AIG and the Berlin Wall

Populism against corporate greed and Wall Street big shots is a favorite among today’s politicians on the left and right.   Thus as it became known that AIG executive (and former executives) would receive $165 million in bonuses — over 70 getting more than a $1 million each — it was time to pile on.  Senator Grassley suggested “resign or suicide,” while the Republicans blamed Treasury Secretary Geithner and the Democrats blamed the Bush Administration.  Then came the “revelation” (actually old news) that much of the money was ending up in the hands of foreign banks, creating yet another backlash.   What does all this mean?

First, despite all the political grandstanding and self-righteous prose being heaped by pundits left, right and center, this is more a symbolic issue than a real one.   In the grand scheme of things the money paid as bonuses is only a tiny fraction of the bailout money given to AIG, and the contractual obligation to pay these bonuses appears to come from April 2008 contracts, when AIG still appeared robust.   Second, symbolism matters.  A lot.  When the Berlin Wall came down on November 9, 1989 it marked the downfall of an edifice that symbolized communism.  Within months, Europe was transformed completely.

AIG had to be bailed out when it became evident that letting it fail would reck havoc on global markets.  European and Asian states were heavily involved in AIG, and if the US cut the rope on our economic partners, the pay back could have led to a world economic downward spiral.   It was, therefore, known from the start that a huge chunk of this would end up in foreign hands, that was in fact the reason a bailout was seen as necessary.

Ultimately it came down to this: there was a real panic that global credit markets would seize completely.  Credit is the lifeblood of capitalism.   The Bush administration realized that AIG failing would create a potential global meltdown and after considering “letting it fail” decided it had to save the giant.   It’s share of the bailout money is about $170 billion, a huge chunk of cash, giving the US government ownership of 80% of the company.

The bonuses were agreed to in 2008, before the bailout, and in both administrations someone no doubt read about the bonuses and either they didn’t register as something important, or they realized that AIG was contractually obligated to pay them.   Indeed, bonuses were already paid out last year, without raising the protests we’ve seen this week.  So what gives?

AIG is symbolic of a system of deregulated out of control executive compensation, whereby companies across the board found CEOs and other top officials with large bonuses and severance packages even if their performance was a failure.  Moreover, companies that appeared to be doing well gave large bonuses because officials had incentive to gain short term profits to enhance their compensation, even if it were clearly a long term risk.  The long term was irrelevant.  The fact that AIG and its executives did not seem to think the bonuses anything out of the ordinary (nor did most in Congress, though you’ll have a hard time getting them to admit it) demonstrates that the mentality is still alive.  They believe they are worth the money because they are used to getting that kind of money.  The entire system was built on the fact that extremely high paid executives fancied themselves wizards of Wall Street, navigating and plotting a global investment boom, and therefore saw the bit they took off the top as justifiable.  Unlike Madoff and Stanford, they didn’t think they were doing anything wrong, they felt they’d earned it.

That delusion was based on the belief the boom was real and would last, that investment income would keep growing, the property bubble would continue to expand, and wealth would continue to grow, and in fact feed on itself.   They would make sure that happened, and be rewarded handsomely.  Perhaps some knew it was unsustainable and thus were ‘getting while the gettins good,’ but I suspect most were so caught up in the spectacle that they fooled themselves as well as the average investor.  Moreover, since they were the inside players, making “special deals” and manipulating the markets, they knew their skill — or rather, access to inside information and secret deals — was worth a lot.    The real scandal of the AIG bonuses is how widespread that sort of thing was (and is).

The fact that the taxpayer is footing the bill arouses righteous rage, but our depleted 401K funds paid the bill for all the other bonuses and compensation packages that allowed the fat cats to maintain their high calorie diet.   Either way, they took our money, legally, benefiting from being on the inside, while deluding themselves into thinking they could stretch the good times on for the foreseeable future.

In that, AIG is the “Berlin wall” of the economic crisis.  Just as the wall symbolized the evils of communism, the AIG bonuses symbolize the delusion and gluttony of the world of high finance.   Just as the collapse of the wall led to a ripple effect throughout eastern Europe and ultimately the fall of the Soviet Union, this could lead to a massive increase in regulations on executive compensation and corporate behavior.  Never again should we let the robber barons run wild.

The Hank Paulsons and Tim Geithner’s of the world, insiders themselves, paid little attention to the compensation issue because they saw the credit crisis as a problem to be solved; they didn’t recognize this as a revolutionary change to the practice of high finance in America, or even the globe.   This should shock them out of it, and force them to recognize they are not dealing with just a crisis, but a complete revolt against the way things were done.

This particular case will pass.  AIG execs will return some bonuses, or much might be taxed back into the federal coffers.  Politicians will point fingers, and find embarrassing tidbits about who knew or should have known what when.   But as that fades, change will sweep through the regulatory structures on Wall Street and beyond, executives will face new scrutiny, and more stories will emerge of greed and avarice, funded by the tax payer.   Last week it was financial “journalism,” this week it’s the actual players and politicians under the gun.  No one will be spared.

And next, expect to hear a lot more about money AIG will be paying super rich investors in Hedge funds.   Look for radical change in that industry too.  Things will never be the same again — which, given the mess the old system brought us, is a very good thing!

  1. #1 by cinderalka on March 19, 2009 - 02:33

    I like your image of the Berlin Wall. My take is that we have to stop trying to find a legal or tax angle, and actually shame these people into giving back the money themselves. I think that’s the best way out of this mess.

    Alka Kothari

  2. #2 by simonsays2 on March 19, 2009 - 18:32

    Great perspective Scott. Should be interesting to see how the surreal bailout auction unfolds. Perfect summary on youtube:

  3. #3 by henitsirk on March 24, 2009 - 02:15

    I think it’s largely symbolic, too. These bonuses are nothing new, as you said, and were guaranteed by legally binding contracts. I like the creativity behind this idea of taxing them heavily, but then that smacks as a bit unfair (even though in general I support the idea of graduated taxes putting a heavier burden on the rich). When people’s retirement funds were growing and the economy appeared healthy, the average person didn’t really care how much executives were paid. Suddenly it’s rage inducing!

    If these executives voluntarily gave back their bonuses, I suppose we could applaud their moral sensitivity. But I’m not about to agree that they need to be shamed — compassion for *all* living beings, you know! — for simply being a part of an overall system as you explained.

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