The logic behind the AIG bonuses perplexes most people. We've gone from wondering who would give out these rich rewards to asking who is brazen enough to take one for imperiling the world economy.
Barney Frank and Andrew Cuomo have issued or threatened subpoenas that could help name (and therefore, presumably, shame) recipients from AIG's financial products division. That's the great mystery of the bonus fiasco: Don't the recipients feel any sense of responsibility?
Here I think I can offer a tiny bit of enlightenment. By a strange quirk of fate, I live in a waterfront suburb of Manhattan popular with the middling level of the financial elite, the kinds of people who get $1 million bonuses—and feel very entitled to them.
The worst trick of the credit bubble, a trick made crueler by the bubble's long life, was to convince so many that the money they made was more than an opportunity—it was a benediction. Not that a lot of my neighbors have been feeling so blessed lately. For the financial community, the crisis is entering its third year. It's becoming clearer that our way of life is changing irrevocably, and there's more than a little antagonism about who's to blame.
There's a civil war raging out here. It's not a class war in the traditional sense. It is a conflict between the haves and the used-to-haves.
One side of our town is filled with the shock troops of the overleveraged economy. These are the people most upset about Obama's $500,000 salary cap. They are Goldman guys and MorganStanley folks, hedge funders who levered up, investment bankers who packaged aircraft leases, and private-equity guys who rolled up insurance companies.
From their perspective, the boom was a well-deserved reward for their years of dogged apprenticeship. A decade on the 5:55 a.m. train to Manhattan is enough to convince anyone that they're deserving of seven-figure compensation.
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Let's not leave out all the lawyers who serviced these transactions. (One woman I know addressed her husband loudly at a cocktail party as Mr. World's-Leading-Expert-on-Credit-Default-Swaps. The scorn in her voice was playful ... or was it?) Nor should we overlook the run-of-the-mill banking executives and traders of every flavor who tromp up and down the streets of our hamlet. These lives on Wall Street are a long slog through a dark tunnel. Many are looking up now only to see the far-off light flickering out, not because they never made money but because the money was never enough to cover all of the necessary expenses.
During the boom years, it was a nonstop party among the financial set. Bigger houses, nicer cars, fancier boats, more exotic vacations—they had it all. Nannies drove Mercedes to pick up the kids, and mothers went from yoga studios to gyms they built in their converted garages. Families got bigger. Four kids became the new three; five and even six kids were not unheard of. Everyone got used to seeing thirtysomethings buying trophy homes on the water.
On the other side of the intra-town divide, there are ordinary upper-middle-class families. People with good jobs and decent earning power but not eat-what-you kill bonuses. They watched as their neighbors tore down charming old homes and built new ones out to the zoning limits. In between are the formerly glorified who worry about their future prospects.
I know an investment banker who was recently and unexpectedly laid off. He admitted to me one night over beers: "You know when they say that there has been a misallocation of talent into finance and the industry just can't support that many jobs without leverage? I guess that's me."
So here we sit in the aftermath of the great credit collapse, staring blankly at one another, wondering what it all means. As the significance of it all sinks in, the bitterness is growing.
I know a guy who lives in a waterfront home with a beautiful view of the harbor. He's not working, but it's OK. The gossip says that he made a big bet against subprime mortgages (after having packaged and sold them for years). Too bad his neighbors on the waterfront weren't so lucky.
I was in the middle of that same harbor last summer on a friend's powerboat with a group having cocktails. Our host, a lawyer, was angry because he had much of his retirement money locked up in auction-rate securities.
"The scum who sold me them," he said, pointing to a modern house with too many windows, "lives right there."
"Well, used to live there," he said with gleeful malice. "You know, it's amazing how many of these trophy homes were bought by people who just didn't have the money."
Some of the buyers did have money, but now they don't. My daughter has a school friend who lives in a very big house that was just renovated. Last August, the mother was complaining that she'd begged her husband to sell some of their stock to pay the contractors. Their net worth was tied up in his bank's shares. It was hard to sell because the stock price was considerably below the $60 everyone at the firm felt it was worth. The stock was $45. Then it was $20. Now it's around $2.
The mother recently told someone else that she was grateful they finally cashed out on the way down because they at least ended up with the house.
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And there are families here who lost more—everything, in fact—in the Bear Stearns and Lehman debacles. No doubt they cling to the horrible feeling that some of the traders whose aggressive shorting undermined their firms belong to the same church that they do. So much for brotherly love.
For the bonus class, the work-hard-play-hard mentality was a badge of success. It began with the scrum to get into the best schools, the best grad programs, the best firms and ended with the push to be the best in one's community. Social and professional competition was a way of life.
Money is the one thing that gives this group a sense of solidarity. It's the admission ticket but also the defining factor of their identity. It's hard for someone to feel shame when admitting fault means resigning from their way of life.
Take away the bonuses, and the financial class has no safety net. Lose your job out here and you've got little margin for error. There's little social cohesion, too. We live our lives interdependently. Someone might give you business opportunity, but no one can carry you. No one expects to be carried. Affluent towns are not communities; they're clubs. If you cannot pay the dues, you have to resign.
Even if you do feel a sense of shame, whom are you going to make amends to? The counter-party already cleaned you out. Do you apologize to your investors or feel angry that their endless demand for greater returns forced you to take bigger risks?
Not everyone out here has lost something in the crash. I know a guy who is crowing because he feels the finance types always made him feel bad about his job as a media executive. You might think of him as one of the never-hads. The boom seemed to pass him by; now he's hoping the bust doesn't take him down, too. Until it does, there's a lingering sense of wonder, not to mention resentment.
The other day I dropped my kid at a friend's house. As my daughter raced inside, I chatted briefly in the driveway with the other father. We both turned to look at the house next door that was being dismantled for an expansion. I raised an eyebrow to see such work in the midst of the economic crisis. Our community has been hit hard—very hard—by the collapse of the banking system and the earthquake still reverberating through the hedge-fund world.
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"Math geek," the other father said in reply to my wordless question. "He made a lot of money writing formulas for CDOs and swaps."
"Ah," was all I could muster.
But as he turned and walked into his house the other dad couldn't hold back his own final judgment: "Jerk."