OUR ALICE IN WONDERLAND ECONOMY

I've been meaning to post on health care for some time - and will do so later this evening - but this article ("AIG Advisor Group’s Retention Bonuses Will Be Paid Out by Its Broker-Dealers, Not Its Parent") caught my eye ...

According to Workforce Management the broker-dealers from the once-careening-into-bankruptcy-and-now-taxpayer-funded-AIG will NOT be paid bonuses from AIG. Sounds good, right? After all these broker-dealers are part of the same group that put together the toxic financial packages (CDOs & CDSs; see links) that turned into garbage, exploded in our collective faces, and helped drag the company down. They also helped insure that AIG would need an $85 billion taxpayer funded bailout, for no other reason than they screwed up big time.

In a real business - and in a real market economy - if you put together a deal that exploded in your face and threatened your company with insolvency some people would expect to get fired. If you walked away with cash in the process some people might even be brought up on charges, and could be looking at hard time. But in this Alice in Wonderland economy that's not the case.


It turns out that AIG's brokers will get paid for their incompetence and greed. But not by AIG. Instead, they're getting paid by AIG. Huh? Here's how it works.

Since AIG (and other financial firms) ran into a hail of fire for planning to reward their broker-dealer screw-ups with bonuses they decided to forego paying out bonuses about 6 months ago. Instead AIG is going to allow companies like SagePoint Financial - a subsidiary created by AIG - to pay out bonuses.

Got that? AIG, the parent company that's on the hook for tens of billions in losses manufactured by broker-dealers, and their shoddy business practices, is not paying out bonuses. AIG created subsidiaries like SagePoint (part of the AIG Advisor Group Inc., which includes FSC Securities Corp. and Royal Alliance Associates Inc) will go ahead and pay out bonuses. Nice.

Here's the real fun part. The bonuses aren't called bonuses. They're called "business-building loans" because - at least on paper - they're supposed to be paid back. Only they don't have to be paid back. Why? Because the loans (i.e. bonuses) are structured in way so that they don't have to be paid back. As Workforce points out, they're really "forgivable" loans, that happen to double as "retention bonuses."

See what I mean by "Alice in Wonderland Economy"?

So, you all can rest easy. AIG's mess will not grow because they're not paying out bonuses to reward incompetence. Instead, AIG subsidiaries will do their dirty work. All is good. As Alice might say, "If it had grown up, it would have made a dreadfully ugly child; but it makes rather a handsome pig, I think."

Hey, I think I just saw a rabbit go down a hole ...


- Mark