Do You Feel Lucky, AIG? Well, Do You?

I don’t think that the Wall Street types have any idea at all how angry people are at them. We were angry before, but the business about the AIG bonuses — which is fairly small potatoes in the grand scheme of things — just sums things up perfectly.

If I were an investment banker making millions of dollars a year, I would be trying to convince the people around me to simply take the hit for a couple of years, the better to preserve our ability to go on raking it in in the future. I would seriously consider getting together a bunch of people to buy off the members of AIG’s Financial Products Division who are holding out for bonuses, on the grounds that their actions will only harm us all (where us all, in this example, means: all us fantastically overpaid people in financial services.) The alternative will be much worse for them. Better to exercise some restraint.

Unfortunately, there’s no sign of that. Au contraire:

“In response to expected bonus restrictions, officials at Citigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. (…)

Most traders and bankers on Wall Street get a base salary of anywhere from $200,000 for managing directors to $1.5 million for a chief executive. But the lion’s share of their pay comes in the form of a bonus, a tradition that began when most firms were private partnerships and partners shared directly in the annual income of the firm.

As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation.”

Dear Wall Street: bonuses are more politically radioactive than other kinds of compensation. You see, many people don’t understand that on Wall Street, bonuses are essentially part of your salaries. They imagine that bonuses have something to do with, well, performance. You can see how the idea that your recent performance deserves to be rewarded might rub people the wrong way, especially since so many of you are planning to reward yourselves with their money.

But the real issue isn’t bonuses. It’s your compensation, period. It’s the fact that, after doing your very best to wreck the world economy, you regard yourselves as entitled to levels of compensation that people who actually make things can only fantasize about. The bonus part is just the icing on the cake.

Oddly, though, the idea that bonuses have something to do with performance isn’t limited to us outsiders. The WSJ article also contains this gem:

“Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street’s culpability for the recession and credit crisis.”

Oh noes! We can’t have the notion of pay for performance turned on its head! Not on Wall Street!

Honestly: what planet are these alleged “compensation experts” living on? An industry in which it is possible for people to go on raking in enormous sums of money when their companies have for all intents and purposes gone bankrupt, and in which CEOs get golden parachutes negotiated in advance, and payable independent of performance, is hardly in a position to go all dewy-eyed about pay for performance. That horse left the barn several decades ago.

As someone who thinks that levels of compensation in the US are absurdly unequal, and that this is bad for the country, it’s tempting to say: oh, go ahead, you idiots. Keep your sense of entitlement to other people’s money. Make people come after you with pikes and tumbrils. See if I care.

The thing is, I don’t think that rage normally leads to good policy. (Though, as I’ve said before, I really believe that it would help a lot with moral hazard if people found the experience of having the government bail out their firms profoundly unpleasant.) And I’m sure that my inner policy wonk will shortly regain control. Still, at the moment, it’s awfully tempting. I think of people I’ve known who have worked hard all their lives for not very much money, only to be completely bankrupted by unforeseen medical catastrophes, and I imagine these people being asked to support investment bankers in the style to which they have become accustomed, and fury feels like exactly the right response.

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