Saturday, March 21, 2009

Laying an AIG

The furor and silliness surrounding the AIG bonuses continues unabated. The House of Representatives has passed an un-Constitutional 90% tax on bonuses paid to employees of companies receiving government assistance. The bill will not pass the Senate.

Several other foolish schemes have emerged on how the taxpayers can claw back the squandered bonus money. For example, the $160 million will apparently be deducted from the next scheduled $30 billion government payment to AIG. Can you imagine anything more boneheaded?

Think about this for a second. The U.S. government (you and I) currently has an 80% ownership stake in AIG . The plan is and always has been to inject capital to keep the company alive long enough to unwind, in as orderly a manner as possible, the destructive trading positions and credit default swaps that threaten to bury both AIG and the world's financial system. Once the company has been stabilized, it will be liquidated: its various businesses, some of which are quite profitable, will be sold off. The U.S. government will hopefully be repaid from the proceeds of that liquidation. That's the plan.

The bonuses, ugly though they may be, were retention bonuses, not performance bonuses. They were put in place last year so that key people would remain with the company long enough to assist with the unwinding of all those complicated positions, which are supposedly very difficult to understand. And, according to AIG CEO Edward Liddy (who was brought out of retirement to run the company on the government's behalf, for a salary of one dollar), the bonuses weren't paid to the architects of the credit default swaps; those individuals, he said, are no longer with AIG. (On a related note, there was an interesting story on NPR's All Things Considered on executive compensation. One expert says that retention bonuses are an important and necessary tool that is widely used on Wall Street.)

As I said, we the taxpayers now own AIG, and our hope is to first save the world and second recoup our investment by liquidating AIG's assets in an orderly manner, at an opportune time. So now we propose to deduct the cost of the bonuses from the next bit of capital infusion intended to keep our company functioning. That'll show us.

The furious politicians and populace that are all now piling on should be more worried about running our company as well as possible, and using whatever tools are required to do so. The unnecessary and unwelcome populist outrage over bonuses serves only to distract already over extended officials at Treasury from the profoundly important real work they need to be attending to.

In my previous post I said we need Treasury officials to be fighting more important fires. Another firefighting metaphor is that the difficulties are gushing at secretary Tim Geitner so rapidly and with such force that it's like drinking from a fire hose. On PBS's Washington Week, panelist Jackie Calmes said Geitner was drinking from five fire hoses. It really is that bad. It's a shame that the country's bipartisan political forces are now whipped into such a spectacular froth that Geitner has no choice but to add the bonus fiasco, a matter of otherwise minor importance, to his immediate portfolio.

Completely coincidentally, I was reading last night Rick Shenkman's Just How Stupid Are We? (which I recommend). Shenkman laments that an engaged but ignorant public, which expresses itself though polls and other modern mechanisms, is often not a good thing. I will close by quoting a section from the book that seems to have some relevance to today's events.

The old Theory of American Politics (TAP) was rather simple. America was like a bus. The people could tell the driver where they want to go. They could even yell from time to time if they saw the driver taking a wrong turn. And of course it was presumed that any one of them could (with a little luck and the financial backing of an array of special interests) become a driver himself. But at no time was it stated that The People actually should direct the driver when to brake and when to stop, when to slow down and when to speed up. These and a thousand other similar decisions were left up to the driver, who was presumed to possess enough good sense to steer skillfully if not always perfectly.

That was TAP. Now there's TRAP. The Theory (Revised) of American Politics is that The People should tell the driver not only where to go but when to stop, start, signal, or not signal. And if the mood strikes them they may from time to time not only yell at the driver but actually grab the wheel and try to drive the darn thing themselves, all 300 million of them, or a goodly number of them anyway. If the vehicle driven under these circumstances seems to veer and lurch and on occasion suddenly run off the road, so be it.

That's a strange way to run a country, for what attracts the attention of the public is often of little consequence. One minute it may be the trial of a mob boss, the next the death of a killer whale. While we are talking about these largely inconsequential matters, we are not talking about the consequential ones. Anybody can have an opinion about killer whales or a president's sex life. But it takes knowledge and reflection to reach a considered opinion about the budget deficit or national security. Result: We largely skip these subjects, focusing as a nation on ephemera instead.

Copyright (C) 2009 James Michael Brennan, All Rights Reserved


At Wed Apr 15, 02:11:00 PM, Anonymous bert said...

I too was disgusted to see our elected representatives leaping over each other to get to the microphone.

The problem is that the taxpayer is mad -- mad that a few people in the financial sector could bring the world to the brink of total financial collapse, profit from it, and walk away without a scratch.

Unfortunately, they have been unable to find a place to hang their mad hat on -- until AIG's bonuses.

In a democracy (however ill-informed the voters) this is the kind of outrage that matters. It's disturbing that the fate of our country rests on "issues" such as these.

Much as I'm concerned that the financial bailout is being directed by Summers and Geitner to favor Wall Street, I'm even more concerned that something (as yet to be revealed) as inconsequential as the AIG bonuses will decide the next election in favor of the Republicans.


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