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On AIG and Autos

March 18, 2009

Remember what the AIG Financial Products division actually is: it is the unit that brought down the company. It did so with almost Madoff-style hubris, basically writing huge insurance contracts for CDOs with nothing to back them up. It got away with it because it used unregulated credit default swaps. And now as those assets continue to go south, the taxpayer must keep piling in money. In my view, the instigators of this scheme deserve jail, while in fact they are getting enormous bonuses. To be fair, the outrage about this is near unanimous, and seems broadly bipartisan. But still, there is a general fear of interfering with “contracts” and the way the “market” determines salaries.

Now consider auto workers. In response for federal funds, the auto companies were told to slash benefits to workers. The contrast is stark. The Church teaches that workers have the right to “a pension and insurance for old age, sickness, and work-related accidents” and that all have a right to health care. And yet, the fact that the companies were granting these rights to their workers drew the ire of many, especially on the right, when the companies became the recipients of federal funds.

Interesting, isn’t it? There is a lesson here, I think. In one case, it’s the “free market” determining compensation, and so the outcome is accepted. In the other case, it’s the union forcing companies to pay above market compensation, which clearly must be harmful. I think Pope Leo had it right more than a century ago: the correct way to see it is through the lens of justice, and that means the relative power of the different sides.

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28 Comments
  1. Mark DeFrancisis permalink
    March 18, 2009 3:57 pm

    Excellent post.

    And our paying 100 cents on the dollar as collateral for AIGs credit downgrade as it relates to their ‘credit insusance’ contracts is ridiculous, especially since there have been no significant defaultson the covered debt securities.

    Could Geithner not have stepped in and renegotiated these contracts, or, simply failed to pay anything to the companies who experienced no significant losses.

  2. David Nickol permalink
    March 18, 2009 4:17 pm

    It seems to me that if there are strings attached to bailout money (and I believe there should be), they should be attached before the money is given, as a condition of receiving the money. I have heard hints that there was something fraudulent about the contracts guaranteeing these bonuses, and if that’s the case, of course something should be done about it. But I am doubtful the current approach — we gave you the money, so now we get to cancel contracts from before you got the money — is fair.

    And how do we know which, if any, of the bonuses were fair and which were unfair? Bonuses based on individual performance are not unfair if an individual has done well but the company has lost money.

    There may be a lot to what you say comparing approaches to AIG and the UAW, but I would have to say that I find it appalling that congress would attempt to get part or all of the bonus money back by inventing a tax. I can’t believe I am the only one appalled by that, although I have heard no other people expressing that opinion.

    Better congress should spend its time devising ways out of the current economic mess, and figuring out how to prevent it from ever happening again, rather than devote time to creating tax legislation to get back the bonus money. It’s all a show to try to convince the American people they can do something right for a change, and I’m not buying it.

  3. Phillip permalink
    March 18, 2009 4:44 pm

    It seems Fannie and Freddie are giving bonuses also:

    http://online.wsj.com/article/SB123739512036672809.html

  4. March 18, 2009 4:54 pm

    There’s a massive difference in the radio-talk about these two issues, but I don’t think there’s that much difference in public perception. I think the general public is distrustful of both high-salaried executives and members of entrenched labor unions for much the same reason: Both have a reputation for seeking short-term financial advantage at the expense of longer-range public interest. If you were to ask the Man on the Street who is responsible for the decline of once-proud manufacturing companies like GM, I suspect both corporate management and the unions would share the blame about equally.

    Is this perception fair? Not entirely, but the situation of union workers in America has changed radically since Rerum Novarum, even though the rhetoric of union leaders and their Democratic allies still often them as hapless victims. This allows union leaders to garner support for questionable partisan causes instead of playing what John Paul II called “their specific role, which is to secure the just rights of workers within the framework of the common good.” When legitimate concerns and grievances do arise, the public has come to react with justifiable skepticism.

