THE AIG BONUS FIASCO

(But is this really the issue?)

IN THE NEWS:

AIG has received nearly two hundred billion dollars of taxpayer money, yet decided recently to pay around one hundred and sixty five million dollars to corporate executives as per their employment contracts. Keep these two numbers in mind as you continue reading this article.

The way the majority of the press is covering this issue is to look at all the ways in which the taxpayer can get the one hundred and sixty five million dollars back. Most reporters and politicians have focused on how disgracefully AIG has behaved. True, they have behaved disgracefully -- but this misses the point.

A few reporters are now focusing on how Wall Street, in collusion with Congress, had language inserted into the TARP legislation specifically requiring payments of bonuses in contracts entered into before or on February 11, 2009. Yes, this is appalling – but did anybody really expect Wall Street lobbyists to stay at home (or for Congress to ignore them) just because it might have done the nation some good?

THE BRUTAL TRUTH:

One of the limitations of the human brain is that it has trouble comprehending large numbers. To most people, “millions” and “billions” and “trillions” are somewhat interchangeable (I have observed several television reporters using these words interchangeably – one on a major financial network -- in connection with this story).

Here’s a trick: whenever the word “millions” is used (correctly) in connection with TARP (or other government bailout program), just think of the amount as a dollar. That way, you won’t be so outraged by the fact that people who work on Wall Street make more money than they deserve -- and you will be able to focus on the real issues concerning TARP and companies such as AIG.

On the other hand, when the word “billions” is being used, you should be concerned – and when the word “trillions” is being used, you should be alarmed. The real dollar amount that our government has given or loaned to these few large businesses is in the many trillions. Be alarmed by that.

What is really going on is that the AIG bonus story is being used as a distraction. The political theatre of dragging the CEO of AIG in front of Congress and declaring, among other things, that AIG executives should apologize and then kill themselves – is all designed to shift the public’s attention away from the real issue.

The real issue is that very large companies including AIG are successfully extorting a lot of money from us – and that our government is all too happy to fork it over, even if it means long-term economic disaster.

And there seems to be no plan to remedy this situation.

Here’s what happened. AIG and some other very large companies such as Citigroup failed. It isn’t uncommon for businesses to fail – that’s part of a successful capitalist system – good companies succeed and bad companies go out of business.

AIG distinguished itself in two ways, however. First, it failed worse than any American company has ever failed. Second, they became so large that they were able to argue that they were “too big to fail.”

The solution: former Secretary of the Treasury Henry Paulson gave AIG close to two hundred billion (not million) dollars. We gave AIG – a company that failed worse than any American company has ever failed – more money than most companies ever see.

There was no transparency and we still don’t know where it all went – although we do know that a lot of it went to Mr. Paulson’s former firm, Goldman Sachs. He also gave Goldman Sachs a large amount of free cash directly (in the billions, so you should care) while letting Goldman’s competition (Lehman and Bear Stearns) fail. Was there a conflict of interest? Probably yes… but we have a new administration now so everything’s going to be OK… right??

Current Secretary of the Treasury Timothy Geithner’s solution to the AIG bonus problem is to recover the bonus money for the taxpayer -- by taking it out of the next thirty billion dollars AIG will (I am tempted to use the word “steal”) from us through the TARP program. So Tim Geithner’s solution is to hand AIG a lot more money, minus a small fraction for political purposes. And the executives still keep their bonuses.

Are you beginning to see how this isn’t going to solve the real problem?

We keep giving more and more money to failed companies – to do what? To make themselves even bigger so that the next time they fail, we will have to give them even more money? Will they use this money to lobby our representatives with, so that they can get even more money from the American taxpayer? What is the exit strategy here?

The answer: there is none.

I don’t know whether TARP was the result of government corruption or whether it was the result of government stupidity or whether it was the result of fear of the unknown – or a mix of all of these – and I don’t care. That is another distraction.

What I care about is that this policy is dangerously wrong and doesn’t solve the gigantic economic mess that threatens this nation.

Think about the economic incentives TARP gives to companies and the individuals running them: make your company so big it can call itself “too big to fail,” and then you can do anything you want – including going hundreds of billions of dollars beneath “broke” because Congress will always be there to give you more money – because you’re “too big to fail.”

This is circular reasoning that has this nation circling the drain.

We need a change in policy that eliminates the argument that any company is “too big too fail.” Going forward, no company should be allowed to get so big that it can make this argument. For the companies that are broke but really large – take them over and dismantle them as gently as possible.

But if you really think about it, this argument about being too big to fail is pretty bogus anyway. Yes, if AIG goes under there will be a lot of pain. But there will also be opportunity for better businesses to move into the vacuum that AIG creates. These new businesses will be more energized and innovative and will move the economy forward – until they eventually fail and are replaced by more innovative and energized companies. That’s how our economy moves forward – that is how it evolves. The dinosaurs were really big – but they failed – and the world didn’t end – it evolved.

*Time Magazine has a good article entitled “The Case for Letting AIG Fail” at:

http://www.time.com/time/business/article/0,8599,1885578,00.html (Copy this link into the address bar of your browser).