Tuesday, March 17, 2009

Bonus Armies

The Lesson From Two Depressions: Some People Matter More Than Others... Or at Least Their Bonuses Do...

A.I.G. plans to let their $78 million sponsorship of Manchester United, which includes jersey-naming rights, expire in 2010.

First, let me stipulate that I actually received a bonus from my employer this year. That's really saying something, because not many people did.

I concede that it may have been obnoxious for me to have gotten a bonus when some other people on my team were being laid off, but that's the way corporations work these days. They operate on Darwinian principles that let the devil take the hindmost. Those already being rewarded the most get rewarded with more, and those appreciated the least get shown the door. If I stick with them, though, it's only a matter of time before they eventually whack me too. There are fewer and fewer people left on the rungs of the ladder below me to get devoured.

In any case, my employer still made money last year, and they didn't take any TARP money from the federal government. I'm sure I don't have to remind everyone what's been going on this week with insurance giant A.I.G.
AIG has received $170 billion in taxpayer bailouts and in the fourth quarter of 2008 posted a loss of $61.7 billion, the greatest ever for any corporation. Despite this, AIG announced that they were paying out $165 million in executive bonuses out of taxpayer funds. Total bonuses for the financial unit could reach $450 million and bonuses for the entire company could reach $1.2 billion. This quickly led to what many label a "populist outrage."
Populist outrage... That may be putting it very mildy.

This is truly an amazing thing. After the first A.I.G. bailout, we all heard the stories about the executive junket to a California spa, which was even mentioned in the presidential debates. There have been at least two other additional A.I.G. bailouts, one of them coming after they lost nearly $62 billion in the 4th quarter of 2008, the worst quarterly loss ever reported by a corporation in the history of the world. Nevetheless, more reports trickle out about paid executive hunting trips to England and a trip to a resort in Phoenix. English bloodsports, eh? They ought to consider substituting some of those executives for the foxes.

I'm kidding, of course...

They say that Congress can't do anything about these bonuses because they are written into legal contracts. My understanding is that six of the recipients will be getting over $1 million, and that most of the 370 or so recipients are in the financial unit that actually tanked the company.

What I want to know is, where can I get in on a deal like that? I bet I could run a company into the ground just as well as one of these guys. Heck, I bet I could do it much faster and with more finality. Man, these executives with their parachutes and "pay-for-performance" deals that translate into "heads I win, tails you lose" are really something, aren't they? They sure take good care of each other. What kind of a contract allows you to pull a guaranteed bonus even when you post up the worst losses in corporate history? Would these bonuses have been paid out "contractually" if A.I.G. had actually gone out of business? As a taxpayer and an "owner" of A.I.G., I object to all this.

We've often heard this current economic crisis being compared to the Great Depression of the 1930s. Most commentators think it won't get that bad. I'm not so sure of that. Both collapses had more to do with the collapse of credit markets than with the collapse of the stock market. The credit markets are still a mess, despite all the money that has been poured into them... Furthermore, in the 1930s we still had the infrastructure for the world's strongest industrial economy, despite everything else. We still used to make things in this county back then. We also had a population that wasn't very affluent to begin with, and had a greater sense of solidarity. Most people were already used to dealing with hardship, and they knew how to stick together and help each other out.

Speaking of the bonuses and of the 1930s reminds me of...

The Bonus Army, 1932

After World War I, the federal government promised returning veterans that a grateful nation would pay $1,000 bonuses to their families, either in 1945, or upon the death of the veteran in question.

By 1932, the Depression had reached its greatest depths, and desperate WWI vets started asking the government to pay out those bonuses now rather than later. Congressman Wright Patman of Texas introduced a bill to Congress to that effect. In the meantime, vets started pouring into Washington DC in order to let their voices be heard. They set up a sort of squatters' village encampment near the Capitol.

The bill passed the House but was defeated in the Senate. The "Bonus Army" refused to pack up and leave. A nervous Herbert Hoover began to fear a potential revolution. He wanted the Bonus Army dispersed... In one of this country's most shameful episodes, the Army chief of staff, General Douglas MacArthur, donned his decorated uniform and showed up on horseback, leading his troops to push the veterans out by bayonet-point and to burn the shacks and tents in the encampment.

The late David Halberstam took up the story in his book The Coldest Winter:

At a meeting with top civilian and military advisors, including MacArthur, the Bonus Army leaders asked for permission, if the Army were to enter their little encampment, to march out in proper formation and with some measure of dignity. "Yes, my friend, of course!" MacArthur answered...

The orders to end the protest came down from Hoover himself. Dwight D. Eisenhower (MacArthur's aide), not wanting the Army too closely associated with what was sure to be, even if carried out skillfully, an odious political act, tried to keep MacArthur somewhat in the background...

Eisenhower was appalled when he realized that MacArthur intended to show up on location to lead the forces of suppression personally. Both he and MacArthur had arrived at their offices that morning in civvies. MacArthur promptly sent Eisenhower home to get his uniform and dispatched his own orderly to his quarters to get his - the one with all the decorations. Eisenhower argued valiantly that this would be a mistake, that a terrible stench would arise from it ("I told that dumb son of a bitch he had no business going down there. I told him it was no place for a chief of staff," he later said). The chief of staff, who often spoke of himself in the third person, replied, "MacArthur has decided to go into active command in the field." Then he added, "Incipient revolution is in the air." Eisenhower suggested that if both of them had to visit the scene, they should at least do so out of uniform. MacArthur vetoed the suggestion.

