Bob Vila is Tired of Getting Mugged

James Kwak has a great post about the AIG bonus money.  (The Baseline Scenario is one of my favorite econblogs...)  I'm not usually a fan of grandstanding and populist outrage winning out over pragmatism, but the AIG bonus situation is so outrageous that even I'm pissed off.

This year's bonus represents approximately 50 cents for every American.  That's not a lot of money...I just found two quarters the cats knocked off my desk, so clearly this isn't killing me. I think what is most offensive to me about the bonus money situation is that it took us (Americans, participants in our own financial system) such a blatant abuse to get our blood boiling. 

Apparently wall street doesn't just have to treat us like crap to piss us off, they have to do so after they completely trash the economy.

• If the economy is growing and wall street steals from us, we don't care.
• If the economy is growing, but wall street is stealing from us faster than the economy is growing, astoundingly we still don't care.
• Only if the economy crashes and burns hard and then they steal more from us do we get grumpy.

If there is a lesson for Wall Street CEOs and fund managers, it is this: take all you can during a boom - no one is paying any attention.

The problem is one of leverage.  $165 million is a lot for a small group of people.  But it is not much for the entire population of the US.  It's hard to say "I really want my 50 cents back"...it doesn't feel right.  And this is the problem with all of the ways that wall street takes our money: they take a little bit from us and it adds up to a lot for them.

Actually, it only seems like a little bit.  Consider one of my favorite rants: the lousy mutual funds that get passed off as savings vehicles for employee 401Ks.  If you are like my wife and get stuck with a lousy selection of 401K funds there's basically nothing you can do - don't use the 401K and you lose the tax incentive to save.

Consider the effect of a 1.1% expense ratio on your funds vs. a 0.1% expense ratio.  To make this simple, assume you invest $1000 in stocks when you turn 22, and then just leave it until you are 65.  What will your real (inflation-adjusted) result be when you retire?

If you invested in the cost-effective mutual fund, you have $11,763.22.  Not bad - for $1000 in principle you made $10,000 in returns!

But what about the 1.1% fund?  Should we be angry that the fund managers are syphoning off 1%?  1% doesn't sound like much.  But...in the same scenario, you end up with...

...$7,822.50.

Ouch.  33% of your returns are gone!  If you read a prospectus that said: we will take 33% of your retirement money, would you ever accept that?

So...perhaps we should be outraged about 1%.  Perhaps we should be outraged about $0.50. Because it starts to add up.  But more importantly, because the mindset that lets people syphon their 1%, their $0.50, is wrong and it's toxic.