I've been highly critical of the government bailout of AIG. But the new spectacle
of the company paying $100 million in bonuses to executives, even over Secretary Geithner's objections is an example of what's wrong with it.
First, lest there be any confusion, we're not talking about bonuses for executives at the conventional insurance providing divisions of AIG. We're talking about $100 million in bonuses for executives at the company's Financial Products division, the shop in London that wrote almost half a trillion dollars of credit default swaps (in effect, unfunded de facto insurance policies on wildly overvalued assets) -- the ones that caused the company's death spiral and put taxpayers on the line for what will likely eventually be a quarter trillion dollar price tag.
So Secretary Geithner told AIG CEO Edward Liddy that the these bonuses would not fly. Liddy said: sorry. We're contractually obligated to pay these bonuses. And if we don't we could open ourselves to legal liability. We could get sued.
Now, as a narrow legal matter, I don't doubt there is a contractual obligation. But bankruptcy disrupts contractual obligations. I'm actually not sure where employees with contractual bonuses come in line in a bankruptcy proceeding. But I bet it's really far toward the end of the line. And in business terms AIG was bankrupt. Not just bankrupt but driven to bankruptcy entirely by the division that these execs work at. It is only because -- rightly or wrongly -- the government believes that allowing AIG to founder would threaten the entire economy that we have agreed to let the taxpayer take the hit for all these reckless actions.
So on the business merits, they're bankrupt. But we decide it's in the national interest to prevent formal bankruptcy. And these sharks -- not everyone at AIG, but the execs that created this mess -- use that as a lever to get paid the money they never would have seen if we'd let (market) nature take its course.