Saturday, March 21, 2009

Obama Ducks Responsibility for AIG

Did anyone catch this from the other day? Someone sent me a link to a new Republican ad about the AIG bonuses. Near the end, Obama actually says, quote:

Listen, I'll take responsibility. I'm the president. It's my job to make sure that we fix these messes even if I don't make them.

Do I really need to comment about this blatant double-speak? It double-speaks for itself.

Contrast this to President Bush. Whenever Bush said he took responsibility for something, he never tried to dodge responsibility at the same time. Frankly, Bush was way too quick to always say he took responsibility, which many people would take as an admission of guilt. Bush's biggest political problem was always that he was too much of a stand-up guy. Full pardon for Scooter Libby? No, he had to respect the DC jury's verdict. Put public pressure on Gov. Blanco in Louisiana to allow federal assistance faster during Katrina? Nope, he respected the Constitution, kept the dispute private, and then fell on his sword to "take responsibility" for something that truly was not his fault. He would not insert politics into a disaster like Katrina, but his political opponents had no qualms about doing so, and his entire second term and Republican control of Congress was sacrificed as a result (sure, there were other major factors like Iraq, but Katrina was the pivotal moment that Bush lost another 10-15% in support).

By the way, Chris Dodd is quite the white liar in this clip too. Notice that he repeatedly says that the restrictions on bonuses were in the original bill, when he knows full well that he stripped them from the bill during conference at the request of the Treasury department, who correctly noted that it would be illegal to break the retention bonus contracts.

It is also a bad idea. While I don't like the idea of part of my taxes going to pay for bonuses at a failing company at the heart of the financial crisis, please hear me out on why I think they should be allowed to stand.

First, AIG is far from the most culpable entity in the financial crisis. They were basically the insurance company that is taking the hits when the disaster struck. Think of the case of a hurricane, where insurance companies can end up paying out a lot of money as a result. Some insurance companies promise more coverage than they can deliver given a large enough disaster and large enough insurance claims. That is what happened to AIG here. One could make a credible argument that AIG's insurance offerings to the huge investment banks is one significant factor that encouraged the investment banks to over-leverage themselves as far as they did. To the extent that is true, go ahead and cast blame at AIG, but basically I see them the same way as I see insurance companies that misjudge risk and oversell insurance policies to beachfront homeowners in Florida.

Second, AIG needs to be able to retain its valuable employees. It is simply not fair to blame the entire Financial division at AIG for the decisions a few executives likely made. My understanding is that most all of the executives that were most responsible for misjudging risk and overselling their financial products have been let go. You simply cannot lose all the employees in a division of a company and expect the company to be able to continue to function well, and we REALLY need AIG to be able to continue to function, at least for now. How well would the company you work at function if 80% of the employees left all at once? When AIG started to realize how bad of shape all the investment banks were in, and that they themselves were headed for insolvency as a result, they were afraid many of their employees would leave the company. How many employees would stay at the company and have their reputations sullied by their continued association with AIG if they were not promised additional compensation in return? In early 2008, AIG offered retention bonuses to anyone who would stay until March 2009, and more bonuses for those who would stay until 2010. We just hit the round of bonuses that were due on March 15, 2009, and the bonuses were paid as promised. It is important to realize that the bonuses were NOT performance bonuses, they were retention bonuses. These valued employees that may have had little if any responsibility for the financial crisis were promised bonuses if they would stay on at AIG. They fulfilled their part of the contract, and their contracts should be honored. It is VERY DANGEROUS to go down the road of breaking contracts. Government is supposed to help enforce voluntary contracts, not force companies to break them.

Third, the government is using AIG as the linchpin for the world financial system. If AIG collapsed completely, or if it was unable to continue to function, the entire world financial system could collapse. This has wide ranging political and economic ramifications that greatly affect the U.S. Our government is basically backstopping AIG so AIG can make good on its insurance claims made by banks all over the world. Unless you want the government to inject capital directly into foreign banks by some yet-to-be-determined formula or risk worldwide financial system failure by letting foreign financial institutions collapse, you have to let AIG continue to fulfill its role with government backing, no matter how distasteful this may be. And for AIG to continue to fulfill its roll, you need the employees with the technical know how to stay with the company. Thus the point of the retention bonuses.

Fourth, when we are talking about avoiding chaos with $185 Billion (with a B), $165 Million (with a M) is a relatively minor concern. Why should I be outraged about $165 Million when we are talking about government bailouts in the TRILLIONS, new government spending in the TRILLIONS, and an increased federal budget that will lead to TRILLIONS in deficits over the next several years. And those are three DIFFERENT instances of TRILLIONS, not 3 different ways to describe the same Trillion. $165 Million is a bargain if it means the $185 Billion was managed 0.1% better than it otherwise would be.

At the end of the day, both Congress and the White House knew about the bonuses well in advance, and thought it would be illegal to require AIG to break those contracts, and knew that would cause unneccessary employee turnover at the embattled company at exactly the wrong time. AIG is being run by a former CEO who came out of retirement and is working for a penny a year. He felt that he was contractually obligated to pay the bonuses, and though he said in Congressional testimony that he would have structured the bonuses differently, he expressed concern that he could lose people that he needs to help run the company.

Obama, for his part, instead of taking true responsibility for knowingly allowing the bonuses to go forward, or showing true leadership by bucking popular opinion when popular opinion is uninformed and misguided and explaining why the bonus payments were allowed to procede, is just following the political winds and trying to duck responsibility. This is both dishonest and cowardly.

If you're ready to grab your pitchfork, consider first for yourself whether you've heard any analysis like this at all, or whether you are just following the stampede to crucify AIG.

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