Ruth Marcus, among too many others, informed us that we have little choice to shower a financial division responsible for losing a billion dollars a week, because their incompetence was of a nature that only the incompetents itself can fix it -- after all, where are you going to find people who know anything about finance in a booming economy with such a tight labor market? They're almost as indispensable as people who write third-rate center-right op-eds for prominent newspapers. (Skilled autoworkers, to hell with them, if they don't like having their negotiated contracts changed after the fact and their health benefits stripped, too bad!) Absent from her argument, however, is any actual evidence that only the actual arsonists know how to put out the fire. Simon Johnson and James Kwak, conversely, are more properly skeptical about such self-serving and implausible claims:
A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they're needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.
There is no reason to believe this.
[...]
The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don't need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.
If A.I.G. wants to argue that complex transactions, hedging positions and counterparty relationships require employees who are intimately familiar with those trades, it should at least provide evidence that the arguments for doing so are sounder than the ones made in Indonesia in 1997, when leading bank-owning conglomerates claimed that only they understood their financing arrangements, which certainly were complex. Or the Russian bankers in 1998 who were convinced that only they and their friends could possibly close the deals that they had taken on. We heard variants of the same idea in Poland in 1990, Ukraine in 1994 (and in the Ukrainian crises subsequently), and Argentina in 2002.
In most industries, it would go without saying that getting rid of people who repeatedly screw up is the first step to avoiding screw-ups. If you believe that this doesn't apply to the financial sector, it seems pretty obvious that the burden of proof is on you to justify it.
--Scott Lemieux
