Jesse Jones, head of the Reconstruction Finance Corporation, writes of how the New Deal dealt with an insurance company.
The RFC acquired voting control of Maryland Casualty in April, 1934, when we first bought preferred stock in the Company. At that time we sent Silliman Evans to Baltimore to take the presidency of the company and Edward G. Lowry, Jr., of our legal department, to be its vice president and special counsel, each being elected as director. Mr. Evans later became chairman of the board…. When we got into the company, the situation was so much worse than had been represented that we felt it necessary to replace the management.1
I imagine this would have some present-day relevance to a White House stuck with an insurance company whose position turned out much worse than represented.
Then there is this to consider:
For political reasons, Jesse Jones often toyed with the salaries of corporate management, especially if they were, in his mind, “over-paid” Wall Streeters. Jones and Roosevelt knew that RFC loans always had the potential of political trouble—stirring up liberal Democrats and progressive Republicans who were blaming businessmen for getting the country into such an economic mess. Salary reductions were one way of showing that RFC, even while it was pouring billions into private business, was not enriching corporate management. Amendments to the RFC Act in 1933 required Jones to certify the appropriateness of the salaries paid by every corporation accepting loans and investment money. Jones devised a declining scale of salary reductions. Corporate management receiving annual salaries of $150,000 or more would be cut to $60,000, $100,000 or more to $50,000, and other reductions accordingly.2
Which might also seem apposite.
UPDATED to add a special bonus New Deal version of how to deal with rude letters from corporate types—in this case, the chiefs of the New York Stock Exchange, asked by the SEC to reorganize in light of recent events.
… the matter of reorganization was referred to the Exchange’s Law Committeee—in other words, to Richard Whitney…. After due deliberation, the Law Committee concluded that reorganization … was impracticable, and that negotiations with the SEC should therefore be broken off. It drafted a harsh letter to [William O.] Douglas saying so…. [W]hen an Exchange lawyer delivered it to Douglas in Washington a few hours later, the SEC chairman merely nodded and said grimly, “All right, then, we’ll take the Exchange over.”3
1Jesse Jones, Fifty Billion Dollars, 158.
2James S. Olson, Saving Capitalism, 126.
3John Brooks, Once in Golconda, 245.
The Edge of the American West 
31 comments
March 17, 2009 at 1:21 pm
Greg
You mean to tell me that RFC didn’t pay retention bonuses for people who left the company, along with performance bonuses for m*%#erf*&%#s who lost HUNDREDS of BILLIONS of DOLLARS!?! How could business retain any confidence in a government like that?
March 17, 2009 at 1:27 pm
ari
Well, you have to remember, Greg, that behavior like that cited above is what caused the Great Depression to linger as long as it did. I’m fairly sure that Eric is merely posting a warning to Geithner, et al: consider what the New Dealers did, and then be sure to do the opposite. I mean, you know Eric’s views on this subject.
March 17, 2009 at 1:27 pm
kathy a.
excellent quotes.
March 17, 2009 at 1:36 pm
max
The RFC acquired voting control of Maryland Casualty in April, 1934, when we first bought preferred stock in the Company.
Sigh. If only *we* had acquired voting control.
consider what the New Dealers did, and then be sure to do the opposite.
Oh ho. We should use dynamite!
max
[‘Ok… C4.’]
March 17, 2009 at 1:38 pm
Greg
Ari, you’re right of course. All of that government spending during the New Deal simply prolonged the agony, until the government spending during the war ended the Depression–when all of those “dollar-a-year” men returned from their Galt-cations and long years in the wilderness to restore the economy (what? you don’t think Ayn Rand could make up something so inane on her own, do you?).
March 17, 2009 at 5:42 pm
Stinky
It would be interesting to apply the same sort of logic to other failing entities. Should California be able to renege on its employment obligations—say to revoke professors’ and teachers’ tenure, eliminate prison guards’ seniority rules, or reduce staff salaries—without going through bankruptcy?
March 17, 2009 at 6:04 pm
eric
California has furloughed employees, fired them, and reduced state employees’ salaries—including, as I am told, UC professors’ salaries—in past budget crises.
