« Betting your views, follow-up | Main | A market in something, every now and then »
A.I.G. bonuses
Outrage, outrage, blah, blah, blah, etc. Often I feel that some topics are too obvious to blog.
The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.
Here is a good post on why the bonuses should be paid.
Outrage, outrage, blah, blah, blah, etc.
Addendum: Vanya comments:
If you don't think a massive transfer of wealth from one segment of the population to a small elite based solely on political influence, not value creation, is an outrage then you're not much of a human being Tyler.
Posted by Tyler Cowen on March 17, 2009 at 08:26 AM in Current Affairs | Permalink
Comments
Will the SEC be getting paid this year? Will congress? Barry Obama? Outrage! Blah, blah, blah.
Posted by: josh at Mar 17, 2009 8:29:52 AM
Isn't this a good argument that we should call these bailouts "bankruptcies" in some sense? Why couldn't we let the firm touch BK, then step in to protect the vital counterparties, but let the BK judge(?) handle those questions?
Posted by: odograph at Mar 17, 2009 8:45:09 AM
On a related front, should we distinguish between counterparties who had CDS for insurance and those who had it for speculation?
Posted by: odograph at Mar 17, 2009 8:46:14 AM
Actually I would agree (tongue in cheek) with the bonus’s going away if they will hold the all government employees and elected officials to the same standard. On average the government employees are earning above average wages and getting perks that US the taxpayer are having support. Cut their salaries and perks to the same level they are demanding from business and it employee’s. It is about Fairness according to the ‘O’.
Posted by: Bil at Mar 17, 2009 8:49:08 AM
I think this is completely wrong-headed. There may be a problem with politicization, but that isn't the problem here. The problem is that manifestly undeserving people are being paid bonuses to which they may be legally entitled because we propped up AIG without taking them through bankruptcy or a close substitute.
I believe I know the arguments as to why that was not done, and I do not find them persuasive, because the alternative (what we have now) is worse.
You should only support these institutions AFTER bankruptcy, not before.
Posted by: matt wilbert at Mar 17, 2009 8:52:33 AM
Bil, it was actually the 'B' administration that decided not to let AIG hit BK, and probably mark down those bonuses. The 'O' is on the same page ... so far.
Posted by: odograph at Mar 17, 2009 8:53:38 AM
I thought bonuses were about rewarding talent for their oustanding performances. I guess I was wrong, legally wrong.
Posted by: Alex at Mar 17, 2009 8:54:54 AM
Given this post I see no point in following what you have to say any longer. Adios.
Posted by: Fred at Mar 17, 2009 8:59:29 AM
True nationalization would have have voided the bonus contracts and the bonuses would not have been paid.
This issue is an argument for true nationalization rather than half measures.
Posted by: dk at Mar 17, 2009 9:00:45 AM
All these comments, so soon in the morning. Outrage, outrage, blah, blah, blah, etc.!
Posted by: Tyler Cowen at Mar 17, 2009 9:08:48 AM
Yes, what a disaster politizising would be, now that the free market has showed us how fantastic it works. Wow, what an argument.
The day the banks/AIG turned to government for bailouts, THEY politizied everything. To suggest otherwise is baffling.
Also, on rewriting contracts. AIG wrote contracts to pay billions it never had. Is that fraud?
Posted by: Morten at Mar 17, 2009 9:15:11 AM
So Obama is outraged over the irresponsible and reckless bonuses (which sacrifices our values) by AIG ?
I'm outraged by Obama and Congress doing exactly the same thing on a much larger scale with the bailouts and stimulus.
Posted by: DaveinPhoenix at Mar 17, 2009 9:17:39 AM
Those of us who service the web might have been up a few hours (or all night) ;-)
Posted by: odograph at Mar 17, 2009 9:30:26 AM
It is outrageous actually. It's outrageous that the taxpayer should own 80% of an insolvent company and then be forced to payoff the criminals so that they can undo this mess.
We have a process for dealing with failed firms in this country and it's bankruptcy. It's a great system where all contracts get renegotiated. It's apolitical. It's backed up by mountains of case law and highly experienced courts.
