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AIG: The common good is a sucker bet

The real outrage of the $165 million in bonuses to AIG employees that dominated the news yesterday isn’t the money. In a certain sense it isn’t even the principle of the thing. It’s the spectacle of a U.S. government–still the most powerful state in the world, and the one to which every other industrialized country is looking for leadership out of this mess–that’s so completely in the bag for the financial sector that it’s powerless to stanch even the most obvious political embarrassments of Wall Street business as usual. (It’s lucky for Citigroup CEO Vikram Pandit, and the Obama administration, that news of Pandit’s $38 million in pay for 2008 coincided with the AIG disclosures.)

How can the Obama administration possibly restore order to the high seas of finance when it can’t even get the pirates to lay low for a while? Monday’s events could hardly have made it plainer that the major financial players still do more or less as they wish. Here’s the lede from WSJ: “President Barack Obama said Monday that he would ‘pursue every single legal avenue to block’ $165 million in bonuses to American International Group Inc. employees who were in part responsible for the insurance giant’s near collapse. But hours later, administration officials said the payouts made Friday couldn’t be extracted from their recipients without a legal fight that would cost the taxpayers even more.”

The Obama crew’s breathtaking fealty to Wall Street has many implications. It will very likely make for greater long-term public costs than a regime of nationalization. It substantially increases the odds of failure in resuscitating the banks, which would mean a full-blown depression. Both those eventualities are widely discussed among critics, but the situation also threatens to lay waste to Barack Obama’s political credibility, which rests in the end on moral grounds. The popular force of his “change” campaign derived only in part from disgust with the status quo; it was also a matter of his call to shared purpose and the common good. 

But where the central crisis of the age is concerned, Wall Street has a rejoinder to “Yes We Can”: The common good is for people who can’t afford anything better. According to the Journal story quoted above, Obama officials “worry that taking too hard a line with AIG and other companies could discourage top financial experts and institutions from joining the government efforts to fix the financial system. That’s one argument that AIG itself has used to justify the bonus payments: that if certain executives leave at this point, their departures would complicate efforts to wind down the financial-products division.”

You could say that the best minds in finance are effectively a mercenary army. Nothing short of financial martial law will so much as get their attention. It’s yet another case for nationalization. This isn’t to say nationalization is a tidy solution. It would be fraught with difficulties, not least the staffing of the temporarily nationalized institutions. But all the solutions are fraught at this point. Better we have government control of the banks than the continued control of government action by the banks.

Comments (3)

  1. Anonymous Submitted by Anonymous on 03/17/2009 - 08:52 am.

    Steve – I was wondering for a long time whether AIG’s ancestry as being:

    … started by the CIA during WWII has anything to do with the fealty being paid to it today. Is there still a relationship between AIG and CIA?

  2. Submitted by Steve Titterud on 03/17/2009 - 10:43 am.

    Here’s a quote from AIG’s own press release: “Severe valuation losses on the super senior multi-sector credit default swap portfolio of AIG Financial Products Corp. (AIGFP) triggered collateral provisions in the swap contracts, creating a liquidity crisis…”

    In other words, their analysts and decision-makers got them into a lot of bad deals. Essentially, they bet the value of certain assets would not go down, on pain of penalties in those contracts. After all, real estate values always go up, never ever go down, right?

    In Minnesotan, you could say they missed the barn.

    This industry’s propaganda machine and Mr. Liddy of AIG repeat, repeat, repeat the message: “You can’t get top performance without paying enormous bonuses. The kind of people we need won’t work for less.”

    You might think that over-bloated pay for people who do stupid things makes no sense, but it all depends on where you apply this kind of scheme. Apply it to something we want to get rid of, something we hate, and it becomes a very useful and valuable scheme.

    I suggest we find an industry we WANT to destroy (can’t think of one right off hand, but I’m sure we can think of one) – an industry everyone hates and we can all do without.

    Let’s send these same geniuses into THAT industry, pay them a ____load of money, and tell them we don’t want to hear from them again until that industry is in tatters.

    I realize it may take them a while, but experience counts for a lot. Their experience in wrecking the banking and finance industries should enable them to ruin our target industry in less time than it would take beginners. That’s why these people don’t work on the cheap – we’re paying for performance here!

    Rather than villifying these peerless performers as harlots and thieves, we should recognize their true worth, acknowledge their feelings, challenge them with new goals, and help them to be all they can be.

    This could be the turnaround we’ve all been waiting for! Thank you, Mr. Liddy – you are absolutely right! We don’t want any half-baked ideas or lukewarm results! We want real performance, we want it now, and we’ll pay whatever it takes!

  3. Submitted by Glenn Mesaros on 03/17/2009 - 02:03 pm.

    The Minnesota Legislature should take its collective head out of the Mississippi Mud, and face the necessity of pulling their weight in the national debate about wall Street.

    THe NY STate Assembly just passed the Larouche Homeowners and Bank Protection Act Resolution to urge the Congress and FDIC to take over certain insolvent banks, such as Wells Fargo, Citibank, BOA, and JP Morgan.

    In 1933, Minnesota legislators had the guts to stop all Foreclosures, which was later upheld by the Supreme court.

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