A.I.G. Planning Huge Bonuses After $170 Billion Bailout

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From this morning’s NYTimes.

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

So, let me get this straight: the contract which must be honoured is such that it rewards employees for running the firm into the ground? At this point you really begin to wonder if the people who created this system ought to be sectioned under the Mental health Acts.

Madoff’s ‘victims’: what were they thinking?

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Answer: they weren’t. Joe Nocera has a fascinating piece in the New York Times about the Madoff hearing — and the reactions of the people who entrusted their fortunes to his Ponzi scheme.

Judge Denny Chin had made clear that he was not going to allow the Madoff guilty plea to turn into a Wailing Wall for the victims, so most of them stayed away. Though Judge Chin allowed them to speak, he insisted they stick to the issue before the court: whether he should accept Mr. Madoff’s guilty plea. One woman argued that the judge should not and force a trial instead, for the “opportunity to find out where the money is.” But of course there is no money — certainly nothing close to the supposed $60 billion plus he was “investing.” That is the whole point of a Ponzi scheme: the fraudster uses money coming in from new investors to pay old investors, pretending that that is their gain.

Afterward, the TV cameras surrounded a woman named Sharon Lissauer. She had not been wealthy, she said, but she’s lost everything. She didn’t know what she was going to do. She was weeping. It was hard not to feel sad for her — indeed, for all the victims of Mr. Madoff’s evil-doing. But one also has to wonder: what were they thinking?

At a panel a month ago, put together by Portfolio magazine, Mr. Wiesel expressed, better than I’ve ever heard it, why people gave Mr. Madoff their money. “I remember that it was a myth that he created around him,” Mr. Wiesel said, “that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand.” Mr. Wiesel added: “He gave the impression that maybe 100 people belonged to the club. Now we know thousands of them were cheated by him.”

Nocera’s central question — what were these people thinking when they put all their eggs in the Madoff basket? — is just the latest reminder of the extent to which we are not rational creatures. I’ve never owned shares personally, but even I know that one should spread one’s risk. As Nocera puts it, “Diversification has many virtues; one of them is that you won’t lose everything if one of your money managers turns out to be a crook.” Many of Madoff’s eager victims had plenty of money, but most seem to have sought no professional advice before handing over the dosh. This kind of behaviour was, said one fund manager who interviewed Madoff years ago and concluded he was fishy, “like trying to do your own dentistry. It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.” Nocera goes on to say:

And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.

Never waste a good crisis

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Simon Caulkin has an interesting column reflecting on an academic conference he’s been to in which people tried to extract the lessons of the financial crisis. One conclusion: the worship of “shareholder value” was one driver of the catastrophe.

Other workshop participants were quick to extend the diagnosis from the banks to publicly quoted companies in general. If – as it is now becoming permissible to suggest – shareholder value is indeed the problem, then, as Einstein said, “the significant problems that we face cannot be solved at the level of thinking we were at when we created them”. A wholesale recasting of today’s unfit-for-purpose corporate governance becomes another urgently necessary response. In short, we are a very long way from business as usual.

Of course some people argue that the situation is now so bad that preventing a future crisis takes a distant, second place to getting things moving again. One inhabitant of the real economy feared that the squeeze would suck so much life out of companies like his that we wouldn’t even care about the possibility of another bubble.

Assuming it doesn’t go that far, the dilemma is poignant. The softer the landing, the more the government will be tempted to shore up the crumbling orthodoxy, making another crisis certain. The worse the depression, the better the chances that Whitehall can be pressurised into a fundamental rethink. Neither prospect is a cheerful one. But as the Obama team keeps repeating: “Never waste a good crisis.”

Rash predictions and cloud computing

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This morning’s Observer column.

So what about [Tom] Watson’s prediction of the world market for [five] computers? Once again, there’s no convincing evidence he ever said it. According to Wikipedia, the earliest known citation is in the email signature of a Usenet member in 1986, which simply says “remark attributed to Thomas J Watson (chairman of the board of International Business Machines), 1943” – not exactly an impeccable source.

Nevertheless, Watson was on many people’s minds this week, after a talk given in San Francisco by Rick Rashid, the computer scientist who now heads Microsoft’s formidable research division. According to the Financial Times reporter who broke the story, Rashid said that “around 20 per cent of all the servers sold around the world each year are now being bought by a small handful of internet companies – he named Microsoft, Google, Yahoo and Amazon”.