The American taxpayer put money into AIG so they could pay counterparties like Societe General. Shouldn't the FRENCH taxpayer be asked to put up the money to cover the counterparties that were using an American company to avoid French regulators? And perhaps shouldn't executives from both firms be held to account for trying to hide things from regulators?
As for the regulators... we have the whole CDS situation and we have the Madoff situation. How can anyone, with a straight face, say we need fewer cops on the streets with less authority when we have a shooting spree going on downtown? How is this any different?
These people knew exactly what they were doing. They knew why they were doing it. And when it all blew up they figured they'd go back to the cookie jar and walk away real clean.
The bailout is genius, frankly.
AIG stockholders keep their stock, sure it's diluted, but they keep their stock. The foreign banks get paid 100 cents on the dollar... and they aren't beholden to anyone. No executive pay caps there, no sir.
And check out Goldman Sachs in all this... getting the biggest payout of all. Their old boy in there running Treasury. Goldman Sachs played this smart. Goldman Sachs was connected. If I worked at Lehman or lost money with Lehman, or Bear Sterns or any of these other ones, I'd be all over my Senator to find out why Goldman Sachs and AIG weren't treated with the same stick. Cause, from the outside, the stink is real bad.
And best of all: nobody gets called on the frauds they committed. The real fear in all this is that they'll actually be regulated in the future and won't be able to go back to business as usual when this whole thing blows over.
I'm a believer in markets. And I believe the market will survive the failure of AIG. It'll survive the failure of the US government. The market is a human condition. You can fight it, but you'll always be stuck living it.
All this talk about "if we fail the whole thing explodes" sounds like terrorism to me. It's financial terrorism. Either you pay us "or we'll blow the whole thing up".
I got news: If you're the guy holding the bomb then you should be in jail. And you can work real hard on unwinding those CDS contracts when you aren't busy picking up the soap.
But here's the sticker. Nobody who reads this site probably took the time to get this far reading this comment. But that's ok. But if you did, here's the real reason why anyone who reads this site should be outraged over this whole mess: because of what these people did the American confidence in market economies has been dealt a near fatal blow. Through the course of the Reagan, Bush Sr. and Clinton presidencies this country grew more and more fond of market economies. We built not only the strongest market in the world, we built the strongest argument for market economies in the world.
And it's been squandered.
The best thing to do is to absolutely pursue all the frauds that have been committed. That includes investigating the Treasury, Fed and SEC officials who turned a blind eye on their friends and families. That includes looking at our politicians and holding them to account for not having the right regs in place or sufficient funding for legitimate, efficient regulation. But it also includes holding the stockholder, bondholders, counterparties, managements and employees of these firms to account as well.
Posted by: Sam at Mar 17, 2009 9:34:20 AM
So long as we revisit forcing the UAW to rewrite their contracts with the US automakers, I'm open to letting AIG's executives and managers keep their bonuses. That assumes that we give back the pay cuts and other concessions that we demanded of the UAW. The UAW didn't run the Big 3 into the ground. Their management did. But AIG's managers, who did trash their company, are getting bonuses while the UAW's members are talking paycuts. I don't see the fairness in that arrangement.
Posted by: Liam Cooper at Mar 17, 2009 9:34:53 AM
Totally agree with this post. It's like lowest common denominator management. People just let their anger override any reason. Sounds like the time to buy stocks.
Posted by: bill at Mar 17, 2009 9:39:04 AM
The real outrage should be directed at the Fed for bailing out AIG in the first place. That said, here a couple of things that make me go "Hmmmmmm".
Is it just a coincidence that this bonus story came up just as AIG finally released the names and amounts of the real beneficiaries of the bailout, headed by Goldman Sachs and a bunch of European banks? News coverage of AIG is now all about the bonuses, which are three orders of magnitude less than the payouts to Goldman Sachs, European banks, and host of other (non-) worthies.
The idea that Treasury is going to stomp its collective feet and not give AIG (and Goldman, et al) their next feeding at the trough unless they somehow get the money back is laughable. Treasury already owns 80 percent of AIG, so "getting the money back" amounts to transferring money from one Treasury account to another. But the administration is counting on most people being too stupid to notice this.