  5. blackadderiv permalink
    March 18, 2009 6:47 pm

    I think David has it exactly right. In the Auto case, people argued that giving up certain benefits should be a condition of taking funding. Unions were free not to agree to this; it just meant they wouldn’t get the money. In the case of AIG, the money wasn’t made conditional on their not being any bonuses (in fact, the bonuses were approved by Geithner!) It was only after the whole thing came to light that politicians started being outraged, and then they proposed to deal with the situation in a patently unconstitutional manner.

    There is also this difference. In the Auto case, the people who favored changing the compensation package argued that it was this additional compensation that was driving the Big Three towards bankruptcy. Maybe you buy that, maybe you don’t, but that was the argument. By contrast, no one is arguing that if it weren’t for these bonuses AIG would be in great shape. In my opinion the whole thing is demagoguery, and dangerous demagoguery at that.

  6. David Nickol permalink
    March 18, 2009 7:06 pm

    In my opinion the whole thing is demagoguery, and dangerous demagoguery at that.

    BA,

    I agree. (I worry that I am becoming a conservative or something.)

    And what are we to make of this story in Politico?

    Sen. Chris Dodd (D-Conn.) looks like he may be facing a fresh political firestorm.

    Dodd just admitted on CNN that he inserted a loophole in the stimulus legislation that allowed million-dollar bonuses to insurance giant AIG to go forward – after previously denying any involvement in writing the controversial provision. . . . .

    Dodd had previously said that he played no role in writing the controversial language, and was not a part of the conference committee that inserted the language in the bill. As late as today, Dodd’s spokeswoman denied the senator’s involvement. . . .

    It appears that Dodd simply lied and then had to fess up.

  7. jonathanjones02 permalink
    March 18, 2009 7:49 pm

    All this populist outrage is hilarious and offensive, especially when coming from any of the Congressmen and president who voted for and signed the pork laden “stimulus package” last month that pretty clearly and explicitly allowed for this. What a joke – at the expense of the taxpayer – and a perfect example of why big business and big government are each other’s best friends, at the expense of everyone else. Privatize profits and socialize costs all the way around. Big unions aren’t much better, and I seriously doubt Pope Leo would recognize much good in our union bosses, especially the public sector ones.

  8. Policraticus permalink*
    March 18, 2009 8:12 pm

    big business and big government are each other’s best friends, at the expense of everyone else.

    I agree with the spirit behind this, though it’s not necessarily “big government” that is business’ best friend, but the Republican and Democratic Parties.

  9. March 18, 2009 9:52 pm

    The AIG bonuses is hardly an example of the free market at work. It’s a good example of how agency costs result in above-market wages.

  10. March 18, 2009 10:06 pm

    In my opinion the whole thing is demagoguery, and dangerous demagoguery at that.

    Huh? I assume you are aware exactly what AIGFP did, right? In a sane world, the instigators would be sitting in a cell next to Bernie Madoff and the outfit would be shut down. Then again, in a sane world, universal health care would be provided through the public purse and we wouldn’t expect companies to shoulder the burden.

  11. March 18, 2009 10:09 pm

    the pork laden “stimulus package” last month

    Do you have the slightest idea what you are talking about here? Do you understand the economics at all, or are you just repeating talking points from the likes of Limbaugh?

  12. jonathanjones02 permalink
    March 19, 2009 12:02 am

    Do you have the slightest idea what you are talking about here? Do you understand the economics at all, or are you just repeating talking points from the likes of Limbaugh?

    Are you either willing or capable for constructive dialogue – that is, without insult or mudslinging?

    Congress voted to make such bonuses legal. And be sure to look into Sen. Dodd’s activities in conference. There was even more than one vote on this – I expect we will be hearing more about the one that would have required bonuses from those partaking of TARP to have been approved by Treasury (but that was a GOP proposal, so it was probably a tool of big business or something, against the common good ect ect.)

    And if you don’t believe the “stimulus” was not loaded down with earmarks and what I think can be fairly labeled corporate welfare, go ahead and start a thread on it. There’s a huge amount of examples that would very strongly suggest otherwise.

