Monday, March 16, 2009

Economics: Of Bonuses and Human Nature

I love bonuses. As someone who tried working as hard and (hopefully) as intelligently as possible, I looked forward to my bonus at the end of the year. I used bonuses to either bolster my savings or to take a vacation. But I always realized that bonuses were a way of rewarding good performance, not a birthright.

Which is why I find the latest controversy about bonuses at American International Group (A.I.G) so interesting. The financial giant, stricken by huge losses, is planning to use US $ 165 million dollars of the U.S. government’s bail-out money to pay bonuses to traders in its financial products division. These bonuses, when awarded, will go to the very same people who got A.I.G. into this mess in the first place.

So what are the basic facts about the A.I.G. bonus controversy? The facts are as listed below:

1. A.I.G (specifically their financial products division) made billions of dollars of losses with bad bets on derivative financial instruments, including trading in mortgage backed securities.

2. A.I.G then went to the U.S. government with hat in hand, pleading for a bail-out. Six months ago the organization’s Chief Executive said that if A.I.G. collapsed, there was a real danger of the entire U.S. financial services industry collapsing. This was true.

3. Based on Point # 2 above, the Bush and then the Obama administration agreed to bail out A.I.G. The U.S. government then pumped in US $ 150 billion to keep A.I.G. alive. This gave the U.S. government 70% ownership of this once-mighty blue chip financial conglomerate, a beacon of American free enterprise.

4. A.I.G. came back recently and said they needed another US $ 30 billion, which the U.S. government, in principle agreed to provide. This additional infusion of money by the U.S. government meant that the U.S. government would own about 80% of A.I.G shares, effectively nationalizing the organization (though nobody wants to use that dreaded word)

5. Last week, A.I.G. said that they planned to use US $ 165 million of the bail-out money (about 1% of the total bail-out funds) to provide bonuses to employees in their financial products division.

When asked about the wisdom of providing such large sums of U.S. taxpayer money to the people who caused such huge losses at A.I.G. in the first place, an A.I.G. spokesman responded by saying that these bonuses had been “contractually agreed to” in 2008, before this disaster unfolded. The spokesman also said that if A.I.G. did not provide these bonuses to these selected employees, it would be detrimental to A.I.G “attracting and retaining the best and brightest talent”.

“Contractually agreed to”? Huh?? I always thought that bonuses are optional, in the sense that they are awarded to employees based on individual and organizational performance. Therefore, in good years when the organization turns in a healthy profit, deserving employees get a healthy bonus. In bad years, you do not get bonuses. When the organization in question makes a loss, it is supposed to either terminate the services of those employees who caused the losses, or at the very least, not give them bonuses. That is how capitalism and the private sector are supposed to work.

“Attracting and retaining the best and brightest”. Huh?? Are these A.I.G. derivatives traders the best and the brightest in the financial services industry? Remember, these are the same guys who put A.I.G. in this hole in the first place. If these guys were so bright, how come they caused this mess in the first place? They should consider themselves very, very lucky to still have jobs. If not receiving bonuses for their disastrous performance makes them leave their jobs, A.I.G. should consider itself lucky. America is in real trouble if these traders constitute the “best and brightest”. I am sure there are thousands of people within A.I.G. who do deserve a bonus. But not these guys!!

Does President Obama have the right to use the “bully pulpit” of the Oval Office to denounce A.I.G’s decision to give these bonuses to derivative traders? You bet! Remember, A.I.G. is now 80% government owned. The U.S. government is the majority shareholder in A.I.G. As head of the U.S. government, the President has every right to do everything in his power to prevent this bonus being paid. A.I.G. is now (to use an Indian term for a loss-making government-owned organization) a sick “Public Sector Unit”.

However, the President has been left red-faced; because it appears that no such pre-conditions were put in place before the governmental bail-out money was handed over to A.I.G.

Obama, and his administration, are definitely going to be slammed for not putting in stringent conditions in their bail-out package before actually handing over the money to A.I.G. in the first place. Two U.S. administrations rushed the bail-out package through, without providing for adequate checks and balances. The fact of the matter is – the U.S. government does not have any legal recourse when it comes to A.I.G. and the bonus issue. The President can rail, rant and thunder, but he cannot stop A.I.G from handing out these bonuses. He can sway public opinion against A.I.G. (which is what he is doing), he can pressurize A.I.G. to reconsider its decision, but he cannot actually stop A.I.G. from using taxpayer money for bonuses to those who caused this financial crisis.

