The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Friday, March 27, 2009

A Bulls-Eye on Their Backs

Earlier this week, Treasury Secretary Tim Geithner attempted to lure investors, such as hedge funds, into partnering with the federal government to buy toxic assets off the books of financial institutions by offering to split the profits if they gained in value, while pushing up to ninety-three percent of the risk onto taxpayers if they did not. Yesterday, he laid out the real price to Wall Street for past improprieties in the form of extensive new market regulations.

The Obama Administration previously laid out restrictions on compensation and other rules for firms receiving bailout money. Geithner’s new proposals were far more substantial and aimed at “restoring faith in the financial system,” according to one official.

Just as many deemed AIG “too big to fail,” hedge funds are pivotal to the Obama Administration’s plans to clean up toxic assets. They attract the only investors likely willing to assume the huge risks associated with buying these securities. As expected, hedge fund managers reacted positively to Geithner’s taxpayer underwritten purchase program. They were not hostile but decidedly cautious about new regulations.

“You don't want to paint a bulls-eye on your back,” Steven Persky, Managing Partner of Dalton Investments, a Los Angeles hedge fund, joked nervously.

If Wall Street is doubtful about new regulations but feeling too chastised to complain, conservative thinkers are feeling no such restraint. Just as AIG bonuses triggered a populist backlash, rightwing pundits are now lashing back against the backlash.

On Thursday, Wall Street Journal columnist Daniel Henninger was blunt and vitriolic. Between Congress’s attempts to tax AIG bonuses out of existence and the White House’s proposed regulations, Henninger declares, “The national Democratic Party has disconnected itself entirely from the private sector . . . how it works or what it needs to function.”

Henninger sees an out-of-control progressivism that goes even beyond the current populist anger in the streets. “A Democratic Party that was always anti-Wall Street is becoming anti-Main Street.”

One day earlier, Jake DeSantis, an Executive Vice-President in AIG’s troubled Financial Products unit, anointed himself poster boy for the populist backlash’s backlash when he submitted his resignation to AIG CEO Edward Liddy in the pages of the New York Times.

DeSantis is one of those who received a $1 million plus bonus and now asked to give it back or face government retribution. He considers others and himself “betrayed by AIG” and “unfairly persecuted by elected officials.” DeSantis explains he was never responsible for any of the credit default swaps that brought down AIG and imperiled the entire economy.

In 2008, AIG placed him in the Financial Products unit and asked to help clean up the mess by dismantling it. DeSantis agreed to do so for an annual salary of $1, with the understanding he would receive a large bonus upon completing the twelve-month assignment.

DeSantis notes, “Like many others here, I lost a significant portion of my life savings in the form of deferred compensation invested in the capital of AIG.” He regards this as a risk fairly taken that failed to pan out. However, the loss of his bonus represents a broken contract/promise, creating “too much bad blood” for him to continue.

If you have not read DeSantis’s resignation letter in full, I urge you to do so. It is remarkable in its frankness, its civility, and its attempt at fairness. Having lost my own job in 2007, after twenty-three years with my company, I understand how hard the combination of lost income and trust must have hit DeSantis.

However, I took special note of other excerpts within his letter as well.

“On March 16, I received a [bonus] payment from AIG amounting to $742,00 after taxes . . . The profitability of the businesses with which I was associated clearly supported my compensation.”

“I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust.”

“Many of [us] have, in the past six months, turned down job offers from more stable employers.”

Forty former co-workers in my old company will lose their jobs next week. They spent their careers creating software that allowed clients to assure revenue streams from their customers. There was no question about the quality of their work and their unit always made a modest profit. However, the push for lower rates from clients resulted in the decision to replace them with cheaper, offshore India contractors.

Unlike DeSantis, few of them face the prospect of multiple job offers from other, more stable employers. Most can expect to be unemployed for months.

Unlike DeSanits, few have adequate savings to make mortgage payments or continue their healthcare coverage premiums through COBRA while unemployed. Many will have no option but turn to credit cards and other forms of debt almost immediately.

Particularly unlike DeSantis, I guarantee not one of them ever had a post-tax annual salary equal to even one-tenth of his disputed bonus.

DeSantis is correct that AIG made a decision that betrayed him but he has misidentified the decision. It came not when AIG bowed to hostile political winds and asked for the return of his bonus. Instead, it came when AIG bowed to hostile economic winds and chose to accept federal bailout money to avoid bankruptcy. DeSantis made his contract with AIG but is now calling on taxpayers to honor it.

I view DeSantis as a decent man. He is a case of a Wall Street executive with a bulls-eye painted on his back. However, it is clear he has at least three feet of straw and cotton padding underneath his bulls-eye; he can take quite a few arrows without feeling any pain beyond his own indignation. My former co-workers just got bulls-eyes painted on their backs and the first well-aimed arrow will pierce a vital organ on them.

I fully empathize with DeSantis but have extremely little sympathy for him. This is a triage situation, where degree of need alone dictates who receives treatment and who waits, who gets the morphine and who suffers. No matter how deeply his experience cut DeSantis, there are bodies lying on the floor all around him, missing limbs and spewing arterial blood. That he has a year-old piece of paper promising him a band-aid for being a good soldier ought not to be our top concern.

As regards his bonus, DeSantis announced his “intent is to keep none of the money myself.” However, rather than turn it back in, DeSantis plans to donate it “directly to organizations that are helping people who are suffering from the global downturn.” He explains this course of action by saying, “I at least deserve to dictate how my earnings are spent.”

He also adds the following disclaimer, “In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less – in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to ninety percent stands.” Whatever happens, rest assured DeSantis will be all right. He has been on top of the food chain too long to engage in altruism without first hedging his bets.

The unintentional, subconscious hubris in DeSantis’s well-intention proclamation is exactly why President Obama is correct in saying a sense of entitlement, combined with greed, is the true root cause of the current crisis.

In his resignation, DeSantis notes with pride that he comes from poor, working-class parents and achieved success through education and hard work. “I . . . fulfilled my American dream,” he proclaims. In a fairer world, he would get his reward. Unfortunately, it is not a fair world. Unlike DeSantis, many have not achieved their dreams and more still lacked even a chance to start following theirs.

So if you find a bulls-eye painted on your back, consider it may mark you as one of the lucky ones. And if you happen to work in high finance, look on the bright side – a bulls-eye is probably the only bull that Wall Street is likely to see in the immediate future.

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