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Has the AIG Bonus Backlash Gone Too Far?

In some corners, the anger over the AIG bonuses has turned into mindless populism that serves no purpose. That’s the viewpoint of The Washington Post, which weighs in today with a scolding editorial.

YESTERDAY, we were more skeptical than most about the “populist” backlash against the $165 million in bonuses that went to some employees of government-owned AIG. The events of the past 24 hours have only confirmed our view. We don’t love the fact that the men and women of this disgraced company are insisting upon the compensation they signed up for before the company collapsed into the arms of the taxpayers. But whether they are being greedy, or simply human, is hardly relevant to what is in the public interest now. AIG’s demagogic critics in both parties should keep that in mind.

There is something to the argument that it’s in the best interest of the taxpayers and their money for AIG to do what it takes to strengthen the company’s bottom line — and if it means giving bonuses, so be it.

But at the Financial Times, of all places, investment editor John Authers takes another view: It’s wrong to dismiss the outrage. It’s genuine, and it highlights the fact that bonuses themselves represent a market failure that needs to be resolved.

According to the model of grief outlined by Elisabeth Kübler-Ross, investors are in the second stage of a cycle in coming to terms with financial crisis. First comes denial. Next comes anger.

That anger is now everywhere and it is aimed at bonuses. While the UK tries to claw back the pension of Royal Bank of Scotland’s Sir Fred Goodwin, the US wants back the $165m paid in bonuses to AIG executives for last year. The amounts involved may be trivial given the scale of the crisis; the anger, however, is real and justified. It cannot be dismissed as cheap populism.

Going forward, Authers sees an opportunity to end the incentive structure that helped to create this crisis in the first place:

Basing rewards on one-year performance, with no ability to claw them back later, actively encourages the creation of bubbles. Pumping up gains on the back of excessive valuations, whether in internet stocks or credit, made total sense for anyone being paid this way.

When working for public companies, bonus recipients took capital from shareholders, who had no recourse when the profits backing the bonuses proved illusory.

While the going was good, the market failure was impossible to correct – anyone paying bonuses on a more long-term basis would have lost talent. But the current anger might force a resolution.

This might include a return to the private partnership model for investment banks. Partners would have a strong incentive to deter short-termist behaviour, and would be much more able to get their way than indirect shareholders.

Auther’s ideas are worth pondering, whether or not you agree. The Post, on the other hand, represents an elitist viewpoint that entirely misses the bigger problem. It’s true – the anger over the nation’s financial crisis often has descended into cheap populism, with banks and Wall Street as easy targets. But The Post and others dismiss as mindless an outrage that, while sometimes outsized, is based on something real — a system that has been deeply corrupted, to the detriment of just about everyone. You don’t have to be an elite to figure that out.

Brushing off the AIG backlash means more of business as usual. And people trying to save for retirement or college aren’t going to accept that anymore, regardless of how those in power try to rationalize it.

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