AIG, Bonuses, Populism and Recovery

I've been quiet about the AIG bonus kerfuffle while the media and the Congress fan the flames of righteous indignation, mostly because I while I found the whole dustup moderately interesting, I really didn't see it growing to this level. Now that it has, I suppose it is time for me to weigh in.

First, I think the whole thing stinks. I think it is execrable that a company that is getting so much money from the Feds (well, not really--getting it and passing it along to the banks it insured), a symbol of all that has gone wrong with the financial sector--would be paying out hefty bonuses at this point in time. The politics of it stink, the optics stink, and the message it sends stinks. I wish this hadn't happened, I wish this weren't a story, and I wish we were spending more time talking about the $2 Trillion that is getting spent elsewhere than the $170 million going to these bonuses. I think the American people have a right to question this, I think they are right to be angry.

That said, I find the "remedies" all worse than the "illness". As has been reported, it was Senate Banking guru Chris Dodd who inserted the language that protected bonuses agreed upon before February 11, 2009. So not only do we have the contractual obligations of the corporation who agreed to the bonuses, but also the protection of legislation passed by the US Congress. Dodd's all of a sudden religion on this subject is inconsistent with his legislative actions.

Next, I come back to an argument I've made here before--that what is required to steer us out of this mess are smart, incentivized people doing the very best they can to unwind these complex derivatives in order to eventually eliminate the bad debt from the books of the banks and other lending institutions. That they are paid bonuses to do so seems perverse given that in some instances, it was the actions of these very same people who helped get us where we are. But at the end of the day, we really do need these people, their skills, their experience and their wisdom to get us through this. If the Congress goes ahead with boneheaded schemes like special taxes on the bonuses of executives of companies who take government money (I've seen as high as 100% of bonuses above $100K), they'll simply drive smart, hard-working people from jobs in companies that desperately need the help to others who are doing much better. As far as I can see, there's no upside in denuding these troubled institutions of the people who will help them through this period--except perhaps quieting an angry mob, one that will only get louder when the system does indeed collapse under the weight of its own incompetence. All the talk of the folks at AIG being replaceable by out of work investment bankers and financial types seriously and irresponsibly undervalues the specialization required in this industry. A psychiatrist is an MD, but you don't go to one for a hip replacement.

I do think though, that the industry has to be a lot more judicious in actually targeting people for bonuses who are meeting performance goals. Although I have no inside information, I would speculate that there were just a few more pigs at the AIG bonus trough than were warranted.

UPDATE: Not that it really matters, but it appears Ruth Marcus agrees with me.