For all my sympathy with people whose stupid bets got us into this mess, I am not overeager to hand them more of my hard-earned money. But the AIG retention bonuses raise a question the government is going to have to ask again and again before all this is over: do we want to make a point, or do we want to make money?
This is a very common problem in business literature, and bankruptcy law. One of the unnoticed provisions of the 2005 bankruptcy reform made it much more difficult to use KERPs, or Key Employee Retention Plans. The problem is that these funds, often large, were frequently used by management as a slush fund to keep themselves from suffering too much in bankruptcy. The other problem is that without these funds, bankruptcy often doomed hurting companies, because the only employees willing to stay on a sinking ship were the ones who couldn't get a job anywhere else.
Which is it, at AIG? The problem is, there's no way to tell from the outside. The employees of AIG know which traders are good, and which ones are idiots who made a bad mess worse. But they're not going to tell us--or rather, they'll tell us, and the idiot traders will point the finger at someone else. From what I understand, you can't even just ask which traders lost money--some of the traders will be able to argue, with justice, that they lost money because they were helping the company cut its risk exposure rather than taking bets they might win. Others made good trades that were Overtaken By Events.
Why not just say "no bonuses for anyone at AIG"? To hell with the bums! Well, we now own the company. If we hasten the flight of quality employees out of the company, that will cost us money. The answer might be some kind of performance bond. But as in other financial firms, traders often take as bonus what should be salary, which means that they need at least part of their bonuses to maintain their lifestyle. If they're faced with bankruptcy, the traders who are talented will go elsewhere--the financial market is shrinking, but the top traders still have other opportunities. AIG has a lot of positions to unwind. Do we want to leave the job to the dregs of the organization?
I don't know the answer to this question. Perhaps it is true, as my interlocutors accuse, that I am too stupid to understand the obvious. On the other hand, perhaps excessive confidence in your diagnosis means that you just haven't asked the right questions.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
As I wrote on my blog
I've been reading recently about the bonuses being paid out to some of the people at AIG. And I read this.
American International Group Inc. will pay $450 million in bonuses to employees in its financial products unit. That division was at the heart of AIG's collapse last fall, which compelled the U.S. government to provide $173.3 billion in aid to keep it running.
Now theoretically you could argue that you need these people to fix the mess that they caused. But I'm actually getting tired of the idea that the only people on earth who understand this stuff are the people who work on wall street. This isn't the creation of Quantum Mechanics where even though the initial math wasn't particularly hard, you have to get over non deterministic causality. This is math, particular math, but math non the less. Give some damn good math people some books, tell them that they have a couple of weeks and then let them go at it. I can't imagine that its that difficult. Lots of people do this stuff they are not magical unicorns prancing through the fucking liquor forest.
And then I hear this.
Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit -- whose woes caused massive losses at the giant insurer -- are due on Sunday, and added "quite frankly, AIG's hands are tied."
There are people out there called lawyers who from my understanding can twist the law into all sorts of fun shapes. Use them. If you don't it indicates that you don't want to.
This stuff makes me so angry that the hair on the back of my head and arms stands up, rippling like the god damn African savanna. If I could I'd get these people chained and make them walk a fucking Gauntlet.
Also, I don't care about the existence of AIG as a company. We do need to unwind its bets but I am sure that we can liquidate it for a good price.
Don't pay the bonuses and let them sue. I've love to see the voir dire wherein the AIG executives try to sit a neutral jury.
Maintenance of a trader's lifestyle is not my top priority as a taxpayer.
Whats the difference from basing your lifestyle and budget on a future "bonus" and taking out equity from your house on the speculative idea that it'll be worth more in the future?
Why are bonuses being rewarded to people that didn't do their jobs?
because everyone else gets one isn't the right answer, or a answer that capitalism should stand.
Well if a bunch of fools wouldn't have given them money in the first place we wouldn't have this problem. All the people expressing outrage need to go back to the start of this mess. If the company failed, as it and others should have, we wouldn't have to be nanny-guessing everything that gets done there. "Do you guys really need to spend 50,000 on arrowhead water?"
I'm not pissed about bonuses. I'm pissed about you and others wanting to give away money to a company in the first place that made poor business decisions and by all accounts should have failed or floundered or whatever would have happened without our "help".
For anyone arguing "But XYZ would have happened." Well then I suppose you're happy you invade Iraq because plenty of people could argue "But Saddam would have had a nuke and used it on Isreal or DC by now".
It's one thing to have some interference by government or assistance here and there as needed. It's entirely another thing to completely prop up a failing company. If its failing its failing for a reason. Let the company fail and the employees resources be allocated elsewhere.
This means some pains in the mean time. But we don't seem to have avoided those and we're in a huge mess with people whining about how the company spends its money every other week.
The bonuses the executives were paid amounted to less than 0.1% of the bailout money. Not worth worrying about, in my opinion.
Can we just shut up about this whole, "If we cut bonuses period, we'll drive all the talent away" drivel?
For every single trader - good or bad - at AIG, there are plenty of perfectly good (or perhaps better) people willing to take their place.
This is particularly true for upper management. Do you honestly think there aren't plenty of incredibly talented, ambitious people out there willing to try and make a name for themselves rescuing the company? I'll be they do it for a hell-of-a-lot less than $100 million a year.
If my memory is correct, finance managed to carry on just fine up until just a few years ago when things really started to get out of hand.
Everyone. At. AIG. Is. Replaceable. Period!
Cut the bastards loose.
I'm not even going to bother reading all the vitriolic responses to this either. The stupid will burn my eyes.
Megan,
Who are these fabulous employees who are goinig to leave if they don't get bonuses? They fucked up the entire world economy. No one associated with AIG should be allowed to do anything but park cars for the rest of their lives. Even then, that is an insult to car parkers.
Who exactly are these brilliant people working at AIG that are going to bring the company back if only they can get that next multi million dollar bonus? If they are there, why is the company broke?
How about this suggestion? None of our CEOs or top people in the financial industry are worth a bucket of piss. They are all incompetant and got to where they are based upon ass kissing and backstabbing and luck. The market as they say is a harsh mistress. Eventually incompetance has a way of catching up with you. If anyone wants to hire all these great people from AIG, let them. They can go bankrupt to.
We are never getting any money back.
That is the problem. The AIG executives are just looting the company before anyone can figure out what happened.
The "best and brightest" were doing nothing more than arbitraging the company's AAA credit rating across other markets. This is "brilliant" I guess in the sense that no one else could figure out that particular method of effectively stealing money by claiming profits off of these ridiculous bets.