    As AIG received about 170 billion in bailout money, it appears that the contractual obligatations of bonuses were well known in that deal’s formation. Or, if this wasn’t all that known, some people (including the Treasury Sec) are….deflecting blame, or are negligent, or both. Or maybe they just really dropped the ball on the concession negotiations. Now, however, bad press makes more necessary politically soothing populism. Well, hilarious and offensive.

    The whole thing is quite the mess, and is a perfect example of big business and big government working together for their benefit (until its a PR disaster) as taxpayers foot the bill. There are many other examples of this, and will be many more. If you support corporatism broadly defined here and elsewhere, bully for you, but how about taking my characterizations and responding directly and more comprehensively and more charitably…unless you don’t care to lay aside the insults and actually talk details, which I’d be interested in doing.

    http://www.time.com/time/business/article/0,8599,1886138,00.html

    What did the Treasury Sec know and when?

    This is also another example of the fading myth that big business and the GOP are in each other’s pockets (though they certainly can be). AIG and other companies counting on the taxpayers to bail them out will play with whoever, and the Democrats have their hands out all the time, Dodd being a prime example now.

    (as a more superficial aside on this point, check out the lovely t-shirt on J. Cassano here
    http://www.talkingpointsmemo.com/archives/2009/03/che.php )

    Now how about an end to the insult and condescension? If you think someone wrote something stupid, how about writing something like “I disagree because” ? Playing Big Man of the Internet Putting These Crazies In Their Place may be satisfying in those moments, but it’s a pretty poor way to be much aside from a small measure of amusement.

  13. March 19, 2009 8:30 am

    If you want a reasoned response, write something reasonable. If you persist in using meaningless slogans like “pork-laden” “big government”– the slogans of the neanderthal right who have no inkling of understanding this financial crisis, then I will not bother. And where did I say that Geithner and Congress did not deserve blame for allowing these companies to act in a business-as-usual manner (a manner defined by the pope as being ruled by raw greed) when they were effectively under the control of the taxpayer? For that is exactly the kernal of the issue, which you don’t seem to understand at all.

    Anyway, you seem immune to rational argument. It’s not so long ago that you were linking to “white culture” sites blaming the financial crisis on minorities. Just go away.

  14. David Nickol permalink
    March 19, 2009 9:43 am

    Huh? I assume you are aware exactly what AIGFP did, right? In a sane world, the instigators would be sitting in a cell next to Bernie Madoff and the outfit would be shut down.

    MM,

    It seems to me that’s a separate issue from the issue of these bonuses. It may be that some of those who received bonuses did reprehensible things but that others simply did their jobs and earned their bonuses. Also, you seem to be implying that if we can’t punish them by prosecuting them, we can punish them by taxing away their bonuses. I don’t see how you can justify using tax legislation to punish people. I don’t see the government doing anything constructive about this whole bonus situation. Too many people are whipping up anger about bonuses at the expense of working on real solutions to the current economic crisis.

  15. March 19, 2009 10:31 am

    David: but that is the issue. How do people “earn” multi-million dollar bonuses for not only creating nothing of value but for engaging in financial fraud? Is it because the “free market” says so? Or is it because the financial industry has an immense amount of power and influence? I ask that to contrast with the treatment given to auto workers to have the audacity to demand health care benefits at a time when their companies are in trouble.

  16. blackadderiv permalink
    March 19, 2009 10:41 am

    MM,

    David is right. If AIG employees have broken the law, then the appropriate method of dealing with this is through the criminal justice system. Trying to take away the bonuses through the tax system, as the Congress is proposing, is not an appropriate use of governmental power (and is in fact explicitly prohibited by the Constitution).

  17. March 19, 2009 10:52 am

    Blackadder, that strikes me as overly positivist. What they did was objectively wrong– they just got away with it largely because credit default swaps (thanks to Phil Gramm and his friends) were not regulated. An inappropriate use of government power would be to simply chuck them in jail. An appropriate use of government power would be to assess compensation in a company it already owns, using the powers it has to do so.