So off they went in full uniform to meet the Bonus army. Their orders from the secretary of the Army were quite specific. Hoover wanted the marchers tamed, but he wanted no riot. The suppression of the protest should be as restrained as possible. The Army troops were not to cross the river or go near the largest encampment of veterans, on the other side of the river. Eisenhower later recounted how he had told MacArthur that there was a messenger there with specific orders from the president. "I don't want to hear them and I don't want to see them. Get him away," MacArthur answered. He had decided that if he did not receive them, there would be no need to act on them, and thus no limits set to his movements. The river would be crossed, the encampment destroyed...

It was a devastating political moment for Hoover...

For millions of ordinary Americans, who in hard times sympathized with the marchers, it was a defining moment; MacArthur became forever in their minds the kind of military man who abused the rights of ordinary people, a man who was never to be trusted politically and was too militaristic...

He had made himself, however, the favorite general of a formidable, increasingly frustrated constituency that resented almost every initiative taken during the New Deal.

This was three months before the 1932 elections. Hoover was finished.

What do these bonus stories have to do with each other? In the midst of both these crises we can see that some people just seem to matter more than others. The government in 1932 wasn't able to deliver a bonus to alleviate the suffering of veterans, and it appears that the government in 2009 may not be able to stop the bonuses of the wealthy and powerful while others suffer as a result of their decisions.


crystal said...

I really have to learn more about economics. It hasn't affected me much - I have no job to lose, no bonus to not get, no stocks to tank, etc. I worry about my sister losing her job, though. Is this not as it's always been, - corporations using the lower cogs as cannon fodder and grotesquely over-rewarding those at the top? Maybe it's just that, with the economy so bad, middle class people are finally being affected?

Jeff said...


Is this not as it's always been, - corporations using the lower cogs as cannon fodder and grotesquely over-rewarding those at the top? Maybe it's just that, with the economy so bad, middle class people are finally being affected?

I don't think it's always been like that. From the 1930s up until the 1980s it wasn't really like that, but with the Reagan Revolution, there was a shift back towards those robber baron days.

It's been a source of great frustration to me that the middle class has been blind to the fact that it has been in the process of being squeezed and shrinkened. A society without a middle class, which is polarized between rich and poor, becomes a violently ugly and unfree society. That's why I post so much on economic matters. With the economic crisis underway, though, more people are finally starting to see this for themselves.

crystal said...

I don't really understand it all. Sometimes my sister talks about what it was like when she lived in Japan, where job security is almost total but where the employees have to work so hard that there's actually a word for death by overwork - Karōshi

Deacon Denny said...

Jeff --

What a thoroughly educational post. I'm not sure how you found all this, but I had never heard about the "BONUS ARMY" before.

I'm not surprised about MacArthur and Eisenhower's respective positions on this, though.

I share your sentiment about the middle class since the '80s. Where in the world were they/we? In those days our family was living in the Seattle Catholic Worker house, and found an incredible apathy about these basic, bread-and-butter, economic issues.

Don't know where it's all heading. For me, the saving grace is that I already know how to live on very little.

Jeff said...


A lot of things might eventually contribute to taking me down, but I doubt that overwork will be one of them.


For me, the saving grace is that I already know how to live on very little.

I hear you. There's nothing like an old dented-up Honda, like the one you drive. :-)

cowboyangel said...

Great post, Jeff.

I knew very little about the Bonus Army, and nothing about MacArthur and Eisenhower's involvement. (This wasn't too long after Eisenhower, Patton and Pershing were chasing Pancho Villa in the mountains of Northern Mexico . . . without success.)

Yeah, what a time we live in. The most amazing to me is that many financial people are angry at everyone else for criticizing them. They can get incredibly snippy at people questioning them. I actually think they're more out of touch with most of our reality than politicians are. They just live in another world.

I love the protests at the homes of AIG execs. I don't want to see any physical harm come to them, but buy do I enjoy watching them squirm a little. Not the healthiest or most Christ-like attitude on my part, but, well....

Jeff said...


I know what you mean. Like this guy, feeling sorry for himself...

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down...

So what am I to do? There’s no easy answer. I know that because of hard work 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. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. 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 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

So he's going to donate most of it... OK, good. Still, the petulance gets to me.

How many years has he been pulling 700K bonuses on top of a handsome salary? Working for $1 a year to set things right after his company contributed so much to tanking the world's economy is practically the least he could do. If AIG had gone down, his fault or not, he'd have gotten nothing.

Unlike AIG, my company is profitable, but I see high-performing people losing their jobs all the time for no other reason that they can be replaced by somebody cheaper in India.

The guys like him on Wall Street have been loving that and eating it up for years.

cowboyangel said...


I enjoyed the post on Walking on the Road to Emmaus, but was unable to comment there for some reason.

Hope you're well.

Jeff said...

Hi William,

I'm just thinking it might be time to wrap this thing up, that's all.