Thursday, March 19, 2009

My thoughts on the AIG fiasco

As I watch the AIG circus unfold, I don't whether to laugh or cry. First, the people running these banks must be tone-deaf not to recognize that once you appeal for government bailouts (and get them), the rules have changed. If something appears unseemly, it is so. And when there people are scared - about losing their jobs and seeing their savings meltdown - the notion that AIG paid bonuses in the millions strikes many as unfair.

There do seem to be two separate components to the AIG actions. One relates to the billions that AIG supposedly funneled out to investment and commercial banks. I noticed Goldman Sachs at the top of the list. I really have no idea what these payments were for but if these institutions were counter parties on positions that AIG had taken, I see nothing wrong with this. After all, was this not what the bailout money was supposed to be for? To ensure that AIG did not default on its obligations and bring other institutions down with it!

The second story (and the one getting press) comes from the retention bonuses that AIG paid out, after it received the bailout money. While the payments may fail the political and populist tests, they too may have been merited. Why should you reward those who created the problems with bonuses, you ask? Remember that the vast majority of the employees at AIG did their jobs and added value to the organization. They had no role in creating this mess. A handful or risk takers brought the firm down. In the aftermath of the crisis, the firm had to do everything it could to keep the good employees from fleeing. After all, what would be the point of saving the institution, if its biggest asset (human capital) departs? I don't know enough to pass judgment, but methinks that the legislators protest too much.


Mohammed AIT LAHCEN said...

Apparently, the European banks to which AIG gave away part of the bailout money had their positions already covered, so i think that they could do it without the repayment. But if this was the case why did the payment occured ?

The second point is that the distributed bonuses were mainly given to the financial services department of AIG who is apparently responsible of all this chaos.

Aswath Damodaran said...

Covered by whom? If AIG had not come through, somebody else would have had to cover the losses. That was the ripple effect that the bailout was supposed to fix.

There are thousands of people in the financial services department in AIG. My guess is that most of them had nothing to do with generating these losses. (In fact, one very small group in London alone accounted for a big chunk of the overall losses)

Trust - Me said...

Pay the bonuses in stock.

These people still have jobs because of the government - that is those who received bonuses and actually still work for the company.

If they are afraid of losing "talent", they should be reminded that they should be focused on maintaining employees that are focused on the long term. A sacrifice of a years bonus is pittance in the long run. I would want people who see this as an opportunity to further their career (long term), rather than people who only care about a quick buck (short term).

It seems to me a lot of the risk taking was brought on by people in the latter category.

TCap said...

Thanks for the post. There's so much emotion around this topic, it's refreshing to have someone actually examine the issues.

If you believe Liddy's House testimony, the people receiving bonuses were not in AIGFP's problem areas of CDS or regulatory capital. Here's a link to the relevant part of the testimony:

According to Liddy the trading books are being/have been wound down. At least some of these employees were being paid to unwind trades and then have their employment terminated. So not possible to have employees "focused on the long term".

My humble opinion is that Mr. Liddy diligently tried to minimize losses to the shareholders & taxpayers (i.e., avoid contract lawsuits and potential trading losses as books were unwound.) However he failed to have the insight a world-class CEO should have - understanding investor and public relations beyond simple cost calculations. The cost to AIG of taxpayer and government anger will greatly outweigh the cost had AIG refused to honor these contracts.

aceman said...

Where would these fine financial services employees flee to?

Current reality is that they are lucky to have a job and there is certainly no need to pamper employees with bonuses in order to retain them.