They should be fired and if they get jobs somewhere else we should probably shut down those companies too before they do the same thing to them.
None of this has anything to do with anything even remotely resembling capitalism. You. me and everyone else will be paying this stuff off for years. In addition, when we finally realize just how bad the "real" economy is, we are going to be paying three times that amount to fix it as well.
There is absolutely no realistic public discourse in this country. We have deified these bankers as the high priests of the cult of the free market. Unfortunately, they are not even "taking" things. They are just destroying everything under a mountain of debt. we will be like some third-world country where the people pay taxes to pay off some foreign governmnet entity.
I think this post pinpoints a serious problem which has bugged me about the financial sector for years-- Their top employees take as 'bonus' something that they expect and demand every single year, and which they really consider part of their salary. I honestly don't know the answer to this for sure, but I would bet that a 'bonus' is taxed under a different regime than a 'salary'. If so, this is just another example of the self-justifying, institutional drivel that got us into this mess in the first place.
Frankly, I think this crisis is an opportunity to speak the hard truth to Wall Street: What you do creates little actual value in the real economy, and you don't deserve to get paid exorbitant wages any more. Moving money around different computers offers less actual, tangible value to a society than teaching third grade somewhere, and it's high time that we stopped valuing the labor of a stockbroker at 100-1000 times that of a person with a real job. Fuck the people who leave, good riddance. Despite all their 'talent', here we are, nearly bankrupted by their industry, so screw 'em.
Megan,
If you randomly pulled someone out of the New York phone book in 2001 and let them run AIG for the last 8 years, could they have done any worse? You have really lost your mind on this topic. Further, I bet I could find a thousand honest traders who could have told you a long time ago that what was happening in the industry was insanity. But those people were not listened to. Their opinion got them a ticket to nowhere. Meanwhile the geniusus who were thinking this shit up went right to the top. Now you want to pay them millions to make sure AIG doesn't lose the best and the brightest. You have got to be kidding.
"We have deified these bankers as the high priests of the cult of the free market. Unfortunately, they are not even "taking" things. They are just destroying everything under a mountain of debt."
I've got no problem with that assessment as long as you include the politicians, especially including the revered Obama in that statement.
The money isn't that big a deal percentagewise, but what is a very big deal is that we make sure federal bailout money is not looted in general.
This would be a good time to make an educational example out of AIG's financial products division.
Some commenters have suggested launching fraud investigations at AIG. For example, it's commonsensically fraudulent to take insurance payments (for CDS's) when you don't have the capacity to make good on them. Is it also legally fraudulent? Let's find out.
"Pour encourager les autres."
Megan-
I don't think anyone is saying that AIG should never pay bonuses again. In fact, I think AIG is going to pay bonuses on a forward-looking basis with the amounts being somewhat tied to the firm's recovery.
The real question is whether it makes any sense for anyone to receive a bonus based on the firm's abysmal 2008 performance, let alone people in what might be the most spectacularly under-performing division of any company in human history.
My view is I'll believe that these bonus contracts are ironclad when I see them. Forgive me for not wanting to take AIG management's word for this.
Do we want to make a point, or do we want to make money?
I want to not spend our money on rich person subsidies. WTF is wrong with you who want to bailout these fools? Believing the lie that it's in our own best interest is pure BS. Didn't we used to have a policy of not negotiating with terrorists? Unless you've totally abandoned the idea of free people and free markets, the financial firms and their employees that didn't make bad decisions can fill the gap of "good things" these bad firms provided.
I don't care about the bonuses, but the company is bankrupt and should be shut down. This is exactly what you get when politicians try to run a company. Show trials over bonuses, and employees with every motivation to loot the company at taxpayer expense.
I have no opinion on whether they are actually looting it, but they have the incentive.
@ GeorgeNYC:
"The "best and brightest" were doing nothing more than arbitraging the company's AAA credit rating across other markets."
You could say that Megan, as an Upper West Side elite/University of Chicago MBA, is another "best and brightest" only she's arbitraging the Atlantic's journalistic credibility to peddle her narrow interests, and the interests of her elite little circle. They're doing everything to throw us off their scent. They had the keys to the American economy, and they destroyed it. Now they want us to think it's the fault of some vague global crisis, or a once-in-a-lifetime event, anything but them. When will someone hold these people accountable? What's the point of having courts, laws, and prisons, if not to protect the population from crooks like these?
I think the bonuses issue misses the point. If AIG had been allowed (forced) to file for bankruptcy, no bonuses would have been paid -- and neither would some $100 Billion to Goldman, Deutsche, et al.
And yeah, there would have been hell to pay for all the life insurance and annuities products they wrote, but they'd be fighting over scraps.
In hindsight, I think this mess would all have been over a lot faster if Paulson & Bernake would have left Bear alone.
My understanding was this money went to the very same division of AIG that created the mess. Thus, are the people getting these bonuses the same folks who directly and indirectly caused our current recession. I know it's not that simple, but regardless - this is not a bonus to retain quality people but in truth a form of legal theft.
Regardless, AIG was one hell of an insurance company once and as I understand still is (the insurance business still makes money. Since the government owns AIG, why not force them to get rid of their financial (dis)services division and go back to being strictly an insurance company?
Give some damn good math people some books, tell them that they have a couple of weeks and then let them go at it.
Who do you think it was who caused these problems?
No No No Jill. Megan claims that she now knows more lefty academics than she does finance people. This has nothing to do with the fact that she has a chicago MBA.
I actually beleive her about that. I just think she has lost her mind. That said, the fact that she threw a fit about throwing a few billion dollars at the auto companies but has no problem spending trillions to bail out scum like AIG sets her up for criticism like yours.
In the end, I think Megan being a product of the upper west side and elite education, just has a hard time admitting to herself that perhaps our elite insututions are rotten to the core and the "best and brightest" have completely fucked everything up. Megan is a committed cosmotarian elitist more than she is a Libertarian. Those facts must be really hard for her to accept.
The money isn't that big a deal percentagewise, but what is a very big deal is that we make sure federal bailout money is not looted in general.
No, not really. Not if it costs us more to prevent "looting" than we'd have lost to it in the first place. If you want to express moral outrage then we shouldn't give AIG *any* money at all. Not $1. But so long as we're giving them a mountain of cash, using a fraction of a percent of that cash to grease the wheels is probably the smart play.
A quick Google search indicates that AIG's yearly revenue is on the order of $100 billion. If forcing the executives and traders to take a massive pay cut results in even the tiniest of revenue decreases -- 0.15% or so -- then it is a stupid financial decision to cut that pay.