Coming back to bonuses, I did not think that India’s Sixth Pay Commission payout to India’s (largely non-performing) Civil Service last year was a good idea. This bonus was given to our bureaucrats to help get their votes in the approaching General Election. It had nothing to do with their performance. They did not deserve the money, because collectively, they failed in their job – which was administering India. Like the traders at A.I.G’s financial products division, India’s bureaucrats and politicians believe that bonuses are a birthright, and not a reward for good performance.

To summarize, bonuses are optional, and not a birthright – and this should apply to both the private as well as public sectors of the economy. I am amazed that private sector companies can “contractually agree” to provide bonuses, even before the performance of employees can be assessed. I am also amazed at the cynical way in which politicians use bonuses and pay commissions to woo bureaucrats and buy their votes at election time. Unfortunately, that is how human nature and bonuses actually work.

Wednesday, March 11, 2009

U.S. Politics: The Role of the Press Secretary

I watch a great deal of the MSNBC news channel here in Vancouver. One of the highlights is the daily briefing of the press by the U.S. president’s Press Secretary. The current incumbent is a gentleman named Robert Gibbs.

Of course, I do not know Mr. Gibbs personally, but the more I see of him, the more respect I feel. This is not an easy job. The Press Secretary has to face a gaggle of knowledgeable, nit-picking journalists every single day. These journalists ask very pointed questions on a whole host of topics, usually involving interpretations of the President’s views on critical issues such as the Iraq War, the stock markets, the economy, healthcare, the budget, terrorism, proposed education reforms, etc. Watching Mr. Gibbs answer these questions is like watching a man navigate through a minefield. He has to ensure that he puts the right “spin” on Barack Obama’s comments. He also has to ensure that his own comments are not misinterpreted, and reflect exactly what the U.S. President wants to say, or would have wanted to say.

If the President says something that can be construed as being even remotely controversial, the Press Secretary has to defend his boss by ensuring that the statement is not misinterpreted. If the President says something that is plain inaccurate or wrong, he has to defend that as well. He also has to have a very good understanding of the issues being discussed, remain calm, and be able to think on his feet. At all times, he has to be able to keep his own opinions to himself, and only express what he thinks the President would have wanted to convey.

And he has to do all this on live television, in front of a bunch of journalists who more often than not, resemble a pack of hungry wolves, just waiting for a misstep or weakness on his part. Journalists in the U.S., like their counterparts elsewhere in the free world, always wait for the opportunity to take any statement, however innocuous it may seem, and make a screaming headline out of it. American television journalists appear to be as opportunistic as their Indian counterparts. They also seem to have the same breezy attitude towards the truth as our Indian television journalists. The focus is on getting viewer ratings, not getting to the truth.

The only difference I see between American journalists and their Indian counterparts is that the Americans actually allow the interviewee to complete a sentence without interrupting. Many Indian television journalists I see are more interested in getting their own point of view across, without even considering the opinion of the person they are purportedly interviewing. As a result, most interviews and debates on Indian television end up being shouting matches, and when you watch them, you are often left no wiser than before.

Coming back to the U.S. Press Secretary, this cannot be an easy job. Standing up in front of a bunch of intelligent, often hostile people who sometimes view you as potential prey, and that too on live television, must be extremely stressful. Yet Robert Gibbs always has time to listen to everyone’s questions. He is always patient and never seems to lose his sense of humour. He keeps the wolves in good humour too, by always being respectful to them, even though the reverse may not be true. And he has to do this live, every day. This is a tough job!

The daily press briefing does provide listeners with a lot of information. I could be wrong, but in India, our Prime Minister does not have a dedicated Press Secretary who faces the press every day. If we did, do you think it would work, in terms of clarifying what the Prime Minister did (and did not) say and mean?

Monday, March 2, 2009

India: A Pensioners’ Paradise?

As a young man, I lived in the U.S for nearly six years, and in many ways, Canada, where I am living currently, is not very different. There is a lot to be said for living in a “developed” country (I always found that term a little strange, but that is the term that is most frequently used to describe economically advanced countries). However, there is one aspect of living in “developed” countries that I find sad. That is the condition of the elderly.