Is it still interesting?
March 17, 2009 at 6:10 pm
Michael Turner
This bonus situation is infuriating, especially considering that AIG is on its third (or is it its fourth?) bail-out, but . . . is it infuriating enough, under the circumstances? I have to wonder.
In 1934, U.S. unemployment was around 25% (cf. today’s sub-9%) and most capitalist nations didn’t have nearly the safety net they have today. At the time, the USSR exemplified, to many, a persuasive alternative model of economic organization — it was not yet, decisively, a Failed God. Also, when you look at Jesse Jones docking the pay of insurance executives earning salaries no longer considered princely now but certainly thought so then, you’re forced have to take inflation into account. The London unit at AIG that incurred most of its loss exposure has perhaps a few hundred employees — if they were to each receive an equal share of the $165M, it would amount to enough for a modest retirement kitty by present-day standards (a million dollars no longer being what it used to be.)
A sense of proportion might make little difference, however. The AIG bonuses are now being defended — even by some who find them repellent — in terms of honoring “the sanctity of contracts.” There’s a limit to such reasoning, of course — there’s a strong whiff of cow patty in the incense being burnt on such altars. Not so long ago, Moody’s, S&P and Fitch defended their inflated ratings of toxic assets in terms of “freedom of the press”. Me, I’m hoping some indictments get handed down on their asses anyway.
Sanctity has its limits, especially with so many moneychangers in the temple these days. Ultimately, rights imply responsibilities, and can only be safeguarded by governments to the extent that most of those endowed with the rights accept some degree of responsibility. Lincoln once defended his suspension of habeus corpus in highly colorful terms: he was, he said, tearing the beautiful figurehead from the prow of a sinking ship and throwing into the bow-wave, hoping it would float into that breach in the hull and plug it up. If the ship went down, there’d be no law anyway.
Where do matters stand now? Are we sinking, still? How much further do we have to go, before there’s a virtual carte blanche for nationalization where it’s needed? In some view of the matter, the AIG bonuses are a blessing in disguise; perhaps we might be grateful for a certain nagging undertow of raw greed and shamelessness, insofar as it brings the waterline up to the point where the situation can be regarded with due seriousnesses. If it’s not the AIG bonuses, it will be some bailed-out company’s bonuses, soon enough. There are a lot of employment contracts out there, and they weren’t signed by the kinds of people who are likely to shove their hands in their pockets and say, “Aw shucks, I don’t really need all that money anyway. What I really want is what anybody wants: to be loved, admired and widely respected.”
March 17, 2009 at 7:01 pm
JPool
Has anyone gotten a good explanation for why Geithner’s on-record response to AIG insistence of contractual obligation wasn’t, “Did you try asking them, in interest of public good will and in the name of all that’s decent, to forgo those bonuses?” If the response that had come back was “F— decency and the public too,” then we could have just gone straight to nationalization and/or torches.
Saves time.
March 17, 2009 at 7:02 pm
Stinky
Is it still interesting?
Yes. If the state government furloughed employees outside of the bounds of the collective bargaining agreement—say furloughing assistant professors in the Cal State system w/o respecting seniority—that would be a huge issue. If AIG or the state went through bankruptcy, then there are well-defined rules for deciding who gets what from what’s left over. AIG, in partnership with the government, offered retention bonuses to what they thought were key employees, reneging on that is wrong, and potentially more expensive than just eating the money blown on the bonuses.
I agree with Michael Turner that the AIG bonus issue is a blessing in disguise, but if we choose this moment to punish these people we’ve failed to learn the larger lesson of responsibility and faith and deny our own culpability in the morass that’s left of the credit markets.
March 17, 2009 at 7:09 pm
Stinky
JPool, my understanding is that the government has been intertwined with AIG since Hank Greenberg’s time, that Paulson and Geithner (as head of the NY Fed) agreed with the need for outsize compensation to retain “key” AIG employees, and that congress wrote specific language into the stimulus bill to ensure such bonuses would be honored and paid.