It is hard for me to believe that income wouldn't dip at least that much in the event of massive employee turnover. You'll lose a lot just to inefficiency, because people who are leaving are never as attentive to current accounts as they should be and people who've just walked in the door need time to get up to speed.
"If you want to express moral outrage then we shouldn't give AIG *any* money at all. "
Exactly. We shouldn't have given them one red cent.
so much b.s. with these finance guys. that's all they do all day is b.s. each other and b.s. us and convince us they deserve even more money.
it's crap.
if we do socialism in the country it'll be because Wall Street forced us into it.
OGWiseman:
For U.S. federal income tax purposes an employee's bonus would be taxed the same as her base salary. The only benefit would be deferring receipt of the bonus to a subsequent taxable year (e.g., AIG execs are paid in 2009 for their 2008 results).
In this discussion of AIGFP, people seem to repeatedly ignore that many of these bonuses were promised to these employees before AIG had run into financial problems. In bankruptcy these people would have been wiped out, but the firm didn't file, so these people are legally entitled to be paid. Claiming that they shouldn't be paid based on one's sense of moral outrage doesn't seem to be much of an argument. The claim that these people must be criminals and should be jailed isn't so hot either. I don't see an actually reasoned arguments about this issue, it just seems that people want to tar and feather AIG. That probably isn't the best way to get out from under this AIG mess.
Wow, liberals screaming about business evils sound a lot like right wingers screaming about anti-American terrorists. Seriously, did most commenters here actually read the post? The point is that the taxpayers own 80% of AIG, and if you want to keep good employees you have to pay them. One can take the posistion that we shouldn't do this for a bailed out company, but you have to at least acknowledge that a lot of good employees will leave as soon as they get the chance. Is there anyone here commenting that wouldn't leave a company that drastically cut his/her salary as soon as possible?
Also, keep in mind that "bonuses" in many finance related jobs are the bulk of an employee's salary (akin to commissions in some cases), and from what I understand a lot of the AIG bonuses being paid are guaranteed.
Megan, I'm glad you brought this up and think you make some good points. However, you're too willing to write off the current job market. Do you really think that anyone would leave AIG right now? Finance jobs are evaporating, but even if someone is hiring why would they take someone from AIG, who has just contributed to one of the most epic failures in the history of finance?
"If we hasten the flight of quality employees out of the company, that will cost us money."
Just where the fuck are these people going to go at the moment??? Which financial firm is hiring?
I think too many people have virtually no understanding how the bonus structure works in most financial services companies, like AIG. In most companies, bonuses are mostly if not entirely discretionary. Bonuses are a lot like a "tip" given a waiter for outstanding service at restaurant. It may be expected, but it's voluntary. If a company is having a bad year -- whether it's the fault of a particular employee or not -- bonuses can be cut at the discretion of the employer.
Bonuses (frequently) are not voluntary many banks and insurance companies. Instead, most of the bonuses paid are formula driven and are NOT discretionary.
When I worked at a bank (for two glorious years) 50% of my total compensation was supposed to come in the form of my quarterly bonus. My restricted stock and stock option awards were discretionary (and in theory were tied in some remote manner to my performance), but my bonus was not. I could calculate any day of the year how much bonus income I had earned. The bonus was based on certain criteria based on my performance. In theory, it created an incentive for me to be a more productive employee for the bank. Short of bankruptcy, where the court could modify the bank's obligations to its employees, my earned bonus was not subject to any risk it would not be paid.
People upset with AIG's paying a bonus seem to think it was voluntary. I suspect it was not.
"That probably isn't the best way to get out from under this AIG mess."
You seem to miss the point. AIG shouldn't get out of this mess. They should have never been bailed out in the first place.
No, OGWiseman, the money paid in bonuses is taxed just like the money paid to the trash haulers who signed on to drive Rip Nichols trucks in Dallas, the trucks that advertised, 'Need Big Money Weekly?'
What is funny about this is that we had a guy, Eliot Spitzer, suing AIG the year before they went bust, forced them to get rid of the principal, Hank Greenburg. I don't know if AIG would have done better with Hank but it would have been nice to know. So our earlier attempts at envy satisfaction may have gotten us in the way of having even more schadenfreude. It might be expected such persecutions probably only inured the AIG traders to 'regulations' and it's cousin, Prudence, as an unfriendly entities.
Cassano and the rest of the pirates at AIG Financial got paid $0.30 on the dollar for all this underpriced CDS insurance they sold. Who priced the insurance? Some actuary or other dolt who thought he understood derivatives?
The government owns 80% of AIG. Just boot out the CEO and refuse to pay the bonuses. Let the Brits at AIG Financial come over here and sue the US governemnt in federal court to try to get their money.
"Seriously, did most commenters here actually read the post? The point is that the taxpayers own 80% of AIG, and if you want to keep good employees you have to pay them."
I think most of the commenters have come to the conclusion that these people are in fact not good employees. One might even conclude they are poor employees. And if they can't possibly be bothered to stay on board without bonuses after their abysmal recent performance, well, I do believe there are quite a number of currently unemployed financial specialists qualified for the positions. I rather doubt they could do any worse than the current ones.
Oh by the way, since it was established under Bush that it's fine if companies break the law as long as it's under the direction of the President (telecom spying), then there's absolutely no legal problem with Obama directing AIG to break whatever contracts he doesn't like.
Wall Street can longer be trusted.
Financial services firms are still hiring top people (and firing the mediocore). A great trader or banker has options, and even if they don't now, the economy is eventually going to turn around.
If we hasten the flight of quality employees out of the company, that will cost us money
AIG Delenda Est.
Even if it costs us more money now to salt the fields, it will imo cost us less money in the long run.
"That probably isn't the best way to get out from under this AIG mess."
You seem to miss the point. AIG shouldn't get out of this mess. They should have never been bailed out in the first place.
Unless you have a time machine, it is irrelevant whether or not AIG should have been bailed out. Insisting that a company we've sunk $170 billion into "shouldn't get out of this mess" is not rational behavior, even though it may be emotionally satisfying.
Dan,
Then why is Obama threatening to take the money back?
Megan, you are NOT getting it. A company should pay a bonus AFTER their employees have accomplished some milestone. This bonus is either rewarding incompetence from last years performance, or acting as a prospective award for future performance. Pay should always follow performance, not the other way around.
