The Corner

More Thoughts on the AIG Bonuses

I usually agree with the guys at Clusterstock, but I think they’re wrong about the AIG bonuses — though at least they’ve actually thought about the problem for longer than it takes to churn out a press release containing the word “outrageous.”

The furor on the Hill and in much of the press looks to me like a lot of ginned up political outrage over something that most people don’t understand very well, which is Wall Street compensation. AIG CEO Ed Liddy, who was brought in after the government fired the old management team, argued today that the company needs to pay these bonuses to retain its best and brightest. Most of AIG’s critics simply scoffed: Why retain the geniuses who screwed up the company in the first place? Clusterstock’s John Carney offered a more serious answer: “Why should talent be trapped inside a money losing company rather than freed to create wealth outside?”

Today, Carney posts an e-mail from a former Streeter, who “hasn’t convinced him” that the bonus payments were necessary, but who makes “powerful arguments” to that effect. It’s worth reading in full, but here’s the gist:

… did you notice the timing on these bonuses?  The 1 year anniversary of the Bear implosion?  S*** must have been hitting the fan at AIG about this time last year, they were realizing all those “uncorrelated” contracts they’d written were now converging.  The CDS traders saw the writing on the wall, or should have.  The firm had just posted its first quarterly loss, the credit markets were cracking up.  They were not going to be making very much money that year at AIG based on performance of their positions.  But they could very easily have left for [John] Paulson & Co or any of the banks.  Demand for people with understanding of credit markets was spiking not dropping off!  AIG realizing that the whole team had lots of better opportunities out there were they not well compensated locked the team down with a guaranteed bonus.   The fact that this was the team drove AIG into ground was besides the point, everyone who knew the book was poised to walk out the door.

Ed Liddy sized up this situation when he got to AIG and came to the conclusion that the best course for taxpayers and for the financial system was to pay the bonuses. This gets back to something I wrote earlier: If Obama disagrees with Liddy’s decision, he should either A) fire Liddy, or B) fire the guy who hired Liddy (Tim Geithner). What he should not do is go along with this Kabuki outrage, in which official Washington pretends it had no idea that big financial institutions — especially failing ones — might need to keep paying their top employees competitive salaries.

Of course, it would be nice if the Obama administration figured out a better way to wind down AIG, but unfortunately, as Rich pointed out the other day, Obama decided that it was far more important to do Great Society II than to formulate a set of clear rules for the orderly liquidation of insolvent non-bank financial institutions. I’m all for figuring out how to get the government out of AIG, but I don’t think shaking our fists over these bonuses is getting us closer to a solution.

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