March 17, 2009 at 7:31 pm
eric
Stinky, if you’re not just trolling you know that the issue is not the payment but the seemliness of the payment under current circumstances—i.e., the federal government is giving extra-special tax dollar after tax dollar to these guys to bail them out after they screwed up their company and some large part of the world’s economy.
You will note that tax dollars that go to California state employees are perfectly ordinary budgeted tax dollars for doing a regular job—not special rescue money as a reward for killing capitalism.
I’m pretty sure you can see the difference, if you’re not in outright troll mode here.
If for some contractual reason the bonuses MUST be paid then they ought to be taxed right back, as some fellows are considering.
March 17, 2009 at 8:08 pm
Nora Bombay
I think I might love Douglas a little bit right now.
March 17, 2009 at 8:10 pm
andrew
Clearly the solution would be for the state government to take over the state, run it for a while, and return it to the state. That would be very interesting.
March 17, 2009 at 8:20 pm
Stinky
eric, the payments are unseemly—there’s no doubt about that. We—through our leaders and representatives—decided that keeping AIG out of bankruptcy and retaining “key” employees was important, the cost of doing so is huge. To renege on a tiny fraction of that and set the precedent that contracts can be unilaterally, retroactively revised is worse than paying-out the bonuses. If AIG failed to pay, they’d spend a lot of money in court and could be subject to fines for bad faith. If the government steps in with a punitive tax or retroactive law that’s narrowly targeted at TARP winners, how is that not at least arguably a bill of attainder? Arguable enough to get the issue into court for years.
I see your point about ordinary vs. extraordinary expenses. But the contracts AIG (with help from the SEC) negotiated were prior to TARP or the stimulus. The stimulus package contains language that protects retention bonuses, so its not like the issue wasn’t contemplated.
I realize it’s bad form to reason from my own situation to a general rule, but if California unilaterally adjusted my compensation outside of my employment agreement, I would seek arbitration and sue. I can’t imagine why AIG beneficiaries—with substantially more resources to seek recourse—would not do the same.
We created the fiction that AIG is not a failed enterprise by injecting huge amounts of cash into the operation, avoiding bankruptcy means AIG doesn’t get to default on its obligations—including its obligations to employees.
March 17, 2009 at 8:34 pm
jazzbumpa
It would be interesting to apply the same sort of logic to other failing entities. Should California be able to renege on its employment obligations –
Mish cheers
as “In a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts.”
Not all of his commentors agree.
March 17, 2009 at 8:38 pm
Greg Miller
Stinky, its not that difficult. These people have proven to by extremely incompetent. Without a union, they have even less protection. Fired with cause (billions in losses, leading to the company teetering on bankruptcy). Want to go to court for that? Jury of peers? Oh, yes, lets.
March 17, 2009 at 11:44 pm
Standpipe Bridgeplate
Contracts are not divine emanations. Newsweek does not care that you found the likeness of a contract on your grilled sandwich.
Businessfolk frequently weigh the cost of adhering to a contract against the likely penalty for reneging on it, and sometimes they choose option number two. Some people in Chicago call this “efficient breach”. Perhaps if you squint, a government with a 79.9% majority stake in a firm looks kind of like businessfolk.
But forget all that nonsense I just wrote. Consider that AIGFP just scrogged the global economy with a combination of negligence and fraud, but on your view it’s the government’s bonus-scuttling talk that threatens the very possibility of orderly commerce.
March 17, 2009 at 11:47 pm
Michael Turner
These people have proven to [be] extremely incompetent.
Hold on. We don’t yet know exactly who they are or what they did, individually. They might range from very competent people who didn’t blow any whistles because they felt bound by their nondisclosure agreements, to people whose main talent might have been to make themselves indispensable to the operation when it seemed to be printing money, but who are now mainly useful as a source of knowledge about how to stem further losses. That’s quite a range. From what I’m reading, they all agreed to $1 salaries in exchange for whatever the bonuses would be.
eric writes: If for some contractual reason the bonuses MUST be paid then they ought to be taxed right back, as some fellows are considering.
There are apparently plenty of contractual reasons why the bonuses must be paid. As for how to tax them back without violating equal protection under the law, well, good luck. From what I’m reading, a number of them are not even U.S. nationals.