The correct course is now what is has been for the last six months: Spin off the financial products division and force it into bankruptcy. The other AIG subsidiaries (the legitimate insurance companies, aircraft leasing, and so on) could continue as usual. It is becoming painfully obvious that the reason we're not doing this is that the Fed and the Treasury want to continue funneling money through AIG to Wall Street and the European banks without giving the Congress a chance to intervene.
Posted by: jeff at Mar 17, 2009 9:40:34 AM
The welfare queens at AGI should have been driven into bankruptcy. There will be hell to pay for these bailouts.
Posted by: floccina at Mar 17, 2009 9:42:20 AM
Aside from the anger issues, this is a perfect example of the magnitude of complexity and potential for screwups associated with this Administration's massive government intervention in the economy.
The fact that no one in the Administration anticipated the bonus issue (they're now talking about recouping it via the terms of later cash infusions) highlights how tough it is to see even the most obvious negative ramifications, much less the much more subtle (and dangerous) long-term ones.
Posted by: JackTrade at Mar 17, 2009 9:42:25 AM
The problem is that manifestly undeserving people are being paid bonuses
Maybe, maybe not.
In March 2008 AIG eased out Joe Cassano, who had led the charge into credit derivatives. It was obvious to the 450 employees of AIGFP that there would be no discernible income or bonus pool and that the prudent personal course would be to resign and re-emerge up at Goldman Sachs or some hedge fund.
AIG senior management wanted to keep the group together since they are involved in many lines of profitable business away from credit derivatives.
Now, had senior management foreseen in March 2008 that AIG was going to lose its AAA rating and go into de facto receivership they would have probably decided to shutter AIGFP post-haste. OK, their bad.
But some (not all) of the AIGFP folks who remained after the Cassano departure were surely his rivals who had chafed under his rule and were keen to help right the ship. So the business decision to keep the team together (although it has not worked out) was reasonable, and not every bonus recipient was involved in credit derivatives or acting in bad faith.
And almost entirely off the radar - government support for the AIG credit derivatives activity was $27 billion from Sept to Dec 2008; in the same time period the securities lending activity picked up $44 billion of support, despite the watchful eyes of the state insurance commissioners. Not as glamorous a story, but who broke AIG?
Posted by: Tom Maguire at Mar 17, 2009 9:43:59 AM
Isn't the loan modificatoin program with cramdown proposed by the governmenent a form of contract abrogation?
Posted by: yorkville at Mar 17, 2009 9:48:49 AM
I still don't see a good justification for the bonuses. If allowed to stand why would it not prove an incentive to fix the system in such away that it would perpetuate the need for to keep the fixers (who originally broke the system) in place? The lesson would be, sure I screwed up, but was rewarded anyway and am now in a position to "mend" the system in such a way that I might be able to benefit again in the future, by replacing it with another complex but flawed system?
Posted by: James M at Mar 17, 2009 9:51:30 AM
I have a more cynical take here. The government is fixing to save the car industry again. Hence the AIG outrage is a way of building a parallel case for the actions for the auto industry. We must pay AIG people, so we must pay the auto people
Posted by: anon at Mar 17, 2009 9:55:45 AM
I always felt like public choice gave short shrift to leadership issues, and this is a case in point.
Tyler especially and others, you ought to be looking at this as a public choice problem.
Why is there "outrage, blah blah blah". Because Barack Obama got up on the bully pulpit and called it an outrage, despite knowing (I think... I hope he's not a fool) there where very little legally he could do about it. Not that he probably should in the first place, which only compounds the problem, by creating increased political pressure for rash and foolish action.
In short, he made himself look impotent and angry.
Which, you know, is not typically how Presidents (or anyone else) want to make themselves look.
Posted by: MikeDC at Mar 17, 2009 9:56:05 AM
Needless to say, telling a company that it's "too big to fail" is not a great negotiating tactic. It's like telling someone whose house you're planning to buy, "I must have your house at any cost!"
Posted by: JP at Mar 17, 2009 9:58:12 AM
