Misplaced Outrage at AIG

The media, political class and general public are filled with outrage at the bonus payments for AIG employees.  This anger and disgust is largely misplaced, and as such, are detracting from the real issues.   The fact that AIG is making payments to employees in their financial servies area is far more complex than is made out in the press.  For one, there’s issue of the sanctity of a contract, although it’s fair to say that these contracts should have been renegotiated, if possible.  The other nuance is the fact that Wall Street salaries rarely reflect the market value of work even in bad times – some part of a bonus payment is better thought of as a deferred salary rather than a reward for exceptional work or a sharing of profits.  For example, in my own experience certain bonus-oriented positions saw no salary increases for over a decade, with no adjustments for cost of living, seniority — the bonus was the tool used to make those changes. 

But — we should be outraged by the AIG situation.  Here’s three issues that should be the object of our anger:

1) Why do we continue to have a tax code that encourages bonus-skewed compensation, with all the “swing for the fences” mentality that engenders?

2) Credit default swaps are clearly not only the center of systemic risk, but have become a new tool for market manipulation among the fast-money crowd.  The conditions that may have supported the deregulation of these vehicles in 2000 not longer apply.  Why do we still not have effective governance of this market?  Why is effective legislation being held up?  Don’t waste your anger on a few derivative traders at AIG — focus instead on the International Swap Dealers Association and their Congressional supporters who are fighting effective rules for the derivatives market.

3) Why do we still have no clear plan for getting the taxpayer out of AIG and other financial institutions?  I believed that the first round of TARP was necessary to halt an immediate meltdown, but we’ve now bought 6 months of time from enactment of that bailout and have passed the 1 year anniversary of the Bear Stearns takeover, but seem no closer to a plan.

I can’t help but feel that our policymakers’ outrage at the AIG bonuses serves as a distraction to their failure to address the above issues as well as keeping focus away from AIG’s very generous political contributions over the year.  In fact, the grandstanding on this issue seems very familiar to me:

“I’m shocked! Shocked! Shocked that some of the AIG money went to foreign banks!  Shocked that there were employment contracts with bonuses!  Shocked that AIG money went to Goldman Sachs and other swap counterparties (so they could pay their bonuses)!  Shocked, I tell you!”

 

disclosures: neither the author nor his clients directly hold any positions in AIG

Advertisements

4 Responses to “Misplaced Outrage at AIG”

  1. anon Says:

    worst…congress…ever!

    i wish we could get rid of congressmen and just vote for things online…sigh

  2. Patriot Says:

    I envision that these Marxist policymakers will be held accountable and tried for their treasonous actions against our once proud country. Capitalism will once again reign supreme!

  3. Thomas Esmond Knox Says:

    Jeff, if they own the business (as they claim), they can close it down.

    Their choice.

  4. NickH Says:

    Excellent point. How easy it is to grandstand in front of the TV cameras instead of doing the heavy lifting of coming up with some regulations that will clean up the mess. Lazy, egotistical, self-centered politicians, trying to please their constituents so they would re-elect them is what got us here. I thought Obama said he would bring change to Washington! I’m still waiting for the change. Does anybody have better eyesight than me?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: