Monday, March 16, 2009


These guys still don't get it ...

With millions of Americans unemployed or fighting to keep their homes, this weekends revelation that AIG spent over $150 million on bonuses is (yet another) another slap in the face to the American taxpayer. So is this comment by AIG's CEO that they needed to give out bonuses because,

"we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses ... if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
I don't know about anyone else but AIG's CEO, Edward M. Liddy, just demonstrated how clueless he and his Wall Street brethren are. Real talent does not run a company into the ground. Nor should they be compensated for doing so.

Look, we're all going along with these bailouts because we've been told that we need to keep the banking system solvent. We are not, however, going along with these bailouts to maintain a self-indulgent out of touch lifestyle. Paying bonuses for AIG's incompetence contributes to keeping out of touch lifestyles (like this one) afloat.

Here it's necessary to keep in mind that AIG was brought down mostly by its "Financial Products" group, the division that insured the toxic investment products. The people in the Financial Products division are also the guys who received the vast majority of the bonus money. Why? Because AIG's Financial Product division had incentive contracts that said, in effect, "We'll pay you $________ if you insure these bad bets."

Put even more simply, these guys are supposed get bonuses simply because they made a deal. It didn't matter how the deal actually worked out for the firm, as long as the deal was made. Even Monty Hall's "Let's Make a Deal" prize give away show didn't do business like this.

Here's a chart illustrating AIG's "Structure of Investment Stupidity" (click on the chart to expand it).

I don't know of anyone who believes we need to honor bonus contracts for market players who underwrote bad bets. If the auto workers can have their union contracts renegotiated, and my credit card company can unilaterally change the terms of my credit and interest payments, AIG's bonus contracts can be changed as well.

- Mark

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