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.