MATERIALITY AND THE AIG BONUS PROBLEM

When I was reading about the AIG bonuses I was as outraged as anyone else. The first thing that came to my mind was “How could Geithner let them get away with this?” Then I stopped and thought about the days when I managed a half-billion dollar portfolio. Number in the thousands didn’t seem very significant. The problem arises from the fact that large numbers contain a lot of digits. Most people working with large numbers drop several digits due to what accountants call immateriality. For example: Most company financial statements have (000) written under the title of the individual financial statement and all of the numbers are in thousands of dollars. So, $1,985 is really $1,985,000. We’re talking millions of dollars, not thousands and hundreds of dollars get lost in the shuffle.
So, how did Mr. Geithner miss $250 million? It is easy to do when the bailout is in the billions. Simply, most of the numbers crossing Mr. Geithner’s desk were probably written in billions. The bailout package to AIG was probably written as $185 instead of $185,000,000,000. This means that the bonuses would have been written as $0.165. This is a number that looks insignificant in the overall scheme of things and could easily be missed. Especially by a person who is dealing with a national debt number in the trillions. Let’s face it, if all day long you’re seeing number like $9,654.4 which is the national debt, $0.165 looks like peanuts. That fact that the true numbers are $9,654,400,000,000 and $165,000,000 gets become obscured.
What is needed is to have people working with the Treasury Secretary and the Fed Chairman who understand that apparent small percentage numbers have a high impact when read as whole numbers. People in the rarefied air of Washington and New York do not realize that the AIG bonuses could eliminate the debt of many smaller cities and pay for the complete budgets of many school districts. I do not blame Mr. Geithner for missing the impact news of the Bonuses would have on the public. I do blame the loud mouthed critics who would have claimed that the Obama administration was destroying the capitalist system if the bonuses had been blocked. Once the bonus contracts were written, it became a lose-lose situation for the Obama team.