Got Clawbacks? Thugz on the Bailout
Dear Secretary Geithner,
I’ve been out of touch. Sorry. I spent the last month on grand jury duty, putting Manhattan’s poor minorities behind bars. I needed a little time to recover.
As promised, this is the first in a series of friendly dispatches. Advice, if you will. Learned counsel. Wisdom from the streets (as opposed to “The Street,” where wisdom is scarce these days). Given that you can’t even control bonus payments to employees of a company (A.I.G.) that you own, how could anyone expect you to jump start the overall economy.
Your friendly consiglieres will be “The Thugz.” To learn more about them, you can visit previous Freakonomics posts, in which these self-described “avatars of the underground” watched a full season of HBO’s The Wire with me.
The Thugz were itching to take on the problem of executive compensation — specifically, what to do with leaders of firms who bring their companies to the brink of ruin (and, who then run crying to you for help).
Before I begin, I should tell you that I write this letter under protest. I expected a much different reaction from the Thugz to the compensation issue. I had hoped that my Afro/diasporic brethren would share my desire to nationalize, equalize, spread the wealth, tear down the hierarchies, and send the damn bourgeois pigs to jail where they belong.
But No! The Thugz would have none of that. And I probably should have known better. They are pro-capitalist down to their boxers.
In fact, they laughed when I said the government should prioritize the punishment of senior management. In the words of Shine, the elder statesman of the group, “You have to be real careful when you mess with folks at the top, because when the war is over, you’ll need these guys real quick. Ninety-nine percent of people just doing what they’re told — you couldn’t find half a brain among all of them. But the ones with the brains — don’t let them go.”
I was deeply upset by this comment. In fact, I thought A.I.G. Chairman Edward Liddy might have been communicating with Shine.
“You got to be kidding me,” I said to Shine, my blood boiling. “Have you been watching the news? These guys are the ones who created this mess. You don’t want them to hang?! Whatever happened to the law of the jungle? Whatever happened to letting people take the hit for their behavior? Isn’t that what your world is all about.”
Portis, 42 years old and with a six-year grand larceny prison sentence under his belt, answered for Shine. “There’s two kinds of brains you need to run a good business. Sometimes you need “Sleepy Heads.” You know, the ones who pick up the money from the crews; the ones who make sure everyone got ammo; the ones who just do their job, don’t cause no trouble. Then you need bona fide Killers. The Killers like watching you bleed to death while they are eating a plate of ham and collard greens. You understand?”
“What does that have to do with the financial situation?!” I asked, exasperated.
“See, by the time there’s a crisis, the Sleepy Heads are already gone. They’re the ones who keep the books, so they know where the money is, and they know when trouble starts. So they usually get out first. But at this point, in most of these companies, all you got left is the Killers. They’re the ones who like hanging around, who ain’t got no home life, who just love the blood, and the guts, who love the pain!”
“Again,” I interrupted, “what does that have to do–”
“Never lose your killers. Never let them go, because you’ll need them when things gets better. You can always get the Sleepy Heads back. They’re hiding under a rock anyway. But the Killers! Those folks are hard to find, so you got to give up the money. Pay the ones at the top, the one’s who like to smell blood. Let the Sleepy Heads go, but keep the Killers.”
This went on for some time, and, truth be told, I was ready to call it quits. I expected the Thugz to be firmly in the camp of the taxpayers, ready to support clawback provisions and creative tax schemes that might recoup taxpayer dollars. Instead, they toed the party line.
I should have expected this. I should have predicted that the Thugz’s backgrounds as senior executives would make them an interested party.
So kudos, Mr. Secretary. Your initial hunches seem to have support from “the streets.” The media reports of your failure to examine outstanding A.I.G. bonus contracts before handing over $170 billion were probably just a reflection of inadequate business acumen on the part of the reporters. Clearly you understood that the bonuses were needed to keep the executives happy, and that performance and bonuses have little to do with one another.
But don’t let your head get too big. Portis said that leaders in your position always make one mistake when they allow the Killers to receive compensation with minimal interference: “The real key to working with Killers is that you have to destroy one of them, just for show. Because as much as they like to see their enemies in pain, they love to see one of their own bleed even more. … If you want to keep them hungry, kill one of them just for fun.”
So, there you have it. In the interests of making capitalism work, who will you sacrifice, Mr. Secretary? A.I.G Chairman Liddy? Perhaps Mr. Thain. My South Asian brother, Mr. Pandit?
Act quick, because the lions might just be outside your door. (I’d watch that Summers guy closely, btw.)
Until next time, sweet dreams.