  18. blackadderiv permalink
    March 19, 2009 11:10 am

    An inappropriate use of government power would be to simply chuck them in jail. An appropriate use of government power would be to assess compensation in a company it already owns, using the powers it has to do so.

    They can do that going forward if they wish. The fact that the U.S. government “owns” AIG does not give it the authority to demand a return of compensation already agreed to and received. The fact that Congress is proposing to use the taxing power (something which the owner of a private firm does not have access to) should tip you off that the ownership analogy is off somehow.

    By the way, given your oft-stated hatred for hypocrisy, I’m surprised that you haven’t had more to say about the utter hypocrisy involved in many of the people denouncing the bonuses. When you have people talking about how outrageous the bonuses are, only to find out that they knew about them beforehand and may have even changed the law specifically to allow them, well, that’s taking chutzpa to a whole new level.

  19. Julian permalink
    March 19, 2009 11:18 am

    I’m not comfortable with Congress trying to tax away bonuses they disagree with, but I also am not comfortable with executive setting up exorbitant compensation packages that are structured unreasonably.

    It may be that the company was contractually obligated to pay these bonuses, but that actually makes the problem worse! How nice: bonuses that are guaranteed even when the company (essentially) fails! And it’s not just bonuses; employment agreements often ensure top executives as much if they are fired without cause as if they have a long, successful career. It’s all ridiculous and highly abusive!

    The public wouldn’t mind appropriate bonuses for jobs well done; the problem comes when huge bonuses are guaranteed regardless of the company’s performance or situation. So the problem isn’t paying contractually-required bonuses; the problem is entering into such contracts in the first place.

    I may not be comfortable with the way the government is going to pursue this, but I have ZERO sympathy for the people and the system that produced these absurd results.

  20. March 19, 2009 11:55 am

    It may be that the company was contractually obligated to pay these bonuses, but that actually makes the problem worse! How nice: bonuses that are guaranteed even when the company (essentially) fails!

    Do you think it’s outrageous that AIG employees are still getting salaries? If not, why does the fact that compensation is labeled “bonus” rather than “salary” matter so much?

  21. Michael permalink
    March 19, 2009 12:27 pm

    <<>>

    I have never seen Morning’s Minion give anything even resembling a reasoned argument. All he or she does is say something along the lines of “stop sounding like ” or “you’re too American to understand, just trust me and my european friends.” I’m not even sure it’s possible for Morning’s Minion to make an argument.

    Getting to his or her actual points, he or she is, of course, wrong. Now, you can make arguments for the people running AIG paying some kind of consequence within the realm of business. They could be reprimanded, fired, run out of the investment business altogether, etc. But they can’t be jailed. Why not? Because they didn’t break any law. You might think that was they did was immoral, or that they’re actions should be illegal. Perhaps they should. But the simple fact is that they are not, and therefore there can be no criminal prosecution. Now, if it comes out that they did break the law, then by all means go after them to the extent that the law allows.

    As for their bonuses, AIG is contractually obligated to give it to them. This is a good thing. Why? Because contracts and laws exist specifically for this purpose. Contracts and laws are created so that there is no misunderstanding between parties on what is expected of either of them. And contracts should be kept during difficult times because they contribute to the rule of law. If AIG, or the government, says “well, yes we had a contract, but too bad, Morning’s Minion says you shouldn’t get your contractually obligated bonus, so you won’t” then we no longer live in a lawful society. A lawful society is a society where laws are followed regardless of whether people want to follow the law or not. If the law is incorrect, or unjust, then there are ways of working to change the law. In fact, a robust democracy demands that people work to change unjust laws to more accurately reflect the greatest good for the people. But one cannot merely pick and choose which laws are followed and which ones are not. That leads to anarchy, the end result of which is the “might makes right” situation. Laws no longer matter, merely power matters and whoever has the most power says what goes. And that would be a nightmare world to live in. Just ask anyone who’s lived under a dictator (there’s a reason that word has a negative connotation)

  22. Michael permalink
    March 19, 2009 12:32 pm

    Hmm… for some reason the sentence I quoted from jonathanjones is missing. Here it is “Are you either willing or capable for constructive dialogue – that is, without insult or mudslinging?” It should go at the top of the post.