"Unless you have a time machine, it is irrelevant whether or not AIG should have been bailed out. Insisting that a company we've sunk $170 billion into "shouldn't get out of this mess" is not rational behavior, even though it may be emotionally satisfying."
Sending good money after bad is not rational behavior either. There is no evidence that even after the $170 billion AIG is going to recover. It is a toxic waste dump of bad assets. It is only a matter of time before it will demand a further infusion of cash and another one and another one.
So now the argument for bailouts is that "you have already spend X number of billions how can you let us fail after that"? This is not about emotional satisfaction. It is about people who have run their companies in the ground and the world economy with it now looting the treasury.
As the bonuses paid to AIGFP, it's a outrage and no one can plausibly argue that it's not. But just because it's outrageous doesn't mean it's not prudent business. What you are paying for is institutional knowledge that can only be replaced at a higher cost than the retention payments (if at all), not excellence.
As Megan points out, this is a common problem in bankruptcy. The thieves are usually the only ones that know where the loot is. So if you want to know where the loot is, you better not shoot the thief.
And yes, there are theories by which the bonuses would not need to be paid -- offset being the main one I can think of. AIG probably has some sort of legal claims against many of these people. At a minimum, litigation would tie up payment of these amounts for years.
The Simple Solution is to pay contractual bonuses with the scrip that is a CDS, but marked to market based on reality. To wit: if somebody or some institution will pay 10 cents on the dollar for a CDS (or some sort of security based on a tranche of them), then pay AIG folks with their own monetary units.
(Do not allow a CDS to be evaluated at face value. To date this is a complete fiction to keep international trading partners happy.)
This will be easer than changing the culture of Wall Street that makes bonuses an entitlement rather than a reward for legitimate success. Millions of Americans wokr for just salary and wages. This Wall St Bonus scheme is clearly corrupting and leads to moral hazards of many sorts.y.)
Which is it, at AIG? The problem is, there's no way to tell from the outside. The employees of AIG know which traders are good, and which ones are idiots who made a bad mess worse. But they're not going to tell us -- or rather, they'll tell us, and the idiot traders will point the finger at someone else.
Why do you assume any of them are competent? Certainly none of them were competent enough to prevent their incompetent fellows from doing what they did, or even competent enough to realize what was going down and get the fuck out of Dodge when the getting was good.
And if "we" own the company, as you put it, we're not on the outside. "We" can audit the fuck out of each and every one of the fuckers, review every one of their transactions, and act accordingly -- including but not limited to naming and shaming, prosecuting, delicensing and chemically castrating. Or all four.
You don't want to hold anyone in power accountable for his incompetence -- which is not surprising, given your own.
If we give these weasels bonuses, can we, as majority owners of AIG, then be told who the counterparties are to AIG's positions, and are being made whole with our, or more precisely, our and our children's, money?
Pretty please, Masters Obama, Geithner, Summers and Bernanke? With sugar on top?
It is an interesting question whether paying big bonuses actually gets you the "top talent" For the last ten years corporate America and Wall Street has been paying larger and larger bonuses to its top exectutives. What evidence is there that those exectutives are actually the top performers? Anyone who reads the business papers even casually can think of any number of high paid CEOS who have wrecked their companies.
Megan seems to assume that the only way to run a company is the New York Yankee model whereby you throw money at every problem and pay to get what are considered the "top people" whoever they are. What about operating a company on the Minnisota Twins model where you look for bargain players? Who is to say AIG wouldn't be better off hiring lower paid execs and traders with something to prove. Indeed, it is hard to imagine how the AAA team could do any worse. Considering that the dream team Megan wants to pay millions to are the equivilent of the 62 Mets.
In bankruptcy these people would have been wiped out, but the firm didn't file, so these people are legally entitled to be paid.
Are you actually serious? The reason that AIG didn't file for bankruptcy was that they were deemed to be "too big" to by the government and thus received a massive twelve figure bailout. All rules about what happens in bankruptcy and what doesn't are out the window at that point.
I work for a company that is (was?) a direct competitor of AIG. The big difference is that we made a profit last year and I can tell you a couple things:
1) John is right. It is more than likely that AIG was contractually obligated to pay some bonus. That being said they probably weren't obligated to pay all the bonus (and no one is saying they did...I'm just saying they weren't obligated).
2) Go where Megan? No one wants to hire anyone at AIG. Those people are desperately looking for jobs anywhere else regardless of bonus. It's not like they were hanging out at AIG because they think they're is a future there. Anyone worth his/her salt and could get a job elsewhere has already left. More to the point, now these people have their bonuses they are MORE likely to leave ASAP. Your argument is not based in logic there.
That is a really good point Kate. If I were some star at AIG, I would have left a long time ago. It is not like there is any future there. I would imagine all that is left at this point are the crooks and the slugs.
"Are you actually serious? The reason that AIG didn't file for bankruptcy was that they were deemed to be "too big" to by the government and thus received a massive twelve figure bailout. All rules about what happens in bankruptcy and what doesn't are out the window at that point."
Just because you assert that the rules about bankruptcy are out the window doesn't make it so. A firms that is still in business still needs to honor contracts it has signed. I have no problem with bonuses not being paid to people who are contractually obligated to receive them, but there isn't nay evidence that that is the case here. People are just asserting that this is robbery and that everyone at FP should be shot.
Large financial firms like AIG are an amalgam of many different businesses. At least some of the legacy AIG businesses are doing just fine. Methinks Megan has a point in that bonuses should be paid to those who work for the healthy divisions of AIG (especially if AIG is contractual obligated to). I agree that it is ridiculous to pay bonuses (or even salary) to those instrumental in the bad decisions that got AIG in the current mess. There is a lot of justifiable anger all around but acting like an angry mob with pitch-forks is not the solution.
Here is something else to consider about AIG. It is an insurance company. One of the things it insures are banks and credit agreements.
http://www.rte.ie/business/2009/0316/aig.html
Earlier it emerged that AIG passed on $22.4 billion worth of US government bail-out funds to other banks and financial firms.
France's Société Générale, Germany's Deutsche Bank and US investment bank Goldman Sachs were the top three recipients.
....
The payments were made between mid-September and the end of December on credit default swap contracts - complex financial products which are a type of debt insurance.
Heres an idea:
Step One: Buy insurance on Bank X from AIG.
Step 2: Short Bank X. Drive it's share price down through market manipulation.
Step 3: Collect payoff from AIG when Bank X fails.
Step 4: Get AIG on taxpayer support so you can repeat from step one indefinitely.
But we must save AIG to keep us from the Dark Ages right Megan?
