Some Thoughts About the AIG-Bonus-Outrage

"Administration aides know this outrage can go too far. If the president stokes too much outrage, he'll have a tougher time asking for more tax money for future bailouts of banks and other industries. But, as it was explained to me by an administration adviser, it is impossible for the president not to show that he's outraged. If he didn't, he'd lose credibility, which would eventually hurt his ability to sell future bailouts and his budget."

Slate: Anger Management, March 18, 2009

I've considered why I did not blog about the financial crisis this week. Usually, there is some tiny bit of information I find in the news which seems worthwile to add to this little collection of messages of doom. This week, all I found were articles written about the 165 million dollar bonuses paid to AIG managers, which I did, as everybody else, find shocking, but after considering the incredibly high bonuses paid to people who worked on Wall Street during that time of doom, I was neither surprised, nor, for that matter, considered this a matter that would really decide whether or not the current US policies to fight the crisis worked or not
After AIG (American International Group) found itself faced with the liquidity crisis back in September, it was bailed out by the Federal Reserve, in exchange for a 77,9 % equity stake. Now, according to yesterday's Planet Money Podcast, this doesn't exactly mean that the goverment owns almost 80 % of AIG, and can therefore do whatever it pleases with the company. Instead, those 77,9 % belong to a trust that is run by three trustees.

"Their compensation was disclosed today in the trust agreement released by the Federal Reserve Bank of New York. The trustees, selected last week, will make all decisions about how to manage taxpayers’ 77.9% equity stake and decide when to sell the government’s shares, which the U.S. received in mid-September for bailing out the insurance giant.
The three trustees are Jill Considine, former chairman of Depository Trust & Clearing Corp.; Chester Feldberg, former chairman of Barclays Americas; and Douglas Foshee, chief executive of El Paso Corp. While they won’t sit on AIG’s board, they will have all rights of AIG shareholders — including decisions about corporate governance to represent the equity stake."

WSJ, January 22, 2009

Now, it is argued that the bonuses are a contractual requirement - which naturally raises the question of why it can be an contractual obligation to pay bonuses to manager who have failed on such a spectacularly high level - but a contract is a contract, right? I understand the public outrage. There is even an argument to be made that all these public hearings serve a purpose - I guess it's supposed to be some kind of cartharsis for enraged citizens - but on the other hand, it is also kind of troubling that the entire Obama-administration just spent one week of very, very valuable time explaining 165 million dollar bonuses and trying to find ways to get them back. After all, what about those 400 billion dollars (the first part of the TARP money paid out before Obama came into office) that seem to have gone into a very black hole? What about the auto industry?
So, on the one hand, this is important because it points out one of the basic reason for the entire crisis: what happens when an entire system run by greed and irresponsibility is not sufficiently controlled, not by government agencies or the personal responsibility of the actors involved - but on the other hand, it seems like one big distraction from the real, enormous problems the Obama administration faces.

NY Times: House Approves 90% Tax on Bonuses After Bailouts, March 19, 2009
NY Times: Many in Government Knew Weeks Ago About A.I.G. Bonuses, March 19, 2009
Economist: Cranking up the outrage-o-meter, March 19, 2009
Financial Times: AIG chief urges staff to return bonuses, March 18, 2009
New Yorker: The A.I.G. Bonuses and Altruistic Punishment, March 18, 2009