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Misdirected anger towards AIG

March 16, 2009

Everyone is upset that AIG is paying bonuses.  Obama is talking about it. Larry Summers brought it up on the Sunday. shows. Fox News is complaining about it. And now Andrew Cuomo, Attorney General for New York, has ordered AIG to turn over the names of people getting the bonuses. Cuomo said “we owe it to the taxpayers to take every possible action to stop unwarranted bonus payments to those who caused the AIG meltdown in the first place.” Well Andrew, I can help you out there.

You’ll have to travel to Washington to find the folks who caused AIG’s meltdown. When you get to the District, ask for Mr. Frank and Mr. Dodd.

AIG’s meltdown was caused by the proliferation of mortgage-backed securities.  The banks, nervous about having to underwrite loans for people who couldn’t pay for the loans, sought insurance for the pooled mortgages. AIG, figuring the mortgages were backed by Freddie and Fannie,  was perfectly willing to charge a hefty premium to insure mortgages that it figured were already backed by Uncle Sam.  The Credit Default Swap market, intended to spread risk, really heightened the risk. Then the bubble burst, and AIG took a bath.

Why should AIG executives, relying on the assurances of Fannie, Freddie, and the government, be the whipping boys here? Ahhh, but they’re getting bonuses with “our money”, right? I don’t see it that way at all. AIG still had plenty of its own money, money that was created by the executives that are getting these bonuses.  That’s what performance bonuses are all about. They company asked them to do a job, and these men did it, and deserve to be compensated as agreed.

Further, if we’d let AIG fail in the first place, then we wouldn’t have to concern ourselves with what some employees of some insurance company is earning. Do you really want the Attorney General to be able to decide whether or not you deserve YOUR bonus? I mean, your workplace has ties to the U.S. Government, doesn’t it? I can’t imagine the markets being happy about he prospect of Barney Frank being able to pull compensation information for any executive on Wall Street.

UPDATE: The NY Times has an excellent article filled with reasons to pay the bonuses, starting with “because they had a contract”. And then hopes that Cuomo will get and release the names of the employees anyway. Exit question – you’ve got an agreement with YOUR employer, who’s probably having a tough year. Shouldn’t you give some of those wages back?

UPDATE II: Want to know why these guys are worth such large bonuses? Wall St. Journal posted a white paper from Liddy to Geithner that sums it up pretty well. Some key provisions:

The guys to whom they’re paying $165 million in bonuses  were responsible for $2.7 TRILLION in business.

 These same guys are responsible for areas where a .1% change in their business climate could result in $700 million in losses for AIG. Losses of that size can happen every day.  So it’s a pretty high-pressure, high responsibility job.

 Under Connecticut law, employees could sue for DOUBLE the amount of the bonuses.

 Failure to pay the bonuses could be construed as a cross default, which would allow many of their partners in the credit default swaps at the root of the current economic mess to jump out, sticking AIG with billions in losses.

2 Comments leave one →
  1. Kevin Corcoran permalink
    March 17, 2009 4:02 pm

    Are you suggesting the chump change of 165 million for bonuses could NOT be paid by the company to the execs,with interest, after the crisis is over ,and the taxpayers are no longer involved? You know ,when AIG can once again put on their big boy pants and make their own money? Pay the execs over time.

    • lightduty permalink*
      March 18, 2009 4:00 pm

      No, I think they should be paid now. But if Congress is serious about recouping that money, they can recover it by just lowering the amount of the next truckload of money we send to AIG. Instead of giving them $30 bn, give them $29 bn.

      In the unlikely event that AIG doesn’t NEED another handout, well, these guys must have done a good job cleaning up the mess, so don’t worry about recouping it.

      Bottom line, to me – I’m not a fan of the government telling ANYbody “you’re not allowed to earn what your employer wants to pay you.”

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