Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, March 17, 2009

AIG Bonus Outrage

I am still struck by AIG paying bonuses of $165m to high-level employees, including its financial traders, despite heavy losses. I work in an industry (law) that routinely awards bonuses to people, but they would never be given out if the company was in dire financial straits. Bonuses are structured as bonuses - rather than salary - precisely so that they can be adjusted at the will of the employer. There are exceptions. Some firms pay bonuses based mechanically on the number of hours a lawyer bills. Even in those cases, the bonuses remain inherently discretionary. At worst, the company could enact salary cuts after the bonus to recapture the bonus amount if the employee refuses to forego the bonus. AIG had a lot of options. It decided to pay the bonuses believing that it would lose "the best and the brightest" unless it did so. First of all, in this economy, where are they going? Second of all, they ain't the best and the brightest if AIG is hundreds of billions in the hole as a result of their poor investments. In any sane world, they would be laid off. AIG in fact laid off thousands of lower-level employees. They didn't get bonuses.

For those who don't know, AIG is in trouble not just because it bought mortgage-backed securities, but because it insured them against losses for firms like Goldman, Sachs. AIG grossly - I would say negligently or even fraudulently - undervalued the risk.

President Obama is right. The real problem is that the leaders of AIG lack fundamental values. They just don't understand that they screwed up badly and that it is fundamentally unfair to take any special reward, never mind their fellow citizens' money. Instead, the same greed that got them into this situation propels them to - let's not mince words - steal money from the rest of us.

This raises for me a larger question. Is this sort of thing an inevitable side effect of government intervention? Perhaps the best solution would have been either for (1) AIG to file for bankruptcy or (2) nationalization. Some GOP leaders insist the former (bankruptcy) was the best option, and they reject nationalization on ideological grounds. If you believe the case was made that an AIG failure would have serious and severe ripple effects - i.e., that it was really too big to fail - then perhaps the best answer would have been a government takeover rather than infusions of cash. What we see in AIG now is the result of separating control from ownership. The government - the real stakeholder - is cut out of decisionmaking, and the decisionmakers do not have their own money at stake. We saw similar bad things happen with the Savings and Loans in the 1980s. I think we can blame both the Bush administration's half-assed "bailout" approach and the Democrats weakness in failing to demand real control.

6 comments:

Raised By Republicans said...

The argument that really ticks me off is when AIG claims that if they don't pay these bonuses they will lose their most talented employees. Well, that certainly inspires confidence in the company! Seriously, these are precisely the executives that brought AIG to ruin. Are they really so valuable?

I've also heard AIG apologists on CNN say, "Have some sympathy with these people. The ones involved with these financial schemes have had their reputations ruined and are unlikely to get any comparable jobs in the futures. This is their last chance to earn this kind of money." This raises two questions: First, why should I care if these guys end up on welfare? Certainly there are people of higher character who have had worse financial success and suffered for it. Second, if they really are unemployable, then why should AIG bend over backwards to keep them? Cut their salaries and tell them to leave if they can.

Something AIG should consider. Every day, wise companies are busy insulating themselves, to the extent that they can, from AIG. If AIG were to go bankrupt now I suspect that the ripple effects would be somewhat dampened - although still great. I don't know if this is actually going on but if I were at AIG I would look into it before I assumed that just because the government couldn't afford to let my company go down in 2008 that the government will make the same decision in 2009 or 2010.

Raised By Republicans said...

I'll also add that I think LTG has a point about nationalization. If the government is going to pony up the cash, they should have a commensurate share of the decision making.

I would especially favor nationalization along the temporary lines adopted by the British government in their recent bank nationalizations. In those, the intent was never for the government to have a permanent presence in the banking sector but rather to reestablish the solvency of the banks in question then reprivatise them - hopefully at a profit.

Spotted Handfish said...

LTG is right that the underpricing of risk is the thing that caused this mess in the first place. I understand the benefit of underpricing risk to Moodys and the other rating agencies even though it goes against what they are supposed to do -- they were paid by the people who they were rating -- but where is the benefit for AIG given they are an insurer? I just read in the LA Times that 11 of the 73 people in AIG receiving $1 mill plus bonuses moved on anyway...

And where is the journalism? How can anyone let someone come out with as stupid an argument as they won't have the opportunity to make this money again? That's nearly as good as the claim on Fox the Obama is building a gulag for GOP supporters...

Raised By Republicans said...

SH, yes, I too am almost as outraged about the complete quality of journalism. I've post a few things about it in the past where I argued that it was due to the way we train journalists now (all the emphasis is on the presentation and process and none on substance - journalism majors are not required to have a side specialization in the same way that education majors who want to teach high school are). The result is journalists are either good writers who know very little about the subjects they are reporting on (or on TV - just good looking people who can't even write) or they are retired practitioners from the field being reported on which raises all kinds of conflicts of interest problems (James Carville and Karl Rove are a "journalists" now).

Jon Stewart recently had a rather well publicized confrontation with some of the people from CNBC (a 24 hour news network specializing in financial reporting). Stewart's core complaint was that this network has the potential to be an amazing source of information for average investors and instead they're just a bunch of snake oil salesmen pretending to give advice but really just waving their arms about and making noise.

Raised By Republicans said...

Typo: "complete quality of journalism" should be "complete lack of quality of journalism."

Pombat said...

Aaagghhh! They've gotten to you too!!! ;-p