worked" in his case.

Congress is another matter entirely. The parties have jerrymandered the country into "safe" districts, with minimal turnover - and have been aided by the increasingly entrenched voting habits that track lifestyles, not politics. Democracy only works if turnover can happen in the government, so the toilet can be flushed occasionally.

As for investments, my best investment in the past five years was the I-bonds I bought for emergency money. Grump.

Bo Peng said...

Hi Greg, glad to see you here!

Congress is an institution that's designed to bicker among themselves, to not act, to slow things down. Whenever they're united, they tend to do great damage. They take on real, serious issues with their usual shallow, sensationalized partisan soundbytes. Talks of bipartisanship or decision action in Congress automatically makes me nervous. It's an oxymoron.

Those idiots got scared and bullied into TARP by Paulson and Co. They couldn't possibly carry a meaningful questioning of Paulson/Bernanke on the subject matter and possible solutions. The least they could do is to call a closed-door expert debate on the matter. But no, instead, they latched on relatively trivial but more headline-worthy things like private jet and "bonus". I'm not saying these should not be criticized. But it's popular media's job.

So far, we haven't learned much of anything of substance from this crisis, and we most certainly haven't addressed many real issues.

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