All of this moral indignation directed at AIG betrays the fundamental lack of understanding that most commentators have about the “bonus” situation at AIGFP. There is a very important distinction to be drawn between performance bonuses and retention bonuses. The former would be criminal and beyond egregious in the current situation, the latter however is a necessary, all be it less then palatable, necessity in a unwind situation. Despite what one may believe about the quality of the choices made by AIGFP, there is significant institutional knowledge among the employees, that if allowed to leave en masse, and in a disorderly and sudden fashion would erode the value of the governments %80 stake. Worse, the disorder in the market that could ensue if AIGFP fell apart due to an exodus of employees would cause a panic, which occurred when Lehman was allowed to fail in a disorderly fashion. I personally don’t want to see the TED spread to blow out again, and the credit markets to lock up completely. The systemic risk is far too great, and in the scheme of things 400 million is nothing compared to potential cost to the global economy of a disorderly failure at AIG. We as a society need to move away from the impulse to exact vengeance on those that caused this crisis, and deal in objective reality.
Then why is Obama threatening to take the money back?
Because it plays well in the press, I'd imagine. I doubt he thinks he could actually do it.
John - If your scenario was true then yes that would be bad. Only problem is that the cash from the bailout was posted as collateral on CDS due to the drop in AIG's credit rating and the rating of the reference obligation that the CDS was written on, in your case bank X.
If bank X or AIG's rating goes up in the future, which one would expect if the economy starts working again in a normal fashion, then AIG gets the money back that it posted. AGAIN AIG HAS NOT PAID OUT ON CDS, except in a few rare cases. This is by far the biggest misconception in this whole mess. AIGFP was bailed out due to improper liquidity risk management, not market risk management.
"they need at least part of their bonuses to maintain their lifestyle. "
Seriously? Their lifestyle and their business got everyone into a mess where all our lifestyles are at risk.
When the average person applies for help from the government, say when they become disabled, they're allowed about $1,000 a month in income, a house, a car and $1,500 in the bank. Why should AIG's welfare kings be any different?
Megan:
In your posting on AIG you seem to imply that the traders at the Financial Products division were truly talented and skilled individuals, and that the company needed to retain these people from walking out the door to other firms.
Aren't these the same guys who wrecked the company so completely that it needed $170 billion worth of capital from the US government just to stay in existence?
Frankly, Bobo the chimp could have executed better trades than these guys did. Unfortunately, Bobo was too busy negotiating employment contracts on behalf of AIG to spend any time on the trading floor.
Just because you assert that the rules about bankruptcy are out the window doesn't make it so. A firms that is still in business still needs to honor contracts it has signed.
No, this isn't right. If AIG would be in bankruptcy but for the fact that there are policy reasons for the government to keep it out of it, then it should only be allowed/required to honor the prebankrupcty contracts insofar as doing so served the policy reasons for keeping it out of bankruptcy. If, on the other hand, discharging the contracts did not support the policy for keeping it out of bankruptcy, then there is no reason to honor them.
To use an analogy, it's like a 17 year-old who gets to use the family car to take his younger siblings to school and go out at night. Let's say he gets blitzed, drives home, and gets caught by his parents. Now, a complete ban on driving might be an appropriate punishment, but let's say that would be an intolerable inconvenience for his parents, who would then have to take off from work to get the younger kids to and from school -- so they let him use the car to chaffeur his siblings where they need to go. If he is AIG (or the above commentator), he apparently would argue that he should be allowed to also drive himself out at night because his parents had the option to ground him from the car but chose not to. BS. He is grounded subject to certain necessary policy exceptions that benefit his parents -- just like AIG should be considered to be bankrupt subject to certain exceptions that benefit the US citizens.
I have no problem with bonuses not being paid to people who are contractually obligated to receive them, but there isn't nay evidence that that is the case here. People are just asserting that this is robbery and that everyone at FP should be shot.
I used to work with a lot of people at FP. I don't think any of them should be shot. I just think that the ones that are still left aren't particularly valuable and that stiffing them on bonuses would save taxpayers money and perhaps even provide a disincentive for incompetence in the future.
Re: If we hasten the flight of quality employees out of the company, that will cost us money.
Given today's job market how many people will flee to the exits in a fit of pique over a deniend bonus? Even star players have to wonder how easy it will be to get another job right now.
It's really sad that The Atlantic has a nonpracticing "consultant" quasi-MBA makingh the arguments she makes, and a twit 3 years out of Amherst (who has neither run a business. nor created value, nor even ghone to law school) talking on the other side (the business channel) about bills of attainder and the rule of alw in re these bonuses.
Can't the magazine afford peop[le who know something either about the economy (as opposed to failed talkinghead mba's) or about law (as opposed to postsophomores from Amherst) to write?
I find a great deal more intelligence and spark in the response-from-readers section than in the blogposts. (Don't think you meant it to be that way, but maybe.)
Why is it desirable to retain employees who are happy to take gigantic bonuses, which they know come from the taxpayer? Is competence the only criterion for what kind of employees we want to keep? How about using morality as a criterion? Do we really think it's in our self-interest to depend on employees who are very happy to steal taxpayer money? These are the people we're counting on to "make the financial system all better"?
I'd be willing to sacrifice any amount of taxpayer money to ensure AIG executives live in poverty, shame, and preferably prison, for the rest of their lives.
Whether or not these bonuses were promised to the employees is immaterial. These people were in the position to accept or deny this form of compensation upon taking their positions. They should have been keenly aware of the risk in accepting their contacts as such. They worked in the damn field of risk, for Pete's sake! Without government money, AIG would be in bankruptcy. They effectively failed, thus their "bonuses" have no merit, promised or not. That was the risk that they took. Normal people accept regular paychecks which often get reduced during such dowturns as these.
It's simply amazing that Megan can be so sure that GM workers must - MUST! - accept reduced compensation...or face the perils of the market. But the "talent" at AIG deserves no such corrections.
I'd be willing to sacrifice any amount of taxpayer money to ensure AIG executives live in poverty, shame, and preferably prison, for the rest of their lives.
Andrew? Andrew Mellon? Is that you? OMG, you're back among us and commenting on Megan's blog? Wow....
Are we sure these are not people hired after the government bailout?
Are we sure these are not people in other groups, or clerks, or people manning the phones, or whatever...
I am not saying they deserve bonuses. I am saying that there is a lot of outrage without a lot of useful information.
I decided a long time ago that I was never going to work for an idiot again, and that was after working for the government.
You folks own AIG. Presumably the reason you own it is because if it fails it will be more expensive than keeping it running.
