Current Popular Argument Against AIG Bonuses Takes the Wrong Viewpoint

I have heard the argument that those at AIG should not get bonuses because they destroyed the firm, or because they destroyed the firm and in doing so helped precipitate the current economic calamity to boot. This sort of argument doesn’t make sense to me.

The vast majority of those in the bonus pool at AIG had nothing to do with precipitating the firm’s failure. They were marketing insurance products, managing call centers to handle customer inquiries, and other exciting stuff like that. They just happened to live in the same corporate city-state as the evil-doers. Pulling their bonuses based on such an argument is collective punishment.

A more reasonable argument is that without the government assistance, AIG would have gone bankrupt. And if it had gone bankrupt, those who are pulling in bonuses not only would have had no bonus, they likely would have had no job. So then, the argument goes, why should the government’s bailout money – which of course is tax payer money – go to give out-sized bonuses?

That makes sense. But then we come to some follow-up questions.

One is why Paulson didn’t include compensation controls as one of the terms for keeping AIG afloat. You could ask the same thing of Geithner, who frankly is taking on far more grief than he deserves, but the time to have done this was back when the government bought the majority stake in the company.

A second is why the argument stops with the boundaries of AIG. We should ask who beyond AIG would have gone bankrupt if the government did not keep AIG from default, and make the same demands on bonuses that are being paid there.

Think of it this way: If time had not been so tight, the creditors would also have been in the bailout meetings. These creditors would have included those on the hook in the event of default due to their CDS exposure. The meeting would have started off with Paulson saying, "We can pull AIG from the brink. It will take a lot of taxpayer money to do so. We want concessions all around, both from AIG and from its creditors, and especially from those creditors that will go under with it.

That is the correct route to collective punishment. A route that starts with questions like this:

True or False: If AIG had gone into default, Goldman Sachs (GS) would also have failed.

Comments

[Jim in Virg...:]

All of this is well and good but had they let the whole thing come tumbling down as bad as it would have been with a bankruptcy and the following fallout, we would not have been put in the position of the government (not a court) retroactively breaking a legally binding contract. We are a nation of laws or we are not. If any contract can be broken whenever public sentiment deems it necessary, we are in much deeper trouble than we are right now.

Mar 21 03:43 PM

[ditto:]

Amen! How can we get more of this writing in front of the government? This country is a mess.....They own 80% of AIG and failed to effectively manage, so now instead of admitting fault like a lot of others are doing, they take the easy route: machine gun taxes (tax them first, ask questions later). Congress need to work harder and smarter then this. This is horrible. I could do a better job then these Congressman and I haven't a clue. This tax defies logic and is so UnAmerican. Maybe this is a conspiracy to solve our immigration problem (make the USA unlivible and no one will cross the border). Hooray. I am on a mission with this nonsense....

Mar 21 03:52 PM

[Ray Lopez:]

Richard Bookstaber? The hedge fund manager? Talking his book, his agenda?

No, we're not going to take it anymore, as taxpayers. You folks are not adding value anymore. You're fired.

Mar 21 04:47 PM

[bike 05673:]

Just like a baseball team if they get into the World Series they split the pot even the ballboys. If they do not make it there is no pot tosplit. AIG or any team should only get a bonus for winning. It is unAmerican to reward failure with taxpayers money.

Mar 21 05:26 PM

[Chabsentia:]

These Bonuses of AIG or chump change even at 212 Million. Nobody is complaining about the 3.4 Billion that were given to Merrill Lynch Executives in the second week of December and the fact that Democrats wrote into the recent Stimulus Bill that only Executives getting Bonuses after Dec 31 2008 would be affected to protect then. When the Democrats approved the first 700 Billion to Paulson they also protected the BonusesThe admendment to only affect Bonus contracts written after FEB 11,2009 to protect AIG on the 165 Million is even called the Dodd Admendment and he denied it. The Admendment was also writtern separately in the latest 789 Stimulus Bill to protect the 3.4 Billion for Merrill Lynch and BOA who bought them got a 30 Billion bailout so these Bonuses represent over 10%. Obama signed this latest 789 Billion bill with them in it so he had to know. 165 Million out of 170 Billion given to AIG is chump change compared to the 3.4 Billion out of the 30 Billion given to BOA. Wake up.

Mar 21 06:00 PM

[Dih:]

The entire bailout is totally unconstitutional. If we were "playing the game" according to the Constitution, none of this would have happened since we would not have had the Federal Reserve with its fiat currency. Hard money requires more attention to details and how it is handled than "phoney" money (e.g. printing press money that is only back by the "full faith and credit of the government"). And that is rapidly becoming a world-wide joke!

Let's get back to basics and require that our government live under the "contract" made with "We the people" back in 1787!

Mar 21 06:05 PM

[RATHER FISH:]

The banks are now complaining about FAIRNESS. BUT is it fair for the banks to charge 28% for credit cards after using every trick in the book and from throwaway flyers re: change in rates etc,etc.
The best and the brightess want it both ways make $$$ on the way up and then the way DOWN. No wonder the taxpayers are angry.

