The cynical take on AIG

on Mar 23 in Politics tagged by Trevor Hicks

There is some good commentary on the AIG bonuses that disagrees with me, notably James Hamilton at Econbrowser.

What is bewildering to me is why our elected officials are going so bat-poop crazy over what is really a modest amount of money, the majority of which is surely going to people who fulfilled their terms of the contract and did what they thought was executing the corporate strategy and worked for the best interests of the firm. I think most people perceive the bonuses as money going to the very people that caused the problem in the first place.  I see it as fulfilling promises made to people who were acting in good faith and doing their jobs to the best of their ability. Making mistakes is not grounds for nullifying a contract.  Now, the contracts are kind of weird, granted, it seems strange to guarantee bonuses without rigorous performance clauses, both corporate and individual. But poor incentive design is not grounds for “take backs.”

I’m cynical enough now to think that if the politicians are making a big deal out of something stupid, it’s probably because they want to obscure something else. In this case, I think it’s the sheer stupidity of bailing out AIG in the first place. This folly is becoming ever more clear as we see the roster of recipients of AIG payments, most notably Goldman Sachs who even said they were hedged against an AIG failure and so the $13 billion they got really didn’t matter to them anyway. Michael Lewis, as usual, is an excellent source who points out:

a) the vast majority of the employees at AIG had as little as you or I to do with its quasi- criminal risk taking and catastrophic losses; b) that the most- valuable of those employees can easily find work at AIG’s competitors; and c) that if the government insists on punishing those valuable employees they will understandably leave, and leave behind a company even less viable than it is, and less likely to give the taxpayer back his money.

And also — oh, yes — that if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.

As I was reading Thomas Friedman this morning in my Houston Chronicle I was struck by a thought. Obama really missed an opportunity to show some leadership on this issue. I’m glad to see he’s pledged to veto the unconstitutional ex post facto law to tax those bonuses making its way through Congress. But as Friedman points out:

Had Obama given AIG’s American brokers a reputation to live up to, a great national mission to join, I’d bet anything we’d have gotten most of our money back voluntarily. Inspiring conduct has so much more of an impact than coercing it.

If all we wanted from our President was knee-jerk belligerence we should have elected McCain.