A Theory of Executive Suite Relativity

People are understandably annoyed at AIG. Their conversion of bailout money into a personal windfall was ... surprising. Guest poster Mark Schwartz (our first!) argues that we can't understand the behavior of AIG executives because they inhabit a different reality.
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The past several decades have seen a massive transfer of wealth from shareholders and rank and file employees to senior level executives. This shift has placed normal people and corporate managers in parallel realities. Like the Bourbons at Versailles, executives seem incapable of understanding what the little people are so exercised about. This problem didn’t start with AIG, or even the financial sector generally. By creating an expectation of kleptocrat-level compensation, the twin instrumentalities of bonuses and stock options shifted the frame of reference in the executive suite. Stock options were supposed to be the ultimate way to tie performance to compensation, but when performance lagged, ways were found (backdating, resets) to make sure pay did not.

So these days, when a company files for bankruptcy, immediately after voiding union contracts, executives award themselves retention bonuses. Retention bonuses for the structured finance group at AIG? When Nick Leeson lost seven billion dollars of Barings' money he got no bonus. He got prosecuted.

Adding further fuel to the fire, senior government regulators either grew up within this system or are so besotted by the larger-than-life folks they are supposed to regulate that they also seem unable to understand how this plays to the public. It is not that government officials knew about these AIG bonuses but rather, that they were caught off guard by the visceral fury of the American public. How, other than by drinking the Kool-Aid themselves, could they be surprised?

So far, Obama's appointees (And I like him very much) don’t seem to be breaking the pattern. Was Mary Shapiro's tenure at FINRA so stellar that she should head the SEC? Why not Andrew Cuomo? The only one I trust is Sheila Bair. She at least has her heart in the right place.