Tuesday, March 17, 2009

Those AIG Bonuses

An outrage has been kicked off over the $165 million in bonuses awarded to executives in AIG. The commentariat seem as outraged as anyone else.
AIG is arguing that they are legally obligated to pay there executives. Basically, say AIG executives, we didn't want to pay ourselves million dollar bonuses, but we are legally forced to do so. I am not familiar with these legal arguments, but this does strike me as a little suspect: if the government had not floated AIG to the tune of $170 billion, those executives would be getting jack (Robert Reich makes similar arguments about the matter here).
Worse, AIG argues that it needs to retain "talent". Before the crisis, people might even have bought into this sort of argument. Today, this is laughable , especially since this will be going to the architects of the "credit default swaps", what Warren Buffett labeled "financial instruments of mass destruction". These helped stick us in the hole we're in, and now we're rewarding the people who did it.
Obama expressed outrage, as far as he could with his cool style. Supposedly Timothy
Geitner had asked that the bonuses not be paid, but AIG went ahead and paid them anyway. It remains to be seen whether this is genuine, or mere political posturing in the face of popular outrage.
Tyler Cowen argues that this is a good reason not to nationalize the banks because that would "politicize" decisions like this (as if the money we paid to float AIG and the other banks hasn't already politicized this matter). To me, it demonstrates the opposite. If we need to bail-out the banks, but wish to mitigate the moral hazard problem of giving money to those who made this disaster (not to mention the gross unfairness of this) temporary nationalization seems the best option.

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