When it came to light that AIG was planning on paying around $165 million in bonuses to some of its executives, including those from the division that created the credit default swaps that ultimately doomed the company, there was near universal outrage. President Obama even ordered Tim Geithner, his Treasury Secretary, to pursue all legal means to prevent the bonuses from being paid out. But none of that can compare to the remarks by Iowa Senator Charles Grassley, a Republican, who recently said:
“I suggest, you know, obviously, maybe they ought to be removed," Grassley said. "But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide.”
I can understand all the populist outrage about the bonuses. Taxpayers, after all, now own something like 80% of AIG. And the argument, put forth by AIG’s spokesman, that AIG needs to be able to retain the “top talent” really rings hollow when you realize that it was those people who doomed the company in the first place. If they’d been left to suffer on their own, AIG would be bankrupt and they wouldn’t be making any money at all.
But think about it. $165 million, while a lot of money, is barely a drop in the bucket considering the tens of billions of dollars the government has already injected into the company. And it might be worth the expense if, as Andrew Sorkin puts it in today’s New York Times, those executives are the only ones who can solve the mess that they created:
A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.
That sounds like trusting the arsonist to put out the fire. But the executives who made mistakes in the credit markets aren’t the only ones getting bonuses, and they aren’t the only employees left at the company. There are a lot of competent, mid-level employees left at AIG who at this point are presumably motivated to help salvage the wreckage, but who might bolt if they think the government is being too heavy-handed or restrictive when it comes to compensation.
That being said, it’s hard to believe how utterly stupid the executives who are getting these bonuses must be. Were they not paying attention to the public outcry when the Big 3 CEOs arrived in Washington on private planes? Or when their own company paid several hundred thousand dollars for a company picnic? Surely they might have thought that getting big bonuses at a time like this might stoke the fire. And surely they could have renegotiated their bonuses to pay them a little now, and more later.
But, alas, financial execs aren’t politicians. We all know that nobody is quicker to stoke populist anger than politicians, which is why Obama, and now Grassley, have hopped on the AIG-hating bandwagon. But if we think seriously about the situation, we might conclude that honoring contracts, however annoying it might be right now, is not a tragedy. Executive compensation reform can come later. For now, let’s focus on fixing the mess that’s been created.