The best thing might be to figure out what many of these people might be sued for, under existing law. It might be plenty. If it’s nothing, well . . . . there was a moment there, just after LTCM’s collapse, when we might have talked about certain kinds of clawback legislation. It didn’t happen.
Some much-needed perspective: the bonuses are 0.1% of the total so far in the bailout of AIG, and on the order of $1 per U.S. taxpayer; progressive taxation means most taxpayers won’t even be paying that much. The bigger picture here is still the AIG bailout itself: maybe $1000 per U.S. taxpayer. And the biggest picture of all is the total corporate bailout so far, which is in the trillions.
I have no desire to defend anybody at that London AIG unit who might be culpable. I hate it that there are people working at AIG who will receive bonuses beyond what I hope to have set aside for retirement. I also hate it that what some of them have done will make my retirement goal more of an uphill struggle. If you put one of them in front of me now, I’m not sure what I’d do with this pitchfork of mine that seems to be waving itself. But if we let the provocations of unseemly behavior lead to popular endorsement of illegal action by our own government, any of us might end up skewered on pitchforks before it’s all over.
March 18, 2009 at 12:03 am
Standpipe Bridgeplate
As for how to tax them back without violating equal protection under the law, well, good luck.
I tell you what. You agree to explain how millionaire wizards of finance constitute a protected class, and I’ll agree to clutch my pearls.
March 18, 2009 at 12:16 am
Michael Turner
Businessfolk frequently weigh the cost of adhering to a contract against the likely penalty for reneging on it, and sometimes they choose option number two. Some people in Chicago call this “efficient breach”.
I think Stinky makes the case that the breach wouldn’t be very efficient here anyway. These are (mostly) rich people who have already been paid these bonuses. If the courts don’t uphold the government’s decision, the taxpayers are on the hook for the legal costs on both sides, on top of having already paid out those bonuses. What’s efficient about that? If tax dollars are to be paying government lawyers in this mess, shouldn’t they go toward paying prosecutors, not defenders?
Perhaps if you squint, a government with a 79.9% majority stake in a firm looks kind of like businessfolk.
I’ll start squinting when the conflagration gets too bright. For now, there’s much to be said for keeping your eyes wide open. With a clear view: government owning a business doesn’t put the government IN business, necessarily. The ways in which one earns votes and profits are largely immiscible.
Aren’t most of these toxic assets written as contracts? Isn’t our best chance of turning the situation around based on ultimately on getting as many of those contracts honored as possible? Is it a smart move for the government to go into a market it can’t completely control and get known as a player who can void any contract at will, if only the contract is “unseemly” to enough voters? What are the potential repercussions of that? Do we even know?
No, contracts are not divine emanations. I’m not big on divine emanations. I worship at the altar of an angry and capricious god named Unintended Consequences, praying only that no divine emanations will be forthcoming today. If AIG were owned outright by the U.S. government, and the issue was salaries, as it was for Jesse Jones, I’d be only too happy to see salary cuts. But that’s not what we’re talking about here. From what I understand, we’re talking about people who took their own salaries down to $1 per year, in exchange for bonuses to be paid out according to what I assume is some formula that still stands. For all we know, if they’d stuck with their salaries, they’d be making even more than what these bonuses now amount to.
March 18, 2009 at 4:51 am
dana
Is it a smart move for the government to go into a market it can’t completely control and get known as a player who can void any contract at will, if only the contract is “unseemly” to enough voters?
Why is the choice, as presented, between paying them millions or abandoning the rule of law?
Contracts get renegotiated all of the time: furloughs, “voluntary” salary reductions, freezes on raises and bonuses, benefits reductions. There has to be a legal way to make this work.
March 18, 2009 at 6:39 am
Standpipe Bridgeplate
Further, I can’t understand why people are at pains to point out the $1/year arrangements. I hadn’t heard of them, but let’s stipulate they exist. Is there honestly a principled difference between the same amount of compensation paid out of a drinking fountain and out of a firehose? I don’t know, but I doubt it. (Appeals to the time value of money are a red herring.) If it made me feel more important, I could imagine that I’m paid a salary of zero! dollars! leavened with bi-weekly performance bonuses.