Your second most important action after buying the thing is to piss off the staff. Great. Take a bad situation and make it worse. Trigger a bunch of law suits. Over paychecks.
Once you've screwed this one up even more, get started on health care. Those greedy doctors. Take any idiot off the street and I'm sure they can do better for cheaper.
Derek
Has everyone lost their mind? The taxpayers aren't paying for this bailout. No one is paying. Bernake said it himself last night on 60 Minutes that the Fed is simply printing money and handing it out. What we are witnessing is nothing short of a heist on a massive scale and it's being sold to us in the same similarly eerie way as the Iraq war. It's the huge panic all over again. We NEED to act fast. We NEED to save the financial system. We NEED to do all of these things or else everything will collapse and we'll be thrust into chaos. Give me a break. When will we learn? Let the free market have its way with these companies. Just as there are thousands of competent brokers who would be willing to do the job at AIG there are no doubt plenty of entities around the globe that would love to pick apart the best parts of AIG and reorganize them and unwind their deals and sell off their assets and reform a bloated company that apparently was allowed to get so big it now isn't allowed to fail. Where is the outrage? I voted for President Obama and wish him all of the best but he's ruining everything out of the gate by letting these enormous and unsupervised bailouts occur on his watch. I've never been as sad and disappointed and furious about what's happening to our country as I'm right now. Every morning I open the newspaper (internet browser) to another story about the enormous sums of money being used to plug a leak here or shore up a company there and it's just making the situation worse. George W. Bush was a terrible President but what Obama is allowing on his watch is going to be completely catastrophic.
This discussion makes no sense. The contracts are written: there are no new ones being written, right? No expertise of the sort needed to write the contracts is needed now.
I'm going to throw my two cents in -- hopefully a bit more politely than some -- with those who doubt that AIG or any financial services company can reliably distinguish talent from dross.
I am, at heart, sympathetic to the idea that you need to pay you most talented employees well in order to keep them. I'm also pretty confident that most employers can tell their best employees from their worst ones. But given what has happened over the past year, that does not seem to be the case on Wall Street right now. And if that's not the case -- if you can't identify your best employees -- there's no case for bonuses, whether they're financed by taxpayers or not.
What -- besides your evident belief that most people can accurately rate their peers -- makes you feel differently? Is there any data, for example, that suggests traders who have made the least in past years got us into this mess by placing the riskiest bets? You have to argue this sort of taxpayer wealth transfer on more than just conventional wisdom, your past experience and the say-so of the very executives who got us here in the first place.
As de facto part owner of AIG, I am just voting my shares when I say that we should not only cut bonuses but salaries down to zero. Maintaining the operation of a wealth destruction machine only makes sense if we want to continue to destroy wealth.
Government insurance of any kind always leads to disaster in the long run because political considerations have shorter time horizons than actuarial ones. The moral hazards grow until they blossom into spectacular defaults.
If AIG would be in bankruptcy but for the fact that there are policy reasons for the government to keep it out of it, then it should only be allowed/required to honor the prebankrupcty contracts insofar as doing so served the policy reasons for keeping it out of bankruptcy.
Then change the law so it says that.
But under current law, a company cannot just throw up its hands and tell its employees "the government gave us money, so we've decided to tear up your contracts and not pay you the money we agreed to pay you". They would be rightly sued for that, and the employees would rightly win that lawsuit. Unless the contracts were legally voided, the company cannot ignore them.
We should be thankful for this. If accepting government money allowed a corporation to unilaterally decide not to pay its employees what it had agreed to pay them, corporations could rewrite any labor agreements they wanted just by lobbying a friendly Congressman to write a "bailout" earmark into the next spending bill. Want to cut $10 million from employee healthcare? Lobby for $10 million, cut the healthcare plan by $10 million for "not being necessary for saving the company", then repay the government its $10 million. The employees get screwed, the Congressman gets a campaign contribution, and the corporation saves a lot of money.
Beware the law of unintended consequences.
The best part: AIGFP is based in CT. The law in CT states that any improper withholding of wages entitles the employee to double damages. If AIG delays payment for even one day AIGFP employees are entied to 2x the original amount.
I have to give these guys credit, they stuck it to the man. How many of us are routinely exploited by our employers, here is a group that has found a way to totally f*ckover corporate America.
I guess I have a moral question. Are you morally bound to provide your employer with the best possible service? Or, should you attempt to obtain for yourself the most salary, perks, and job security you are entitled to?
For example: if you are setting up the system you will work in - should you design the system so that it can be operated by any idiot off the street, or should you set it up so that your termination will bring the company to its knees?
This is the outstanding problem, imho. We've been told that 'efficient markets' reward the righteous, those whose work has created something of value. Except that it doesn't.
In fact, for going on thirty years now, markets have tended more often than not to not reward those who have actually created value. Iow, the labor markets are broken, and this current meltdown is the consequence of a broken labor market. What has been rewarded by the 'efficient markets' has been crazy gambles, leveraged influence, insider knowledge of various degrees of savoriness. Even the Randites should know this, though they don't have much nervous tissue past the top of their spinal cords; John Galt invented a perpetual motion energy machine, he didn't acquire wealth by playing the markets.
Should the man who invents such an energy machine receive fame, accolades, money, the congratulations of his peers? You betcha(Which makes me a sort of cut-rate Randite, I guess.) How about Mr. Fuld, or Mr. Mozillo? Are these the sort of men Rand had in mind as her model of the heroic entrepreneur? I tend to think not.
"I guess I have a moral question. Are you morally bound to provide your employer with the best possible service?"
A good rule of thumb is that the more answer is the opposite of the pragmatic answer. Wise policy is where the two conflict as little as possible.
This is the outstanding problem, imho. We've been told that 'efficient markets' reward the righteous, those whose work has created something of value. Except that it doesn't.
Neither the markets nor any other form of valuation always reward the righteous or punish the unrighteous. Aside from one nut I knew in college I've never heard anyone claim markets never, ever yield bad results.
Markets are just the best option, that's all. The alternative methods of identifying value are worse.
I think just possibly the most depressing part about this whole argument is how many people have opinions, and how few of them have knowledge.
Look, some of this is easy. The reason AIG has to pay these "bonuses" is the same reason your job can't say "hey, we had a bad year, pay us back 50 percent of your salary". That is, it's against the law.
The reason we've passed so quickly from Obama telling Geithner to take any steps possible to get the bonuses back, to members of Congress offering bills of attainder to tax it back is that everyone involved knows it would be against the law to renege on an employment contract, and unconstitutional to try to change a contract after the fact. Even if the run of the mill commenter, thinking with their adrenals and hypothalamus, doesn't.
