Tuesday, March 17, 2009

Roots of AIG Bonus rage - Asset-based compensation vs. Hourly wages: Wall St. versus Main St; how do you like your paycheck?

Wall St, Insurance companies Life & Annuity, Hedge funds, Banks & Real estate broker & agents, Mortgage brokers are among the select few industries where compensation is based upon "Asset values" championed along with all the poms poms and cheerleaders at the "business" TV, radio and print and internet media.

Let me take you higher!!! (Sly and the Family Stone)
No doubt - the higher assets, real estate, mortgages oh and lets not forget those recent vintage AAA – rated mortgage backed securities and derivatives thereon can be driven, whirled, spun, escalated the better - for the recipients of asset-based compensation and the not so tiny bonuses. These once venerated “Capital Assets” turned out to be nothing less than a veritable new and distinct “form of casino-chip-like currency” one whose champions for the past 30 years decried ANY large or small government gaze let alone regulation or information sharing huh?

Where are, I ask, those champions now? Today – with threats couched as lamentations that the “systems” failed us. Crying to the US taxpayers and taxpayers around the world, to give us some time, a line, some bucks, make that a few trillion in bailouts and guarantees?

In the meantime, MAIN St, indeed most of the rest of the world toils or in some cases simply aspires to an hourly wage or annual salary.

Did it ever occur to Congress that Corporate America and the capital markets’ asset values were built in part on the backs of the hourly wage earners and corporate America’s ability to aggressively manage and trim costs thereby boosting profits?

By the way, the next shoe, after credit card and auto loan defaults hit reality look to be those 3 or 4% or more guarantees in life and annuity insurance contracts, with clever lobbying perhaps the FASB, SEC and or Congress will whip up a new accounting artifice to stave that one off.

And now the same titans – are looking for more breaks? Relax fair value accounting because now they cry with asset values at more realistic levels they are “difficult”, give is more guarantees, give us two months to stress test when we know – like Gilligan’s’ Island that they know that we know that they know to the penny to the minute what their assets and liabilities are worth under multiple scenarios. The second largest software vendor SAP AG in the world after MSFT – with many years of presence and dominance in the banking, securities and insurance sectors.

Helps to explain much of the increasing difference in incomes for the past 25 years; and in particular the 2003 to 2008 era.

Something for policy makers to address.
Asset - based compensation tends to do what?
Cause the players to bid up same. How many times do we have to see the same videotape? Asset inflation, Asset bubble, positive skewness - the tendency for asset prices to rise over time - call it what you will…

Example: Short sellers potential gains END when the asset price hits zero; on the long side, upside - is unlimited; limited only by the amount of dollars that inundates an asset; whether by deposit of cash, collateral or borrowed money.

Almost forgot – to include – those newly printed US dollars – whose counting? More importantly what potential whipsaws in the capital / asset markets will they cause in the near and distant future?

And in repeat fashion – is the US Treasury and Fed creating a future asset – based compensation bubble? Increasingly dislocated from that which we know – structural overcapacity in most industries, soul-crushing jobs in same cloaked in career ladders and perhaps to the detriment of emerging labor markets both here in the US and abroad to the detriment of countries whose competitive advantage may lie in its youth?

What is the real promise of America, and more importantly the message America is sending to the rest of the world and its future generations?

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