Thursday, March 19, 2009

AIG Theatre and the Political Dialectic

A hoary dramatic device is to use a small incident as a vehicle to explore all the facets and ramifications of a much larger issue. The AIG bonuses are currently serving that purpose. In themselves, they represent small sums, as compared to the rather larger amounts of financial support the federal government has provided AIG and all the TARP participants. However, compared to the compensation most taxpayers know personally, they are obscenely large 'payments for failure' at best, and theft, at worst.

So, the matter will be addressed. All the ventilating underway merely shadows deeply felt views that will be expressed in the resolution of larger issues. I do think that the political classes in the country have collectively lost confidence in the financial elite. And I think the public wants its pound of flesh.

And, attacking the compensation structure is actually a reasonable way of taking a first step towards re-regulating the financial services sector and confining it within the parameters appropriate to a utility function. By removing the motive for speculation and risk taking, you will surely diminish it considerably.

I doubt very few employees impacted to a vastly curtailed compensation structure will be able to jump ship to hedge funds where they can resume their shennanigans. And I suspect fewer and fewer hedge funds will find sources of funding for the leverage that substituted for alpha in their heyday.

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