November 18, 2008

Looting

I find that about 75% of the time when Gregg Easterbrook strays from football into a topic I have some knowledge about, he is seriously uninformed. But like a stopped clock, he occasionally gets one right, and I completely agree with him about how AIG is looting the treasury:

American International Group, the insurance giant that has swallowed $152 billion in federal subsidies in just a few months, "plans to pay $503 million in deferred compensation to some of its top employees, saying it must tap the funds to keep valuable workers from exiting the troubled insurance giant," Carol Leonnig of The Washington Post reported a few days ago. I suspect all the gold being shoveled to AIG is a colossal blunder by the George W. Bush administration.

Money to reinforce Fannie Mae or to buy stock in banks may or may not be a wise decision, but at least there is accountability regarding where the funds end up. The money being shoveled to AIG is simply vanishing -- AIG isn't even telling the Treasury Department what the money is for. When the General Services Administration buys pencils, many layers of auditors check the deal. Isn't it a tad naive to think $152 billion can be entrusted to a firm with a demonstrated track record of financial mismanagement and that money is not going to be looted? The Treasury Department's handling of AIG appears to be spectacular irresponsibility with public money.

Now, about the $503 million in tax-subsidized bonuses to prevent "top employees" from "exiting the troubled insurance giant." The top employees of AIG are the ones who drove the company into the ground by making crazy deals, taking on bad debt or promising to insure bad debt when they knew AIG lacked adequate collateral. Those "top employees" at AIG are either cheats or incompetents -- we want them to leave! They haven't demonstrated any financial expertise. Yet the same AIG top managers who did a terrible, terrible job are set to receive huge bonuses: an example of the problem that corporate bonuses are awarded regardless of performance.

Management-suite types often rationalize huge bonuses by threatening to jump to another job. What job exactly would a top AIG employee jump to? The financial services industry is contracting; lots of well-qualified people with strong résumés are out on the street; no financial firm in its right mind would hire a failed manager from AIG over the fully qualified financial managers looking for work.

AIG top employees have no career options right now; it is inconceivable any other financial firms are offering them lavish raises to hire them away. So "retention bonuses" aren't necessary. But either the Treasury Department is too dim-witted to realize this or it doesn't care and is merely trying to redistribute wealth from the middle class to the rich by allowing tax-subsidized bonuses that the giveaway team at Treasury knows perfectly well are not merited.

Side note: You might think, "How could the fancy-degree top people at Treasury possibly be that completely, utterly stupid?" But Treasury officials have a self-interest in maintaining the assumption that financial managers should receive gigantic bonuses regardless of performance. Almost everyone at the top of Treasury came from the firms being bailed out, plans to return to such firms and wants to pocket gigantic bonuses regardless of performance. So not only is the Treasury Department acting irresponsibly with tax money but its top executives have a personal stake in irresponsible action.

I expect nothing less but pure, naked greed from Bush appointees, and the Republican party will be fine with it as long as they get occasional kickbacks in the form of campaign contributions.

Posted by Observer at November 18, 2008 04:47 PM
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