And, no, CNBC wasn't pushing the housing bubble.
But under current law, a company cannot just throw up its hands and tell its employees "the government gave us money, so we've decided to tear up your contracts and not pay you the money we agreed to pay you". They would be rightly sued for that, and the employees would rightly win that lawsuit. Unless the contracts were legally voided, the company cannot ignore them.
The original bailout legislation in October gave the federal government the power to rescind executive compensation contracts. It's been mangled in the execution by the current administration, but it was fully within its power to say "no bonuses for AIG."
We should be thankful for this. If accepting government money allowed a corporation to unilaterally decide not to pay its employees what it had agreed to pay them, corporations could rewrite any labor agreements they wanted just by lobbying a friendly Congressman to write a "bailout" earmark into the next spending bill. Want to cut $10 million from employee healthcare? Lobby for $10 million, cut the healthcare plan by $10 million for "not being necessary for saving the company", then repay the government its $10 million. The employees get screwed, the Congressman gets a campaign contribution, and the corporation saves a lot of money.
The check on this is, of course, that Congress can always say "no" to the $10M bailout in the first place. And yes, procedural maneuvers could make that difficult, but this is no different than any other "screw labor" law.
AIG should be gradually shut down. It shouldn't be doing new business. It shouldn't be renewing existing policies. We shouldn't be trying to make money with it. (That would punish the private insurers that didn't screw up.) It should simply be shut down in a controlled manner.
everyone involved knows it would be against the law to renege on an employment contract, and unconstitutional to try to change a contract after the fact.
Unless they're unionized workers, in which case they should be forced to give back everything over minimum wage.
All this talk about contracts forgets one thing.
If the auto companies and AIG didn't take someone elses money, these companies would be bankrupt, their contracts would be worthless. No company signs a contract that says, "we will pay all of our employees even if we go bankrupt and can't continue operations."
For all intents and purposes these companies should be dead.
The contracts should have been thrown out the window when they took someone elses money.
But they weren't. This all comes down to bad design of the bailout. Actually the bailout was bad to begin with, but if you are going to screw things up at least try to do a good job.
The bailout should have been constructed like a bankruptcy. The companies will get these funds, provided they go under some form of restructuring, change, etc.
But this is once again the problem with seeing that a bolt has come loose in a complicated machine and thinking if you throw a bunch of bolts and monkey wrenches at the problem it will fix itself.
"do we want to make a point, or do we want to make money?"
I want to make a point. The point being that financial companies can fail. This is how capitalism works.
Sure, sure, pay them their bonuses...but stop the bail outs. If they complain, then say, "well, I'm sure your bonuses were used to buy up lucrative under priced AIG stock, right?"
Oh, and you can try to insinuate that we will "make money" but in fact, we could just shovel in billions for years while the execs and traders limp on to retirement.
Dan said:
> A quick Google search indicates that AIG's yearly revenue is on the order of $100 billion. If forcing the executives and traders to take a massive pay cut results in even the tiniest of revenue decreases -- 0.15% or so -- then it is a stupid financial decision to cut that pay.
What are the future costs of encouraging behavior so irresponsible that one division (Financial Products) took down the whole company?
Having them personally take a 'haircut' would drive the point home. That is, fire them all and hire some decent accountants to unwind the mess. Then, to drive it home a little further, bring in the auditors and see what the fraud picture looks like.
[..]
On the subject of getting what you pay for, consider the possibility that paying someone a great deal of money might inflate their arrogance and self-importance at the expense of their actual performance.
An example of that is the tendency of companies to engage in pointless acquisitions, for which CEO ego might well be to blame.
Not to put too fine of a point on it, but on the rest of Planet Earth not inhabited by AIG (or, apparently, The Atlantic Monthly) if a company loses ninety-nine billion dollars in a single year, no one gets a fucking bonus.
If your division is wholly responsible for those losses, as AIGFP is, your bonus is every day in the rest of your life that you get to earn a living without saying "Do you want fries with that?" On the rest of Earth, a failure 1/10th this size destroys the career of everyone even casually connected to it.
Which is why it's infuriating to hear these people defended as being so essential to the survival of the company that they have to be paid retention bonuses. Are we really supposed to believe that turning the global financial markets into a smoking crater looks that good on a resume? Has the financial industry lost its collective mind so badly that it would snap up someone who walked out of the ruin of AIG, Citi or Merrill because they didn't get their damned bonus?
Let 'em find out.
(Crossposted in comments at FiveThirtyEight when Nate endorsed this tripe.)
if "Property = theft"
the "POPULISM = BULLSHIT" - always
I am sick of all the faux populism over AIG
the whole point of lending them money in the first place was so they could post margin money on credit-default swap contracts once their bond rating dropped below BBB. (they were dumb to write collateral agreements that way, but ...) Now people are shocked (SHOCKED) to find that margin collateral actually went to other banks. Where did people think it went?
Talk about a phony scandal. And these "bonuses" are another contrived issue. If they can't pay people who produce business for them (same goes for Citibank, et al) then the government might as well shut these places down. Socially, we'd be cutting off our nose to spite our face, but leftists (populists?) are know for such stupidity.
Not a day goes by when Obama does not seem like a callow young man playing on base emotionalism. He is no leader at all.
After 9/11, the government held many Moslems and Middle Easterners for many months, without charges or trials, as "material witnesses". The government could claim that there were likely instances of fraud at AIG, and that these AIG employees could be considered as (and treated as) material witnesses if necessary. AIG does not hold all the cards here.
As much as I dislike the government abusing its power, I dislike equally the "pay me or I leave you to clean up the mess I made" attitude of the AIG people.
So now we have Too Big To Fail companies paying hefty bonuses to Too Important To Loose employees. Um, where's the free market in all this again?
Where is the free market?
It's up a unicorns ass, where it's always been, why?
We take back the power of our hard earned money and stop doing business with these companies. Why should our tax dollars be spent on propping up a company, we the American people, the American customer, with a freedom to spend our money where and how we like, continue to feed these greedy corporate machines?
We take back our power by vowing to stop doing business with them immediately, and never to do business with them again! Remember their names, faces, who they are and exile them from American business!
Megan,
I've heard this argument of bonuses to keep the best and the brightest from other sources and it doesn't really make a lot of sense to me.