There are few sights sadder than watching a lone old man or woman here in winter, struggling to wheel a loaded shopping trolley across a huge parking lot in sub-zero temperatures. Old people here are often lonely, with nobody to look after them or even have a conversation with. Living in “developed” countries is great as long as one is working and fit. Once a person becomes old, children more often than not move away and do not keep in touch with their parents often (I realize that this is increasingly the trend in urban, middle-class India as well). Older middle-class people in the U.S, Canada and elsewhere are often forced to live all alone in difficult conditions. Unless one is rich, one has to do everything oneself, and there are no maids, chauffeurs and other domestic help available. Again, this is fine when one is fit and healthy, but when a person gets old, this can become a problem. The lack of a support system is a real issue for the elderly in Western countries.

This is why I think India (or parts of the country anyway) would be a great pensioners’ paradise for older folks from Western nations. If I was about to retire, what would be the factors I would take into account when deciding on a place to settle down? In my mind, the factors to consider while choosing a location to retire in would be:

1. A secure, stable place with a low crime rate and high levels of political stability
2. Plenty of sunshine and mild, warm temperatures. Cold weather has greater adverse affects on older people
3. A place where the cost of living is low, and my retirement savings will allow me to have a comfortable life
4. A pleasant, quiet, scenic location surrounded by nature
5. The availability of good, inexpensive medical care
6. The availability of domestic help such as maids, chauffeurs, etc.
7. Good public transport
8. Good infrastructure in terms of uninterrupted water, electricity and civic services
9. A place where the English language is widely spoken and understood.

Many parts of India score high on most of the factors listed above, except for Point # 8 (good infrastructure in terms of uninterrupted water, electricity and civic services). Erratic electricity supply is a major stumbling block to our country’s growth.

However, there are many parts of India that meet most of the criteria I have listed above. Goa, Kerala, Uttarakhand and Himachal Pradesh come to mind. All of these places are very desirable places to live in.

Let me give you a personal anecdote. I used to know an old American guy who lived in the town of Almora, in the Indian Himalayan state of Uttarakhand. He was in his seventies when I met him, and divorced. He had worked in the U.S. financial services industry all his life, and had a Masters’ in Business Administration degree from Yale University. His daughter was married and lived in the U.S. They were not in touch often. Once I got to know him better, I asked him what made him come to a small Himalayan town to retire. He told me that the only other choice he had was to die in an old age home in New Jersey. He was alone, and felt that he still had a lot left to offer. He also had an interest in Buddhism. So he decided to chuck his life in the U.S., and move to Almora. He enjoyed life. He was an avid trekker. His dollar denominated retirement pension allowed him to have a very good standard of life in India. He died last year, and I am sure he never regretted his decision to move to India after retirement. He had ten years of an active, enjoyable life in Almora before he died in a hospital in Delhi.

In Europe, Spain is a very popular retirement destination for many people from the United Kingdom. It is cheaper to live in than Britain, and has much better weather. The Spanish government actively promotes Spain as a retirement destination, since British retirees bring in plenty of foreign exchange. Retirees, unlike immigrants, do not compete with locals for jobs, and you very rarely hear of seventy year old burglars or serial killers. These British retirees also create thousands of jobs in Spain, since they need locally based maids, drivers, doctors, nurses, financial advisors, real estate agents etc. Spain has many towns and “gated communities” that are full of British retirees.

There is no reason that parts of India cannot become a pensioners’ paradise. The places I mentioned above (Goa, Kerala, Uttarakhand and Himachal Pradesh) have great, mild, weather, are very scenic, safe and it is reasonably easy to get domestic help. These states also have reasonably large local English speaking populations. Medical facilities in these states are decent, and cities such as Mumbai and Delhi are easily accessible and less than two hours away by air. Most importantly, a pension of fifteen hundred pounds a month goes much further in Goa than it does in Britain.

If the Indian government actively promoted “pensioners’ tourism”, it would help in bring in law-abiding, prosperous retirees by the thousands, as well as millions of dollars and pounds in foreign exchange, apart from creating thousands of jobs. There would be a role for the private sector in providing hospitality and elder-care services. Of course, the government would have to do its bit in creating better quality infrastructure, specifically roads, water and electricity.

These are my opinions. What do you think?