March 18, 2009 at 6:50 am
Standpipe Bridgeplate
I forgot to say: therefore, the issue might as well be salaries, as it was for Jesse Jones.
March 18, 2009 at 7:56 am
Barry
JPool
“Has anyone gotten a good explanation for why Geithner’s on-record response to AIG insistence of contractual obligation wasn’t, “Did you try asking them, in interest of public good will and in the name of all that’s decent, to forgo those bonuses?” If the response that had come back was “F— decency and the public too,” then we could have just gone straight to nationalization and/or torches.”
IMHO, the reason that the original bailout was on Wall Street friendly terms was that Paulson was Wall St Scum. I’m not saying that the rest of the Bush administration wasn’t as corrupt as all get-out, nor that Congress isn’t corrupt. But having a WSS as the chief executive officer of the Treasury, the guy with the most access to and control of information, was bound to lead to a horrific giveaway.
In the current case, Geithner is also WSS. He’ll do his best to bail out the WS elites, and to not notice their misbehavior, and to not notice any methods or tools to check their misbehavior.
I believe that there’s a serious conflict of goals between the Obama administration and Wall St elites. The WSE’s want to get bailed out to the max, with minimal strings or liability. Fixing the economy (in the next few years, at least) doesn’t matter so much, vs the vast profits they can get from bailouts. In general, once a system is damaged or broken, looting it for personal gain becomes much more profitable, since long-term gains are far less certain (e.g., if your employer is facing bankruptcy and liquidation, you might not expect a 30-year career there).
Meanwhile, Obama has *got* to make some economic progress – for American voters – by Fall 2010. If not, he’ll face a withering mid-term, and a rejuvenated and remoralized GOP Congressional faction, who will see their mandate as being to oppose him 100%. That could well castrate the second half of his term, leading to him limping into 2012 with a mediocre economy and a bad reputation. If it comes to stringing up some WSE’s, then he’d better be OK with that.
One thing that I’ve noticed is that I’ve seen only one article in the NYT about the FBI beefing up their white-collar crime forces, but nothing about prosecutions (except for Maddoff). The only way to make the WSE’s pay attention is to hit them where it hurts, in their wallets and lives. The Obama administration needs to start a serious surge effort there.
March 18, 2009 at 7:58 am
Barry
Michael Turner: “Aren’t most of these toxic assets written as contracts? Isn’t our best chance of turning the situation around based on ultimately on getting as many of those contracts honored as possible? Is it a smart move for the government to go into a market it can’t completely control and get known as a player who can void any contract at will, if only the contract is “unseemly” to enough voters? What are the potential repercussions of that? Do we even know?”
‘Efficient breach’ has already been mentioned, but I’ll put it in more common terms – if I were a contractor, and f*cked my client up to the tune of vast sums of money, I wouldn’t be surprised if my client’s attitude towards paying me could be summed up in two words: ‘sue me’. Probably while they filed lawsuits of their own.
And please don’t bring in ‘reputation’ about this; it’s just as arguable that f*cking back those who f*cked you first is a desirable reputation to have.
March 18, 2009 at 11:13 am
Barry
A choice excerpt from:
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/17/AR2009031703022_pf.html
“Moreover, the Justice Department would surely have been within its rights to launch an extensive civil and criminal investigation into whether those bonuses were granted as part of an ongoing conspiracy to defraud shareholders — a conspiracy in which the traders were knowing participants. As part of that investigation, prosecutors could have also prepared a public report to the Treasury, the Federal Reserve and Congress listing the names and home addresses of all the traders who were slated to receive the bonuses, along with a detailed description of their role in creating the mess that brought down the company. There could even be a chart listing their salaries, bonuses and other perks over the past decade.
Call me a cockeyed optimist, but I suspect that when confronted with the prospect of a bankruptcy and a prolonged and public investigation, the sharpies in London and Connecticut might have been receptive to the idea of renegotiating those bonuses in favor of new contracts — contracts that increased their base pay but tied their bonuses to success in reducing future taxpayer liabilities at AIG.
