:: Paranjoy Guha Thakurta

Greed pays no heed to need or prudence

By Paranjoy Guha Thakurta

Mar 22 : IF EXCESSIVE greed on the part of top executives of giant US corporations is an important reason why the world is currently going through an economic crisis that is being compared to the Great Depression of the 1930s, those responsible for precipitating the financial meltdown have failed to learn lessons from the past. They not only seem determined to continue along the disastrous path they have followed, but want to compound the crisis by wantonly wasting public money and, in the process, drag the rest of the planet deeper into the recession that shows no signs of ending in a hurry.

Take the instance of AIG (American Insurance Group), said to be the world’s largest insurance conglomerate of its kind. AIG was one of three Wall Street bigwigs (together with Lehman Brothers and Merill Lynch) that collapsed on September 15, 2008. It has been reported that soon after the George W. Bush administration announced that the group would be bailed out with public money, a bunch of well-heeled senior employees of AIG decided to "celebrate" by splurging at a fancy resort.

Now comes further confirmation of what the AIG top brass, led by chairman Edward Liddy, intends doing with the $173 billion obtained from the US government. Of this amount, $165 billion is to be spent on making payments of "bonus" to senior executives. In a letter sent on March 14 to US Treasury secretary Timothy Geithner, Mr Liddy claimed AIG had "contractual obligations" to make the bonus payments and could face lawsuits if it did not.

This disclosure resulted in howls of protest from US lawmakers. US President Barack Obama himself vowed that his government would pursue legal methods to try and block these payments. "This is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay", Mr Obama said on March 16, adding: "I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?... In the last six months, AIG has received substantial sums from the US Treasury. I’ve asked secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses…"

White House press secretary Robert Gibbs said the AIG proposal was not just "outrageous" but "offends our values". House of Representative Speaker Nancy Pelosi, said in a statement that AIG has turned on its head the basic principle that bonuses and retention payments are rewards for outstanding performance. She said AIG executives should voluntarily forego their excessive retention payments and if they refused to do so, the government "should use whatever tools at its disposal to make AIG repay taxpayers", adding that "no taxpayer funds should be used to pay bonuses or other unjustified compensation to AIG executives whose irresponsible risk-taking brought our financial system to the brink of collapse".

Republican Barney Frank, chairman of the Financial Services Committee of the House of Representatives, said what AIG was doing was to "reward incompetence". What was once a privately-controlled corporate group is today what we in India call the public sector — roughly 80 per cent of AIG is at present owned by American taxpayers. This, to an extent, explains the outrage of US politicians.

The harshest comment came from Republican Chuck Grassley who serves on the US senate finance committee. He suggested that AIG executives should consider emulating their counterparts in Japan: "The first thing that would make me feel a little bit better towards them (is) if they would follow the Japanese example and come before the American people and take that deep bow and say ‘I am sorry’ and then either do one of two things: resign or go commit suicide".

AIG used $93 billion of US government money to bail out a host of politically-influential organisations such as Goldman Sachs, Merill Lynch, Citigroup, French bank Socieite Generale, Germany’s Deutsche Bank, Britain’s Barclays, Switzerland’s UBS and various municipal bodies in US states like California, Virginia and Hawaii. The money was spent to cover their losses, most of it incurred on account of trade in derivatives and complex mortgage investments. The bail out was ostensibly to ensure the "stability" of the financial system.

It is rare that one hears such strong criticism of corporate captains from a cross-section of American politicians who are supposed to be die-hard believers in the virtues of free-enterprise capitalism. In India, a section of the media played up Citigroup chief Vikram S. Pandit’s so-called "sacrifice" when he agreed to receive a token remuneration of $1 a year. On February 17, the Indian-American chief executive of Citigroup told a US government committee: "My compensation for the year 2008 was my salary, which is $1 million. I received no bonus. And as I stated earlier, I plan to take $1 a year in salary and no bonus until we return to profitability".

On March 17, it was disclosed that Mr Pandit received a total compensation package of over $38.2 million for 2008 — most of it from stock option awards that were part of his starting package and which came on top of almost $80 million that he earned from selling his hedge fund to Citigroup in 2007. With that kind of money in the kitty, one guesses it would have been fairly easy to make the kind of "sacrifice" that Mr Pandit is supposed to have made. Citigroup has posted huge losses for over a year and a quarter and has turned to the US government for financial assistance on no less than three occasions.

Two short questions: Why is Prime Minister Manmohan Singh’s government so keen on increasing the foreign direct investment cap in Indian insurance companies from 26 per cent to 49 per cent? Would Tata-AIG have been better off today had the FDI cap been higher? One small conclusion: some people never learn, not even the hard way.

Paranjoy Guha Thakurta is an educator and commentator based in New Delhi