The Misuse of Language in the Financial World

Michael Lewis of Bloomberg wrote in a recent commentary:

…when AIG itself pays out $165 million in bonuses -- money it is contractually obliged to pay -- the entire political system goes insane. President Barack Obama says he's going to find a way to abrogate the contracts and take the money back. A U.S. senator says that AIG employees should kill themselves.

He suggested that there is a loss of judgment in the absence of political backlash when the Federal government transferred 173 billion dollars to AIG that benefited the financiers on Wall Street: the likes of Goldman Sachs (GS) and the Deutche Bank (DB). The hysteria with the AIG bonuses is unjustified and constitutes an arbitrary nullification of a contract.

Lewis may be right. But like CDS, which is an insurance product that carries a misleading name to take on the guise of a financial product that does not require capital adequacy requirement for underwriting a risk, the “bonuses” should not have been called bonuses if they were a contractual payment independent of corporate performance. Bonuses are understood to be contingent on strong performance. The insolvency of the company would not have justified any bonuses, though any remuneration promise in the employment contract should of course be honored.

I have been baffled by the misuse of language in the financial world. This at least is part of the problem. There are Lehman “mini-bonds” that are not bonds; Credit Default Swaps are really insurance contracts; and we are now being told that bonuses are not really bonuses. Where does the misuse of language stop?

Comments

[Steven Hansen:]

your point is well taken. but i would bet that the AIG employment contracts use the word "bonus" to describe these payments.

Mar 29 05:20 AM

[notsosmart:]

its all ponzi & phony language & small & smaller print.thats what this country has turned into.lying,cheating,no ethics,no transparency,renegotiate the contract,quick buck,bottom line is the name of the game.ratings are all that count for the talking heads,reelection is all that counts for the pols.to hell with the country & its citizens.

Mar 29 11:56 AM

[OldNavySailor:]

Let us not forget the media propaganda transformation of "toxic" assets into "legacy" assets. Now it doesn't sound so bad.

Mar 29 01:15 PM

[carey_jim:]

This is a deep problem that has been with the human race from the beginning.

The classic modern treatment of the problem is by George Orwell who writes about it in 1984 and Animal Farm.

It goes back to the ancient world in the debate between Plato and the Sophists and resurfaces in the Middle Ages in the debates between the Nominalists and Realists.

It even shows up in China with a philosophical movement known as The School of Names.

We see Nominalism in the modern world in advertising, propaganda and religious beliefs. They all have their own 'correct speech' which correlates loosely (and sometimes not at all) with empirically observed reality.

I believe that, in the financial world, the blatant misuse of language that you describe derives its great force from religious and philosophical habits that are still influential in universities and churches such as the Catholic Church.

The basic, and very old, idea is that if you can control the way people use language, you can control people. This veneration of language and overestimation of its power is very old, and will not die quickly. Remember the myth of Buddha's shadow: It is said to have remained on the wall of the cave where he meditated, for a thousand years after he died!

Americans (America was founded by religious totalitarians such as John Winthrop) take words and descriptions of behavior very seriously and that is why the debate over such things as homosexuality -- is it a matter of 'choice' or are homosexuals 'born that way'? -- and socialism -- is socialism 'government regulation' or is it 'government ownership' -- are so heated:

You can always tell when you are dealing with Nominalists and their ideology-based discourse because, at some point in the argument, you will find yourself treated as a heretic or untouchable because you have uttered a 'third rail' word, or merely dared to point out the 'the emperor is wearing no clothes.'

Realists and materialists don't believe that words have any essential power over the direction of material events, except as vehicles for human control of other human beings, and they search for underlying forces at work in the world so that the course of events can be better understood and predicted.

When Giordano Bruno was burned at the stake by the Catholic Church for refusing to recant his belief that the earth moved around the sun, he screamed from the flames, 'Whatever you say, it moves!'

And, it still does.

Mar 29 02:37 PM

[BerkeleyBob:]

A very helpful and significant review. Not sure that AIG's transactions were in fact "insurance contracts" because they were intended and structured to avoid regulation, reserve requirements, and were apparently a vehicle for short-sellers who did not have an insurable interest in the underlying secured loans. I described AIG as "an unregulated off-shore bookie operation" which is cumbersome, but maybe accurate. ...

Mar 29 03:41 PM

[ebreen:]

It is not necessary to embed the misuse of language in a long philosophical history to understand the simple immediate problem...which is that most of the commentators and participants in the discussion are ignorant, or worse blind, with regard to the meaning of what they are talking about. It's a stupid discourse of the stupid leading the stupid.

Mar 30 09:24 AM