Wednesday, March 18, 2009

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.


Anonymous said...

If it is that easy for the government to trash the legal contracts that were agreed upon with these bankers, why doesn't it just do the same with the UAW in order to fix Detroit's mess.

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..... said...

I want to agree with you, but the argument that we need these same smart people - the ones that caused it - to help extricate us out of this morass does not make sense to me. I cannot think of any other example in private life where we ask the perpetrator of the wrong to provide the solution.

Ju said...

Breaking News: Dodd Says loophole that protects AIG Bonuses added per request of the Obama administration. The video is about a fifth of the way down.

Obama should take full and direct responsibility for this mess.

The Conservative Wahoo said...

Thairish--couple of things. AIG did get rid of a bunch of the folks who brought them down, so I can't be sure that the guilty are profiting. But I'm assuming some are.

I suppose I agree with you on your observation--but I wonder why it is relevant. I ask you--who should be doing this job? The folks who lost their jobs when their investment banks tanked? Folks off the street? You and me?

..... said...

I guess if you assume the nature of AIG's CDS transactions were vastly different and more complicated than any other firms', you'd be correct. I just don't assume that or find that in my research.

Smoothfur said...

Contracts mean something!Hypothetical case; I sign a contract with the Boston Red Sox with bonus clauses stating that i will get X million for hitting over 300. XX million for hitting over 40 home runs and xxx million for hitting over 130 RBIs. I do all of the above, but due to lousy trades the team finishes in last place and due to the bad team performance and bad economic conditions the team loses money. Does that mean that I should not be poaid my bonus'? Contracts mean something! Some may call this a simplistic example, but remember that this country was founded on a simple idea.

Dan said...

Why didn't Liddy tell Congress he was executing the law they passed, based on language they inserted? Though he may not have wanted to "bite the hand that fed him," instead, he got slapped by the hand that fed him.

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