Monday, March 16, 2009

Scandalous Fund Dispersals from AIG

Recent news items about AIG bonuses have members of Congress up in arms puffing about the scandal of AIG paying ineffective execs fat bonuses for helping auger the company straight into the ground.

Before we address how silly AIG's explanations for this conduct are, I'd like to point out how silly it is to see members of Congress complaining about AIG pouring valuable funds into pointless bottomless pits like the pockets of ineffective oversight personnel. It turns out AIG's federal lobbying budget as the crisis approached included over $50,000 per day Congress was in session. Heck, as a member of Congress Obama received over $45,000 from AIG -- second only to Democratic senator Christopher Dodd.

As explained at the Huffington Post, it's worth asking what Americans have really gained in fiscal accountability or control since the recent election. Considering how seriously fundraising accountability has been taken by the current incumbent (using shared accounts to evade campign contribution limits isn't fraud?), this might not really be a surprise (not that either major party's candidate wasn't playing the same game; gamesmanship like this is apparently just business as usual on both sides).

Now, to AIG's own silliness. Claiming that the payments could not be stopped because they were required by contracts is pure idiocy. Ask Steve Jobs: breach of contract is not a criminal offense, just a business tactic. I'd like to see executives who crashed AIG try arguing to a jury of taxpayers they should receive a damages award for failure to pay a bonus to the idiots who caused the crash.


Anonymous said...

It appears this is much ado about something everyone with knowledge of the AIG bailout knew was cooked in. Even Sen. Dowd expressly wrote a provision protecting these bonuses that were laid out by AIG last year.

So this appears to me to be a political stunt by the W.H. and the Congress. More bashing of greed and class warfare.

Let's be a bit cynical when politicians point the finger at evil corporate managers. We need those people at AIG to fix that mess... a mess the government helped create and propagate.

Anonymous said...

correction... it was Senator Chris Dodd who wrote the bonus provision. Check out today's WSJ editorial on this AIG backlash.

Jaded Consumer said...

The other hypothesis is that paying retention bonuses to the very people who created the loss sends the wrong message -- they should be getting pink slips, and be replaced with, say, people randomly chosen at a bus stop.

Certainly I believe we would get better performance from Congress (that is, results more in line with the will of the population) if its membership were chosen by lot. This isn't the system I'd pick for corporate governance, but corporate governance has been hijacked pretty badly for some time. Like William "Boss" Tweed said, “I don’t care who does the electing, so long as I get to do the nominating.”

We haven't had very representative governance in either the public sector, or the private sector's publicly-traded companies, for a very long time. Careful thought is warranted regarding the proper remedy for the situation.

Anonymous said...

I agree with you, but beyond the way it looks (bad + greedy), this was cooked into the bailout a long time ago and everyone involved knew about it....

I just think it's populist rabblerousing to incite the general public into a mob over something the politicians and the policy wonks, ie, Geithner, who at the time was the NY Fed who arranged the bailout.

We're talking about what, 1% of the bailout money they've received? That's what happens when we start getting millions of dollars and billions and trillions involved... most people blink and think,.... it's all a lot of money.

respectfully, ( keep up the great blog) Rob

Jaded Consumer said...

Dear Rob,

Thanks for the comment, and for keeping up with the blog. I agree that people -- including regulators -- knew the bonuses were expected expenditures, and that there is a strong whiff of populist rabble-rousing in the indignancy with which these are decried by politicians who thought nothing of taking AIG money when the going was still looking good (that is, when the transactions now breaking the company were being entered, or at least before the accounting that made them look profitable for bonus-calculation purposes had been exposed as built on a false foundation).

But, let's look again at that 1% figure. I am reminded of fractal mathematics. Didn't we hear from the Obama administration that the Republican concerns about the bailout bill being a great meal of pork was silly, because only 1% of the whole was objectionable earmarks? Now, we're looking at part of the remainder -- part of the non-pork part of the recent cascade of federal funds -- and we see maybe 1% that's apparently a waste. (I assume paying good cash in retention bonuses to make sure AIG keeps the same pack of imbeciles who created the mess for AIG while chasing their own performance bonuses is wasted investment; paying to retain someone who'd been fighting to get out of the bad transactions, and thus demonstrates apparent understanding of the company's transactions and liabilities, might be much more attractive.)

It makes me wonder whether, as we zoom in on more not-actually-a-waste disbursements, we will discover 1% waste, ad infinitum. In that case, maybe the fraction of wasted expense is vastly different than the 1% we see at any given resolution of analysis. If we see a different 1% every time we zoom in on non-waste, we could find ourselves in principle -- I haven't tried following all the money, though I assume it's possible even though Congress claims it has never learned where some of the first bailout funds went -- discovering that usefully-spent funds represent a very thin veneer over a vast majority of useless expense like bonusing the criminally idiotic and protecting foreign banks that made risky contracts with insolvent insurers. (The fact AIG was insolvent might only have been comprehensible to someone who understood these contracts, but in hindsight it's clear they had no possibility of satisfying liabilities under the agreements it made.)

The poor quality if information available in this market makes it especially attractive to enter investments thought to be well-understood by investors, but possibly discounted by the marketplace panic (or news that is simply wrong).

What was that old Chinese curse? "May you live in interesting times."


Welcome to interesting times :-)

Glad to share them with you ;-)