Of AIG, Popeye Snopes, and the New Feudalism

First, I want to congratulate co-blogger Lawrence Cunningham on his appearance on the New York Times editorial page (he provides a superb analysis of the AIG bonus dispute there). The NYT has also featured law bloggers Frank Snyder and Glenn Greenwald on its “Room for Debate” feature on the issue. Without questioning the validity or value of any of their work, I just want to take a step back and consider the stakes of the bailouts as public disgust with them grows.

Sam Pizzigati of the Institute for Policy Studies has argued that AIG is but a bit player in Wall Street’s drama of overcompensation:

Congressional action to recoup these bonuses through taxes would be a positive step, but merely undoing the AIG bonuses will leave in place tens of billions of dollars in taxpayer subsidies for banks and corporations that routinely overcompensate their executives. [There are many] taxypayer subsidies for executive excess and . . . various reforms now pending in Congress that speak to these problems.

Given this background, it is hard to understand the fuss about the AIG bonuses. Rather than a rancid discontinuity from the recent past of Wall Street moneymaking, they appear to express its distilled essence. As Robert O’Harrow’s and Brady Dennis’s excellent Washington Post series on AIG reported, the company constantly benefited from Washington’s helping hand–including the conscious decision by regulators not even to try to understand what its Financial Products division was doing:

Financial Products unleashed techniques that others on Wall Street rushed to emulate, creating vast, interlocking deals that bound together financial institutions in ways that no one fully understood and contributed to the demise of its parent company as a private enterprise. In the panic of mid-September’s crash, the Bush administration said that AIG had grown too intertwined with the global economy to fail and made the extraordinary decision to take over the reeling giant. The bailout stands at $152 billion and counting [as of Dec. 29, 2008] — almost 10 times as large as the rescue for the American auto industry.

Like Captain Renault in Casablanca, “shocked, shocked to find that gambling is going on in here,” the Geithner-Summers-Bernanke crew now feigns surprise that AIG execs would make one more dive for the trough.

In William Faulkner’s novel Sanctuary, Popeye Snopes is a blackguard who, after a life of violence and exploitation, ends up hanged for a crime he didn’t even commit. Karmically congruent with Snopes, AIG now finds itself in the crosshairs of public opinion for a money-grab trivial in comparison with the systemic risk it recklessly foisted upon us all.

When we think about how much money has already flowed to Wall Street’s masters of the universe, what’s another $165 million? According to NY Atty General Andrew Cuomo, “A.I.G. made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout. Something is deeply wrong with this outcome.” But certainly their culpability didn’t start in 2008. These arrangements grew over a long period of time, and people like O’Neal, Fuld, Thain, et al. are still luxuriating in the tens of millions in “incentive pay” their phantom paper profits generated.

I think the outrage over the AIG bonuses has a deeper root, one unconnected to economic analysis of the “real value” of executives and traders. Americans have a sick feeling that even after repudiating the most fatcat-friendly regime in our history, “Change We Can Believe In” has turned into continuity we can’t stand. Consider Senator Ron Wyden’s comment on the Dodd-Geithner contretemps over who really put in the bonus-friendly language in the bailout:

“I pulled out all the stops,” Wyden [said], “to convince the president’s economic team that [an eliminated anti-bonus amendment] was vital to the White House for two reasons: 1) the president had spoken out against bonuses; 2) fury about bonuses would kneecap confidence in the president’s entire economic policy.”

But no one inside the president’s economic team was in favor of it. As Wyden put it: “If the White House economic team had made it clear that this was important, this provision would never have been removed. I don’t believe the president has been well-served on the bonus issue by his economic team.”

A couple months ago, I thought that President Obama’s strategic decision to defer to “safe hands” like Geithner and Summers on macroeconomic matters was wise. I even held out hope that the government would use some of its leverage over the banks to induce them to invest in our future–projects such as green energy, universal broadband, and health information technology that will be perennially neglected by investors obsessed with quarterly earnings.

But these hopes are fading as a neo-feudal reality begins to emerge. Whatever their failures, however reviled they are by the public, the potentates at our leading banks appear to believe themselves entitled by divine right to determine what projects get credit and which are denied. Rather than assert the people’s prerogative to demand investment that builds a better future for us all, our putatively progressive Treasury Department contorts itself to resist the “nationalization” label–even as conservatarians like Lindsey Graham and Alan Greenspan consider it. Like the Rubin-ites who rolled over Robert Reich and Brooksley Born in the Clinton administration to prevent derivatives regulation, these “centrist” Democrats are pushing the Obama administration into a hollow establishment “consensus” that commands the respect of few outside the Beltway Bubble, Greenwich, and the Upper East Side. For these worthies, we are impertinent even to ask about the long-secret destinations of the AIG money.

We live in “a world in which, according to 2006 statistics, one percent of the world’s adults own forty percent of all global assets[,] [t]he richest ten percent own eighty-five percent, while the poorest half own less than one percent.” We should not be surprised when those in that glittering top percentile pull out all the stops to preserve and intensify those inequalities. But we are still inevitably disappointed by an administration that promised so much, and appears more at drift than mastering the financialization that has brought the nation to the brink of ruin. That’s the kernel of truth and sorrow at the core of public outrage over AIG.

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