Mar 21 07:04 PM

[klarsolo:]

RATHER FISH, I see this come up time and time again. People ask: Why do credit card companies charge 20+ %? Is that greed?

It is not. Here is a small and very simplified calculation. What do you think you need to charge as interest just to make a reasonable return on credit cards?

Let's assume you want to have a 6 % return and you expect 10 % in cumulative credit card losses (people that charge but don't pay you back, etc.) This means that from the 100 cent per dollar you hand out, you expect to lose 10 cent right away to dead beats and others. However, you'd like to get 106 cent back (the 6 % return on your original investment).

Now, what kind of percentage you need to charge to get from 90 cent to 106 cent? Answer: around 17.8 %, very close to the average rate charged on credit card balances. And if you expect more delinquencies, you need to charge even more than that. Has nothing to do with greed.

Mar 21 08:44 PM

[User 373847:]

10% credit card losses is completely ridiculous. All the math that is derived from that ridiculous assumption is also ridiculous. There are times in history that charging rates similar to what credit card companies charge now would be criminal. They should be criminal now as well.

Mar 21 09:44 PM

[klarsolo:]

User 373847, unfortunately it is not ridiculous. It always depends on the deal, but there are several deals in the market that are already approaching this level of delinquency. Cumulative net losses are ticking up rapidly.

Mar 21 09:49 PM

[klarsolo:]

User 373847, what do you think net loss rates on cards are? 2 %? Even if they were that low you'd have to charge over 8 % interest. Also, there are multiple fees involved, for example to the credit card servicer, that need to be paid as well. Believe me, banks are not getting filthy rich from such deals. Keep in mind, credit cards are unsecured. If you don't pay them back, there is not much they can do to recover their money.

Let's look at auto ABS deals in the market. Auto deals are secured, although cars lose their value rapidly. I'm thinking of a 2007 COAFT deal that is currently trading at 73 cents on the dollar. That implies a cumulative net loss rate of about 30 %. If that is ridiculous, why is the market pricing it that low? Keep in mind, these are cars we're talking about. People need their cars and if they default, the car will be repo'ed and sold off. And yet, the market currently assumes 30 % cum net loss rates.

Mar 21 09:54 PM

[Marianthi:]

What I don't get is why ANY of these people running bailed out banks or insurers still have jobs!! They should have been FIRED immediately. As for bonuses, my idea for the ultimate "F### you" to these idiots at AIG is to pay them in 2009 May 30 call options! That is almost as good as firing them, or running them out of town throwing rocks as they deserve to be!

Mar 21 10:10 PM

[User 67693:]

Eveyone says its the taxpayers money. Well, yes, but it is a load. The money loaned to Bank of America is earning 8% for us taxpayes. When the govt sells bonds, they are also loans and the govt pays us about 2-5%. Isn't is nice that the govt is getting something for all the paper they're printing?

On Mar 21 05:26 PM bike 05673 wrote:

> Just like a baseball team if they get into the World Series they
> split the pot even the ballboys. If they do not make it there is
> no pot tosplit. AIG or any team should only get a bonus for winning.
> It is unAmerican to reward failure with taxpayers money.

Mar 21 10:46 PM

[goldenhinde:]

Jim: Contracts are broken all of the time. Who are you kidding? It is standard fare for large companies to break contracts and then throw so many lawyers at the opposing side that they bury their opponent until they simply say uncle and give up or give in.

I do appreciate the sentiment you express, but you sound awefully naive.


On Mar 21 03:43 PM Jim in Virginia wrote:

> All of this is well and good but had they let the whole thing come
> tumbling down as bad as it would have been with a bankruptcy and
> the following fallout, we would not have been put in the position
> of the government (not a court) retroactively breaking a legally
> binding contract. We are a nation of laws or we are not. If any contract
> can be broken whenever public sentiment deems it necessary, we are
> in much deeper trouble than we are right now.

Mar 22 12:24 AM

[THofler:]

goldenhinde,
I agree with Jim. We're not talking about what passes for Enron or Worldcom ethics here. We are talking about the full faith (or lack thereof) and credit of the U.S. government.

The stimulus legislation passed in Feb. abrogates commitments in the Oct. TARP law. And if they pass the bonus tax legislation, that will abrogate the Feb. stimulus commitments. No sane investor wants to touch what the federal gov. has its hooks into.

Mar 22 01:12 AM

[Mbuna:]

On the contrary no sane taxpayer wants to touch what the financial sector has its hooks into.

www.rollingstone.com/p...

And yes Goldman would have failed, beyond a shadow of doubt- not just because of the financial hit they would have taken but the hit that the revelation of their exposure would have done them in. These institutions are so corrupt I say let em all fail. Start fresh.

Mar 22 04:51 AM

[HiSpeed:]

GS failing would have been the ultimate in poetic justice

Mar 22 05:05 PM

[Richard Boo...:]

Viniar, the Goldman CFO, stated that if AIG failed, GS would have had little in the way of losses. According to him, Goldman had collateral on the one hand, and hedges on the other in sufficient size to cover the firm.

Mar 23 12:01 PM