Thursday, March 19, 2009

AIG bonus scandal fallout

The AIG $200 million "bonuses" has been all the talk recently, but rather than add to the condemnation, I'm going to offer sort of a counter-point view. This is not to say that I'm a fan of the bonuses, their size, or bailing out failed companies in the first place, but it's important to look at the whole picture, not just the topic of outrage of the week.

First, this was $200 million ish in compensation, compared to $170 Billion in "loans", TARP handouts, and government guarantees given to AIG by Congress. If giving out the bonuses was bad, then handing out the bailout money was 1000 times worse; where's the 1000x outrage at Congress for wasting 1000x the money in the failed company which is AIG? Which, of course, in turn paid most of that money to counter-parties, which are other failed banks, many of which are also already getting bailout money, Trillions more in fact counting guarantees. The outrage may be justified, but let's have some perspective.

Second, what an unfortunate choice of language "bonus" is to describe what essentially were "contractual payments on completion of specified services in service of winding down business units using specialized knowledge and experience". "Bonus" sounds like a profit-sharing kind of arrangement, and "retention bonus" sounds like you wanted the people to stick around when their particular services were complete, neither of which were the case here. Also, the people contracted to clean up the mess were mostly not the people who created the mess, even though that distinction has been blurred or ignored by the mass media. How much of the outrage is based on distortions and mis-information, I wonder?

Third, as Liddy pointed out, most of the "bonus" money will probably be returned, now that there's public outrage, tax law changes to confiscate it being debated, death threats, etc. However, it will likely come with people's resignations, as you would expect: how would you feel if you were contracted to do a long and complicated job, for a failing company, where you were likely to have a hard time finding another job after and you were being compensated well for taking that career risk, and feared for your life if your job was revealed publicly, only to have the government take your pay after you were done? Yeah, I'd be pretty pissed too. I know I sure as hell wouldn't do specialized work for a failing bank under any sort of deferred compensation any more, and probably not under up-front compensation either: the tax man undoubtedly cometh for both, if you're on the wrong side of public opinion. Good luck unwinding the other $1.6 Trillion in contracts at AIG, and untold Trillions at other failed banks; if you're anyone in that industry, it's time to get the hell out and get somewhere safe: the lynch mob is coming.

The nice thing that might come out of this, as Mish points out, is that it might eventually lead to Dodd and the other corrupt politicians who were complacent or participatory in the bank bailouts going down in flames. I'm not going to hold me breath, but as the economy gets ever worse, you would hope that eventually the rage is directed at the right proximate causes of the root problems.


  1. I had exactly the same thoughts. Yeah, people who set up those bond insurance policies shouldn't get millions of dollars. But neither should other people who made risky investments that didn't work out. I understand that this is different from other investment declines because the people investing mortgage backed securities were seeking safety. It just seems like if you bail out one participant in the system of easy credit, why single out these few people as undeserving? After all, when you go through bankruptcy, I thought employees get paid ahead of some vendors and certainly ahead of investors. No one is clean in this mess, even small retail investors who kept some of the cash in MMFs investing in mortgage-backed securities.

  2. Yup. One of the government points is that without the bailout, the company would have collapsed, and the people would have not received the bonuses; however, they were contracted to do the wind-down work after the company had already received support. Furthermore, it wasn't their fault AIG received a bailout; why should they be penalized for the idiotic decisions made by the government in the first place?

    The bad part is, I have a feeling this is only the beginning. The Obama administration may use this as a jumping-off point to try to limit all executive compensation in public companies. If that happens, skilled people will flee public companies, causing them to largely fail without government support. The regulators running the remaining companies will then argue (to Congress) that they cannot compete with private businesses, and Congress should impose similar limits on all executives in private industry. Then people will question why executives are being singled out: why not fix compensation by job position, so everything is fair an equitable. At the point, you effectively have socialism (which I think is probably a goal of some people in Washington anyway), and say goodbye to freedom and prosperity, unless you can flee the country. The ball is already rolling...