AIG (AIG) Bailout And The Price Of Doing Business

One of the things that Congress and the Administration knows but do not want to admit in public is that bailouts are messy affairs where most of what is planned does not work and one of the unintended consequences is that the process of salvaging large institutions is rarely fair. A lot of people, who should in a utopia, get nothing as the taxpayers dump money into the financial system to save it are paid very well. Others, who seem to be innocent bystanders in the process that has ruined financial firms and put tens of thousands of people out of jobs, are simply given the shaft.

AIG (AIG) is turning out to be the most cumbersome and embarrassing of the government’s neighborhood improvement projects.  Word made it out recently that employees in the division that caused most of AIG’s losses would be getting $450 million in bonuses. Some of the media put the number lower than that, but Congress and The White House have already complained loudly that any amount of money paid to an operation that helped undermine AIG’s viability should get nothing. Edward Libby, the feckless former head of Allstate (ALL) who was brought in to turn AIG around, apparently did not know about the bonuses until recently. In the brief note he sent to the Fed apologizing for the problem he said that the company’s hands were tied. The employees getting the money had contracts guaranteeing them the payouts. Members of Congress have already asked whether the agreements were “legal.” In a moment of lucidity, Lawrence Summers, a former Harvard president who is now the Obama financial czar said that abrogating contracts would led to a precedent that would ripple through the legal system and cause business and the public to lose confidence in the rule of law. To hear Summers talk the action would be worse the Lincoln’s suspension of the right of habeas corpus

AIG, under pressure from Congress and the press, also released the number of the counterparties to many of its credit default swaps. AIG had decided to insure the value of certain paper owned by the likes of Goldman Sachs (GS), Morgan Stanly (MS), and Deustsche Bank (DB). When the value of that paper fell, AIG was on the hook to pay off the “insurance” which kept the likes of Goldman from having to book large write downs. Those write downs might have pushed Goldman into a difficult financial situation. The same holds true for a number of the other companies doing business with AIG under similar circumstances.

Congress will do what it believes is its job. It will question AIG, its employees, and the firms that benefited from getting money from AIG’s bailout pool.

The framers of the Constitution were constantly worried that even in a republic fools could end up in control of the government. That might be the sort of elected officials who would chase issues that may be popular but are ultimately almost worthless in terms of helping the country, and, in the present case, the economy. Whether AIG employees got large bonuses, especially since they probably had contracts to guarantee the compensation, is irrelevant in the overall effort to turn the course of the recession.

But, there will be Senators who cannot resist the urge to spend days in front of cameras questioning how some of the taxpayer’s money went into the hands of people who may or may not have deserved it. Afterward they can spend the evenings in their offices smoking expensive cigars and sipping cognac.

Douglas A. McIntyre