Current Popular Argument Against AIG Bonuses Takes the Wrong Viewpoint

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Includes: AIG, GS, XLF
by: Richard Bookstaber

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 (NYSE:GS) would also have failed.