Wednesday, March 25, 2009

Letter of Resignation

A frustrated AIG executive pens a letter of resignation, which is reprinted in the New York Times. This is likely to be a major topic of conversation today, as bloggers examine, dissect, and mull over its contents. One thing is sure: it paints a picture from within the company as it exists today that has been woefully absent in the media 'till now, and as such it should cast a little light on Tim Geitner's opposition to legislation that would penalize current employees of the company by rescinding, or more recently taxing their bonuses.

One important point the letter makes is that most of the executives who were reponsible for the company's collapse have slithered away into the weeds and are no longer with the company. It's hard to judge how accurate that claim is, but I suspect its likely that a good number of them have left of their own accord. And while it is not easy to feel pity for a guy who's taking home more than $700,000 after taxes, if the author's compensation was indeed negotiated a year ago at a time when the company's terrible financial situation was known, then it's hard to justify tearing up his contract now.

There are three issues that converged in creating this whole AIG bonus tax mess that's transpired over the past few days. The first is a product of Wall Street's habit of providing compensation to executives in the form of bonuses instead of salary. My suspicions are that tax shennanigans are at play here, but the simple fact is that such compensation schemes create the appearance to outsiders that Wall Street is rewarding failure. The second element at play are the outrageous sums that are paid to Wall Street executives to manage money. This naturally creates resentment among the general populace that is struggling to pay tay the mortgage, find affordable health-insurance and feed and clothe the kids. The third element is simple politcal demagoguery. While the previous two elements created conditions that were ideal for an explosion of popular discontent, it was politicians who lit the fuse, hoping to gain political advantage by stoking public outrage.

I don't like the obscene levels of compensation that corporate America rewards its top executives. I think these salaries, bonus packages and golden parachutes create squewed incentives and prioritize short-term gain over the long term viability of our businesses and industries. But I detest demagogic politicians who play to the mob just as much if not more.

Our first order of business must be to repair our economy, set it aright and get it humming again. Once that's done, and before the wounds have healed and people forgotten what got us ere, we need to proceed aggressively to restrain the forces and perverse incentive structures that got us where we are today.

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