I'm a professional, I get bonuses (quarterly and annually). The combination of the two, for me, was almost half of my income last year. I don't expect to see that much this year even though we are doing fairly well. I understand that if the firm doesn't do well, I don't get the bonus (or less of of the bonus) REGARDLESS of my own performance. By taking these cuts, our office is able to retain it's staff with no lay-offs which is ideal as we will need these people when work picks up again (and it will). We have set up our compensation this way to accommodate the economic fluxes in our corporate performance. I make a bit less, keep my job with all my colleagues and keep my health insurance. As I like my job and the people I work with, I consider this a reasonable set up.
But, really, even if I had a problem with the salary cut, where would I go? No one is hiring. Almost a quarter of my friends in the field have been laid off in the past six months - I KNOW I'm lucky.
So back to your argument - What is the rationale for taking bonuses in a bad year separate from retention of staff?
How does a for-profit firm actually keep staff with such high compensation packages in bad years? Haven't any people been laid off? Are these bright, talented staff or just the dregs of the corporation?
Are there actually jobs they could go to if they left their jobs at AIG? (Please don't guess on this one - where are the jobs?)
Are these really the wizards of finance you seem to claim they are? My apologies if they are, but if so, why are we bailing them out?
If they know so much about finance, why haven't they saved any money to survive the loss a bonus? Have they spent it all? How is that smart and why should we help them out of it?
Why is Wall Street so completely blind to the image created by taking these bonuses while taking bailout money? Why are you?
I really want to understand this argument and would appreciate a serious answer because right now it just sounds like a lot of Ivy-League bullshit.
Somewhat belatedly a commentator has noted that AIG might have to pay double if it failed to pay the bonuses on time. Of course it could gamble (with our money, not theirs) that most juries would find in favor of the insurance company and against the employee. Most lawyers for insurance companies are well aware that they have at least two strikes against them if an indivudual sues. Worse, if there is no factual dispute (i.e., the terms of the contracts are clear) the cases against AIG would probably win on a summary judgment and never reach a jury.
Several commentators have noted that AIG "knows" who are the good employees and who are the bad ones--and presumably could fire the bad ones. This, too, runs up against another important fact and that is many "fired" employees go to court alleging any one of a number of discriminations and juries are often quite willing to award huge amounts of money to the "discriminated against" employee. (One example, fifteen MILLION to a womens basketball coach in Fresno California who alleged gender discrimination.) The net effect is that most incompetent employees are kept on the payroll or offered very lucrative buyouts. (This practice is even more extreme, in my experience, in government jobs. Incompetents aren't fired, at best they are just shunted away--and at worst are allowed to keep on "serving" the public in a disfunctional way.)
Maybe AIG was "wrong" to pay the bonuses, but we have structured society in a way to "protect" the indivudual against the ruthless corporate (or governmental) employer and maybe it was the better valor to pay up rather than end up paying ten times more once a series of jury verdicts went against the company.
Finally, I have no idea as to how important it is to keep AIG as a viable company. I hope that those in the government (Bernacke, Geithner, Summers, Romer, etc.) have made some estimate as to how critical AIG is to OTHER institutions that have been weakened by the crisis. How many of those urging that AIG simply go into backruptcy would be willing to say "do it" and "I don't care if it will cost me my 401K, my future pension, and maybe even my life insurance." I have no idea as to whether any of these would be a likely outcome, but I suspect that there is at least some possibility of some of this happening if AIG were to be liquidated in a bankruptcy.
What to do? The Treasury Department should get be on the phone with each of the recipients of the bonus money and strongly encourage them to donate the bonuses to charity. These individuals can then avoid villainy, and the Government can resist calls for populist measures that would further erode confidence that TARP recipients can or will honor their obligations.
The peasants are out with pitchforks. So many targets, so little time.
What the ignoramuses above miss is that the tax benefits to bonuses don't accrue to the individuals, they accrue to the companies. The $1M rule on salary deductibility doesn't apply to performance driven bonuses. So it costs companies much less to pay bonuses instead of salaries. The company also gets to keep its cash, with payments only being made quarterly or annually instead of every 2 weeks, a very big benefit to businesses so reliant on working capital (a big concern at the old partnership driven firms, and why you see similar compensation patterns at law, accounting, and consulting firms). It also works like commissions - you only pay for delivered business and for traders you net out their performance over a quarter or year.
Ah well, the leftist scum can get back to their demands for heads, despite the facts behind the decisions.
I would like to say to all the people who are asking, "Yeah, but where do they think they'll go", one word: "Bermuda". Or maybe the Cayman Islands. Or maybe Jersey or Guernsey. Somewhere that regulators dare not tread.
Since we're all the owners of a company with a $2 trillion "insurance book", we seriously do not want the people who know that book intimately to migrate to rogue hedge funds with ammo to attack the weakest credits in the book.
Now most of them won't do that, but we really don't need but a few who know where the bodies are buried to go to the Dark Side and whammmo, we've another twenty or thirty billion in default claims.
Or worst of all, with a coordinated attack against several credits, they might be able to force a single default. Since most CDS contracts have boilerplate cross-default language similar to your credit card agreement that lets BofA jack your rate up if you pay the hospital late, you could have a default tsunami in that situation.
Now Treasury is fully aware of that so they'll be on the lookout. But it seems cheap to me to pay up and keep the traders happy.
How many of us on the left have argued that spending 1% of GDP to prevent a global warming catastrophe is well worth it, because the possible calamities are so extreme? I have more than once. This is a similar situation; we pay $165 million to limit the chance of a potential $2 trillion technical default.
I should have said "they might be able to force a default by AIGFP on a claim. That was the reason for the original September 15 rescue".
I have to admit that the utter ideological chaos involved is dizzying. Soi-disant free-marketers pleading not only that we have to give public money to bail out massive private institutions, but that we have to put up with the corrupt enrichment of its managerial echelon in order to do it! These are the same people who would gladly hang out the "deserving poor" to dry in order to avoid disincentivizing work by offering welfare, for whom the benefits of a national health care system are outweighed by the "unfairness" to those who can afford insurance.
I think that AIG should be considered dead; the bail-out money should be taken instead as the mass purchase of its assets. Offer immunity from prosecution in exchange for help in "unraveling this mess." Introduce a 99% tax rate for performance bonuses earned at a firm receiving more than so many billions of dollars of federal aid - whatever.
And frankly: yes, I would rather that my sense of justice and fairness be appeased even if the immediate economic consequences are less than appealing. In the long term, I think societies that abide by a sense of fairness are going to be more stable than those that abrogate any sense of fairness due to perceived expedience.