Monday, March 16, 2009

Bernie Madoff and AIG

Two big ticket items in the news of late have been disgraced financier Bernard Madoff's guilty plea and the subsequent examination of his assets and the news that bailout beneficiary AIG plans on awarding million in executive bonuses.

On Madoff, I have two completely different sort of thoughts. The first is on the severity of his crimes and the nature of punishment in general. I've heard countless victims (and ordinary folks) on the news calling for severe punishment for Madoff, some even remarking that this fraud was merely a step down from murder. That last part had me scratching my head a bit, particularly because I don't think this fraud left anyone penniless and destitute. Yes, fraud is fraud, and fraud is wrong, but personally, I'd rather have my money taken by a con man than a mugger on the street or a home invader. I don't think you have downplay the severity of fraud by pointing out the differences between crimes against property and physical crimes against your person. This is where I wonder about the nature of punishment in general, particularly at a point in time where we as a society have seemingly rejected the rehabilitative model of punishment. I would say that today our collective psychology jails people with the dual goals of retribution and the protection of society in mind, but in the case of Bernie Madoff, we're not really looking to protect anyone, are we? Just an interesting thought, that however you dress it up, our real urge with criminals is to make them suffer for their crimes.

My other Madoff thought is in regards to people's baffled inquiries about where the billions and billions of missing dollars went. Certainly Madoff has massive amounts of money hidden, some of which will be discovered and some of which will not. But the interesting fact that people seem to be missing is that Madoff perpetuated his fraud through high payments to early investors, exactly how a ponzi scheme is supposed to work. There are obvious practical problems in seeking restitution from those who benefited from Madoff's crimes, but one must consider whether we should have such legal mechanisms in the first place. Even if we can say that investors bear no responsibility for the nature of their investments, we could still say that the Madoff winners aren't entitled to their ill-gotten gains.

I find it interesting to move from Madoff on to AIG, mostly because of the very populist desire, echoed today by President Obama, to deny AIG executives the bonuses they may be contractually entitled to. (I say may be because most news stories aren't clear, and truth be told, without actually reading the contracts, who's to say what the truth is.) What's interesting to me is how much more anger is directed at these AIG executives than at the Madoff winners and how the Madoff winners have been mostly left alone, while President Obama has urged the Treasury to do everything in it's power to prevent these bonuses from being paid. It's interesting because you have anger about the money that may be a legal requirement and a simple matter of contract and silence about the money that was obtained through fraud.

Now obviously, nothing is that simple. The majority of the Madoff winners most likely had no criminal intent and a large number of the AIG executives may be complicit in the companies failure. But regardless of the facts, which are different in terms of each individual involved, we've reached a point in the court of public opinion where guilt- and more importantly how we treat money- is more about emotion than law or facts.


Blogger McMc said...

I have a hard time understanding why any "contractual obligation" would be a priority for a company in need of help. I also have a hard time understanding why any obligation should be covered by bailout money.

But I also have a hard time understanding why there weren't limitations on how the bailout money could be used. Is it illegal to say you can't use this money to increase executive salary or give out bonuses or is the administration just as at fault here for being stupid enough to trust the same people that were getting condemned in the first place?

11:16 PM  
Blogger lonely libertarian said...

To your second point, the government could put any condition it wants on the money it hands out, but it's much harder, if not impossible and not at all legal to do that after the fact.

As to your first point, the whole point behind the AIG bailout, behind bailouts in general, is to ensure that these companies can meet all of their contractual obligations and not be forced into bankruptcy. This is the real problem with this whole idea of bailouts in the first place. It's hard to criticize business as usual when the whole point of the bailout was to try and ensure business went on as usual.

And to get back to bonuses, for AIG we're talking about 100 some odd million dollars, less than 1% of the total bailout money given to them, which was somewhere around 180 billion dollars. Other than emotion, is there a real point to conditioning such a small percentage of that money in the grand scheme of things? Isn't it more important to be talking about what the company is doing with the other $179 billion dollars of taxpayer money?

12:12 AM  
Blogger McMc said...

To go back to your original point...

The Madoff thing doesn't seem to bother people as much because at the end of the day, we aren't really questioning the person doing the swindling, but the people who actually bought into the swindler.

The AIG situation is bothersome because it almost feels like we're the ones being swindled. You call it business as usual, but isn't the point of the bailout to bring a company that was not doing well back to that point. It is upsetting to see execs getting bonuses when that business might not even be close to being back to "usual".

Is it legal? It very well could be, although New York's attorney general is suspicious. But is it ethical? AIG knew they were getting the bailout money and easily could've decided to freeze their salaries until things were back to normal and they didn't.

Also, $100 million might seem like a small portion, but that doesn't mean $100 million isn't a boatload of money. Yes I'm curious as to what the rest of the money is being used for, but that curiosity is piqued by the bonuses.

I know it's hard to judge and I myself have defended someone who makes a monster salary (Jim Calhoun), but to actually accept bonus money like that, full-well knowing where it came from, that's a hard one to swallow and it is kind of a microcosm of how we got here, isn't it?

I don't really blame anyone for being upset by this and I do think there is more to it than just pure emotion. People all over are making sacrifices to stay afloat and to see bailout money go to executive bonuses...I mean, not only does it make me question what the rest of the money is going to, it makes me question all of the people that handed out that money.

12:49 AM  
Anonymous rose said...

"I have a hard time understanding why any "contractual obligation" would be a priority for a company in need of help. I also have a hard time understanding why any obligation should be covered by bailout money."

Violating contractual obligations is not a good way to keep good minds at your company. People have options. An option is to leave AIG and go work for a competitor. Why would I want to work for a stigmatized company who is rescinding bonuses that are owed to me?

And despite popular opinion, the mind required to be atop these kinds of companies is rare. They are the best of the best and if AIG has any shot of paying back its government loans, these people need to remain there.

10:21 AM  
Anonymous rose said...

Grassley suggested these executives kill themselves.

I feel like I'm in Germany in the 1930's. I'm waiting to turn on MSNBC and see images of bankers juxtaposed w/ images of rats.

This isn't about fairness at all. It is about demonizing business so that people cheer on socialist power grabs by the government.

10:25 AM  
Anonymous Anonymous said...

my comment is on rose saids comment "And despite popular opinion, the mind required to be atop these kinds of companies is rare. They are the best of the best and if AIG has any shot of paying back its government loans, these people need to remain there."
Are these not the same people who got AIG into the mess they are in? why were they not fired for their detrimental mistakes? why were people who have morals and actual intelligence seeked to replace them? with the amounth of people that are unemployed, it amazes me that they are trying to keep these employees instead of finding more ethical employees to fix the problem.
Also, why are no regulations being put on the remaining amounth of bailout money? They have already spent 440,000 on a company trip to the beach, 23,000 of which was spent on the salon!!!!!!! I am outraged about this. Our government is taking our money and giving it to the rich!

5:24 PM  

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