If true, that’s an amazing statistic, and one that suggests we are well on the way to the kind of world supposedly envisaged by Watson.

Newspapers and Thinking the Unthinkable

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If you’re interested in journalism and its future in a digital age, then read this essay by Clay Shirky. It’s the most eloquent, succinct and compelling statement of the problem that we’ve had to date. Snippets:

Revolutions create a curious inversion of perception. In ordinary times, people who do no more than describe the world around them are seen as pragmatists, while those who imagine fabulous alternative futures are viewed as radicals. The last couple of decades haven’t been ordinary, however. Inside the papers, the pragmatists were the ones simply pointing out that the real world was looking increasingly like the unthinkable scenario. These people were treated as if they were barking mad. Meanwhile the people spinning visions of popular walled gardens and enthusiastic micropayment adoption, visions unsupported by reality, were regarded not as charlatans but saviors.

When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse. This shunting aside of the realists in favor of the fabulists has different effects on different industries at different times. One of the effects on the newspapers is that many of its most passionate defenders are unable, even now, to plan for a world in which the industry they knew is visibly going away.

[…]

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given novelty isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing. (Luther and the Church both insisted, for years, that whatever else happened, no one was talking about a schism.) Ancient social bargains, once disrupted, can neither be mended nor quickly replaced, since any such bargain takes decades to solidify.

And so it is today. When someone demands to be told how we can replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

[…]

Print media does much of society’s heavy journalistic lifting, from flooding the zone — covering every angle of a huge story — to the daily grind of attending the City Council meeting, just in case. This coverage creates benefits even for people who aren’t newspaper readers, because the work of print journalists is used by everyone from politicians to talk radio hosts to bloggers. The newspaper people often note that newspapers benefit society as a whole. This is true, but irrelevant to the problem at hand; “You’re gonna miss us when we’re gone!” has never been much of a business model. So who covers all that news if some significant fraction of the currently employed newspaper people lose their jobs?

I don’t know. Nobody knows. We’re collectively living through 1500, when it’s easier to see what’s broken than what will replace it. The internet turns 40 this fall. Access by the general public is less than half that age. Web use, as a normal part of life for a majority of the developed world, is less than half that age. We just got here. Even the revolutionaries can’t predict what will happen.

Thanks to Jeff Jarvis for the link.

How Ethernet got its name

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Fascinating piece in The Register.

Ethernet was born on May 22, 1973. Or at least the name was. Metcalfe and his networking “Bobbsey Twin” David Boggs coined the term in a PARC memo circulated that spring day. Before that, they called it the Alto Aloha network, after PARC’s Mac-spawning experimental PC and the Alohanet, a University of Hawaii wireless network that served as a primary influence.

Before its existence was summarily disproven by American physicists Albert Michelson and Edward Morley in the late 1800s, the science world assumed that light traveled through an unseen medium known as the “luminiferous ether.” The first networked Altos were nicknamed Michelson and Morley.

“The whole concept of an omnipresent, completely passive-medium for the propagation of magnetic waves didn’t exist. It was fictional,” Metcalfe tells us. “But when David and I were building this thing at PARC, we planned to run a cable up and down every corridor to actually create an omnipresent, completely-passive medium for the propagation of electromagnetic waves. In this case, data packets.”

The Public Domain

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Last night I went to the Royal Society of Arts (of which I am, ahem, a Fellow, don’t you know) for James Boyle’s lecture.

I’ve been reading his book which — as the event Chairman, Bill Thompson (left in photograph), observed — is beautifully written (unlike some other treatises on intellectual property that I could name). Perusing the list of attendees beforehand (it was a full house), James noted that it was dominated not by IP lawyers but by techies and ‘creative industry’ types, and wisely decided to go into storytelling rather than law-professor mode. The result: a riveting and thought-provoking event.

BillT is right: The Public Domain is a lovely book, gracefully written and persuasive. Its central themes are:

  • For the last 50 years we’ve been expanding intellectual property rights in ways that are unwise
  • In the process we’ve been reducing (indeed enclosing) the public domain at a time when that domain is becoming increasingly important for our cultural and economic wellbeing
  • We’ve got the balance between IPRs and the public domain wrong
  • All of this has happened largely because — almost uniquely in legislative processes — policymaking on IP matters takes place in an evidence-free zone

    • Boyle thinks that we need a movement (analogous to the environment movement) to protect and reverse the enclosure of the public domain.

