AIG: Fear and Loathing on Wall Street

Hank Greenberg, the architect of AIG as a Global Powerhouse said recently, "I wouldn't have paid the bonuses." So how did some savvy negotiators convince Treasury and the Senate Banking Committee to let them fly.

The bonus tax bill, which makes its way to the Senate this week, will likely be passed in some form and could include a tax on any executives in a company receiving over $5 billion in bailout funds. As well, it could include a $250,000 -$400,000 salary cap for any executive.

President Obama is playing both sides of the political football. He is outraged and angry, but pragmatic and reasonable when he says, "I understand Congress' frustrations, and on one hand they are responding to everyones frustrations and anger but I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn."

Taxpayer bailout recipient AIG is set pay $165 million in bonuses, which led Congress to pass a "bonus tax" of 90 percent, attracting 80 plus Republican Congressman scrambling to beat their colleagues to the "Yes" vote. Apparently Wall Street executives are not very happy, and are planning a backlash of sorts by threatening to quit their jobs. Wall Street types feel like Barney Frank and his colleagues are missing the big picture and they should be focused on protecting the $165 billion in AIG bailout funds already committed. In their minds, this is small potatoes.

In a recession that rivals the Great Depression, leaders in private and public life have to come out of their ivory towers and get some perspective. We are in a period of "high tech bread lines." Millions of dollars being payed out to individuals when the economy as a whole is suffering is naturally garnering major resentment. Common sense would have told them to defer these bonuses until the economy is growing again.

The largest bonus of $6 million, went to Doug Poling and there are two ways to look at it. In the macro version, AIG might say, "We are losing money and we are not paying out bonuses to anyone this year." On the other hand, contract law is the basis for successful commerce. AIG was and is deeply interconnected with global finance as as the insurer or collateral of last resort. It had to be saved, some argue, or it may have destroyed a large portion of the global financial and corporate system.

The big mistake was underestimating public backlash over paying people millions of dollars at a firm that is being propped up by tax payer dollars—even if Mr. Poling at al had nothing to do with the losses. Apparently, Barney Frank is even considering applying the tax to any bank that receives over $5 billion in bailout funds including institutions like Fannie Mae (FNM) and Freddie Mac (FRE). I don't feel sorry for Wall Street, the public should be angry, and demand a solution, but we would be nuts to punish ourselves in the long run with political solutions.