    Also, I should add the corollary that while people are bound to obey laws they might not like, they are not bound to obey laws that are objectively immoral. For example, rounding up priests for execution was the law in Soviet Russia, so the faithful, and the populace in general, are not bound to follow that law. However, the AIG bonuses are no objectively immoral, but debatably immoral.

  23. Julian permalink
    March 19, 2009 1:54 pm

    “Do you think it’s outrageous that AIG employees are still getting salaries? If not, why does the fact that compensation is labeled “bonus” rather than “salary” matter so much?”

    bonus n. something in addition to what is expected or strictly due … (Merriam-Webster’s Collegiate Dictionary, 11th ed.)

    First, bonuses are commonly understood to be an extra reward for a good job done. People have a hard time seeing that a good job was done here. So if you mean salary, say salary.

    Second, I’m not a tax lawyer, but I think there penalties on salaries over a certain level; everything else has to be incentive compensation. It’s not incentive compensation in any meaningful sense if it’s guaranteed even as the ship is sinking.

    Third, I doubt the bonuses were TRULY obligatory. Bonuses rarely are (but not never). We are told they are obligatory; but I, at least, have seen no evidence of this. (If they were truly obligatory, then Sen. Dodd wouldn’t be in a pickle for allowing them.)

    Fourth, even if they were truly obligatory, the company wouldn’t have to pay them if it couldn’t pay them. So taxpayers find it unreasonable to be the ones footing the bill. I suspect it would be the same if the company were contractually obligated to purchase a luxury jet for the CEO. The expense was outrageous in the first place, but taxpayers have no grounds to complain when shareholder money is being used; however, they have the right to complain when taxpayer money is being used.

    Fifth, to the extent the bonuses were obligatory, it is illegitimate: the product of the agency problem and self-dealing. It’s funny how top businesspeople see the logic in guaranteeing bonuses to themselves (and rough equivalents); but somehow, the same logic never extends to blue collar workers. It’s a bunch of self-serving garbage that’s only one step removed from theft.

  24. jonathanjones02 permalink
    March 19, 2009 2:14 pm

    Anyway, you seem immune to rational argument.

    You seem immune from refrain from insult. Censor me and others all you want, but I will not censor or delete anything you write in any of “my” threads. We’re all big boys and girls here, and should be able to make points and seek clarification in a charitable manner and let anyone have their say. Finally, I’m not “going away,” unless I am busy with something else aside from cruising the net and, more likely, procrastinating. So – too bad.

  25. Greg permalink
    March 19, 2009 8:09 pm

    MM’s post is factually incorrect. The people who are currently working at AIG in the Financial Products division did not engage in the irrational investment decisions that brought down the company. And this leads to another point. MM vociferously complains when the fat cats at AIG, Lehman, Bear Stearns et al brought down their own companies but I wonder how much complaining he did when his 401(k) was shooting up year after year thanks to those some fat cats.

  26. March 20, 2009 9:51 am

    AIG has received more money than all 50 states combined. Regular people get screwed, corporations get welfare. While that’s nothing new, I am a bit surprised that there aren’t smoldering ruins on Wall Street. There was a time when people stormed Versailles. Heck, there was a time when failed businessmen viewed suicide as honorable. Nowadays, it’s bonuses and offshore accounts – and a subdued, subprimed populace. At least Icelanders rioted, here we hope the bailed out banks won’t raise our interest rates too much. The bank may have gone under but your debt hasn’t. Another bank got it for free and now owns your debt. Sweet.

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