    Like me, JB is a great admirer of Macaulay. (Unlike me, he sometimes writes like him too.) The book has some lovely quotes from Mac’s speeches on copyright. He was particularly fierce against attempts to extend its term far beyond the death of the author — and particularly against the idea that literary legatees might choose to withdraw access to great works. Here he is, for example, on Boswell’s Life of Samuel Johnson.

    One of the most instructive, interesting and delightful works in our language is Boswell’s Life of Johnson. Now it is well known that Boswell’s eldest son considered this book, considered the whole relation of Boswell to Johnson, as a blot on the escutcheon of the family. He thought, not perhaps altogether without reason, that his father had exhibited himself in a ludicrous and degrading light. And thus he became so sore and irritable that at last he could not bear to hear The Life of Johnson mentioned. Suppose that the law had been who my honourable and learned friend wishes to make it. Suppose that the copyright of Boswell’s Life of Johnson had belonged, as well it might, during sixty years to Boswell’s eldest son. What would have been the consequence? An unadulterated copy of the finest biographical work in the world would have been as scarce as the first edition of Camden’s Britannia.

    Boyle argues that, in many respects, people like Thomas Jefferson and Macaulay got right to the heart of the matter. One couldn’t ask for a better refutation of the IP lobby’s arguments that extending IP rights incentivises authors (including dead ones) than this blast — again about Dr Johnson.

    Dr. Johnson died fifty-six years ago. If the law were what my honourable and learned friend wishes to make it, somebody would now have the monopoly of Dr. Johnson’s works… Now, would the knowledge that this copyright would exist in 1841 have been a source of gratification to Johnson? Would it have stimulated his exertions? Would it have once drawn him out of his bed before noon? Would it have once cheered him under a fit of the spleen? Would it have induced him to give us one more allegory, one more life of a poet, one more imitation of Juvenal? I firmly believe not. I firmly believe that a hundred years ago, when he was writing our debates for The Gentleman’s Magazine, he would very much rather have had twopence to buy a plate of shin of beef at a cook’s shop underground.

    Shameless plug: James Boyle is coming to Cambridge to give the first Arcadia Lecture at my college. Details here. All welcome.

    The Great Rewind

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    I was brooding about the (dire) state of the automobile industry, and thinking that however pragmatic a short-term rescue for GM & Co might be, it makes no long term sense to enable them to continue as they were. Why? Because that would just be to encourage them to continue making products that are no longer desireable or needed. (It’s strange how silly SUVs look now.)

    As usual, Mark Anderson has an interesting take on what’s going on.

    I would like to suggest a way of viewing today’s layoffs in a different light. It now appears that we have been living on borrowed money, literally, since about 2000. Whether you are looking at house pricing and the housing boom (and bust), or stocks, or commodities, or consumer items, it’s all basically true: the pricing of the last eight years was supported by too much personal (and corporate) debt. Alan Greenspan gets most of the credit in the U.S. side of this story, but that’s a different tale.

    In that sense, layoffs are not “bad.” Our society tried to live beyond its means, we invented fake ways of making fake money, all built on debt and fake financial structures. All of that now has to come down. The jobs we are “losing” never really existed, by and large. Rather, that level of employment, at least in the way those jobs were allocated, was itself, mostly, also fake.

    We are now rewinding back to 2000, like it or not, back to a time when borrowing was high but not exponentially approaching infiinity; when house prices were high in many places, but not doubling and tripling in short order; when stocks were expensive, but not hundreds of times earnings (and not fueled by borrowed fake money).

    Once we have done this rewind, down to what you might call a “value base,” a base level of employment justified by a normal (and now temporarily reduced) workload, we can allocate jobs, work hours, and money for salaries all over again, as a society. Guess what won’t happen? All the smartest kids in physics won’t end up on Wall Street. If they do, we’d better all move to some agrarian economy.

    I can only imagine how hard it is on families to live through this Rewind Period, but I also suspect that knowing it is a Rewind, rather than an Infinite Collapse, should be helpful. I hope it is.