Unfortunately, none of this seems to have occurred to Eddie “Good Hands” Liddy, the former Allstate executive who was supposedly brought in to dismantle AIG and sell it off in pieces for the benefit of the taxpayers and creditors. So far, all Eddie seems to have served up is a litany of complaints about what a bad hand he was dealt. ”
I think that yet again, putting Wall St Scum in charge has been proven a very bad idea.
March 18, 2009 at 12:17 pm
Stinky
…if you’re not in outright troll mode here…
No trolling. I like your NPR appearances, so I like to come-by edge of the west from time to time. I get the urge to comment when it seems like an issue you’ve brought-up might have a different facet worth considering. In this case, considering the consequences of the actions suggested by your historical analogy. jazzbumpa’s link does this better than I did: if the government can renege on contracts with AIG employees, then what’s to stop it from reneging on contracts with SEIU or whomever? In the Vallejo example, the city is at least in bankruptcy, in the case of AIG, extraordinary means have been used to ensure that doesn’t happen.
Like Michael Turner says, we don’t know the specifics of the employees involved. Some may be earnestly trying to get AIG on its feet, others may be fraudulent conspirators. There are remedies for the latter that don’t involve retroactive taxation or special-case legislation, namely criminal prosecution.
Like Barry says, bankruptcy would have precluded these payments. But we reason from uncertainty and make the best deals we can, “we” made the decision to keep AIG out of bankruptcy and assumed the responsibility for that decision, including upholding the contracts that had been made with employees.
March 18, 2009 at 2:44 pm
AWC
Very interesting.
My irritation at the AIG bonuses is tempered by my knowledge that New Deal policies benefited some horrible people along with hundreds of millions of ordinary Americans. In other words, I’m trying to judge Obama’s banking policy by its effect on recovery and the future growth, rather than by individual examples of injustice.
Unfortunately, it’s much easier for humanists like me to judge the morality of the bonuses than the promise of Geithner’s policy. It’s frustrating.
March 18, 2009 at 6:20 pm
Michael Turner
I’m not sure why I feel any need to dignify Barry’s posts with any response, given that he’s been so factually challenged in the past at to accuse me of being a New Deal Denialist. Let it suffice that, in quoting Steven Pearlstein at WaPo, he’s citing a factually challenged source at an increasingly factually challenged newspaper (the particulars of the latter charge are outsourced to Brad DeLong, of course.)
The problems pop out within the first few paragraphs. Pearlstein speaks of $400 million in retention bonuses; actually, every report so far has mentioned $165 million in bonuses paid recently, $220 in total. These bonuses (some of which are as small as $1000, perhaps awarded to some who now rue agreeing to salaries of $1?) are going out to about 400 people — is that the source of his confusion? If Pearlstein can’t keep basic numbers straight, and foams at the mouth about how AIG needs a “Clint Eastwood” not a “Gary Cooper” at the top, how seriously are we supposed to take his psychoanalysis of Wall Street?
It’s just a screed. Screeds we got. Wall Street hasn’t woken up to the new realities! Pearlstein shrieks. Well, AIG is now being run by a guy who has no bonus, just his $1/year salary — how can anyone think he’s oblivious to the new realities? The Justice Department should be investigating these bonuses as a conspiracy against the stockholders! Pearlstein shrieks. A quick Google News archive search reveals that hardly a year goes by without the Justice Department launching an investigation into AIG — I’m sure they’ll get around to it (if they haven’t already). Pearlstein’s supposed schtick at WaPo is Leadership, but he mainly seems to be straggling and sniping. Memo to Steve: if you can’t figure out anything original to say, why not hunt down people who can, and quote them?
March 19, 2009 at 7:16 am
Barry
Just in case you haven’t actually *read* Brad’s screeds against WaPo, they always seem to involved BS in a right-wing direction. I’m not aware of Brad pointing out serious BS in a left-wing direction. This, of course, could be Brad’s bias.
I note that you’re not challenging the basic attitude I take, that the normal business practice towards bonuses to be given to people who trashed the firm would be ‘so sue us, and by the way – here are our lawsuits against you’.