Why The AIG Bonuses Matter

[girl gone mad]

via http://www.businessinsider.com/why-the-aig-bonuses-matter-2009-3">Clusterstock

The rush to legislate a 90 percent bonus attack, harrassment of AIG employees and unbalanced public outrage over the bonuses is leading to a backlash. Most of the backlash is coming from those who object to the populist tone coming out of Washington. It's most articulate objection to the bonus furor is that this is a distraction from the more important job of fixing the banking system and getting the economy out of the recession.

aigsecuritieslending.jpgThis line is being pushed by the Obama administration and its fans in the mainstream media. The Washington Post, for instance, recently wrote that "the bonuses were a distraction from what senior aides called the main focus: getting the economy working and people back to work."

Unfortunately, the bonus issue is not just a distraction or a side-issue. It's part of the larger problem, a gaudy demonstration of what is wrong with our financial rescue attempts. AIG is perhaps the worst case scenario but it fits into the pattern that we adopted under the last administration: bailing out failed firms while leaving them in the hands of existing management, a recipe that was sure to privatize profits while socializing losses.

Paul Krugman explains the situation perfectly today:

At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.

This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

[On the Road]

1. Executive Compensation

is indeed part of the larger problem, but it also was and is a distraction from efforts to salvage the economy. The Obama/Geithner approach seemed to be to control it going forward, which seems to me to be setting the right priorities.

[girl gone mad]

2. But here's the big problem with that approach..

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3_Cg0PirveU&refer=home">Northern Rock Made Risky Loans After Brown Rescue

No private investor would put a lot of money into a troubled company without management changes and decent oversight,let alone allow management to keep plundering via inflated bonuses. The bank has the incentive and the personnel still in place to go out and do the same stupid things it did to get itself in trouble all over again.

[On the Road]

3. OK, So Rather Than Kill The Bonuses

you would prefer to replace management.

That is not an unreasonable position. The problem is who to replace them with that is removed from the same kind of criticism. I don't think you can take a Wall Street outsider and plop them down into that kind of environment. It is very specialized and the learning curve is long.

The other issue is that the government effort to rescue the economy is based on the cooperation of business, both those that have failed (or would have failed) and those that have not. It makes the effort exponentially more difficult to take the approach "We're going to forcibly take you over and fire everyone at VP level and above."

I would prefer to see current management in place, replaced where necessary by a board vote (which is how it generally happens), and for charges to be filed against executive who can be shown to have broken the law.

[Po_d Mainiac]

4. Huh?

"It is very specialized and the learning curve is long"

We've figured that out....When does the varsity take the field? During O/T?

[IrateCitizen]

6. The learning curve to become an expert engraver is long, too.

However, if you discover that the expert engraver you have designing your money is also an expert counterfeiter, do you still keep that person on because it would be too difficult to find another to take over for him?

These people have proven themselves to be greedy, incompetent boobs who gambled with other people's money and lost. It's a basic issue of TRUST. There is currently little to no trust in our economic or political system. Unless they make moves to regain legitimacy, it doesn't matter much what they do.

Personally, I think that nationalization (federal receivership) is the only answer. Demand up front the letter of resignation of every member of management or they will be immediately terminated and their compensation packages held due to current insolvency. Hold on to them as leverage throughout the receivership process -- if anyone rocks the boat, they immediately leave to "spend more time with their family" and are denied any severance package. Those banks that can be saved are through a long and painful process that helps insure that the banks don't take such risky moves again in the near future. Those banks that cannot be saved are liquidated.

If all of this means that AIG goes under and Goldman & Morgan take a serious body blow, so be it. We seem to be trying to sustain something that has already died right now, and there isn't any way out of it without a certain amount of pain, IMHO. The question seems to be whether that pain will be shared by all or if the titans of finance will be exempt, shifting their share of the pain onto us even after they're the ones who screwed up the most.

[AntiFascist]

5. Focusing on the AIG bonuses directs the public's anger towards corporate executives...

instead of the corrupt politicians who were working in league with the biggest financial institutions, mostly during the previous administration. This all seems to be a very clever and deceptive game of preventing the public from getting at the truth of the matter.