Bailing Failure
Brace yourself boys and girls for this once in a lifetime headline.
BigFrick agrees with President Barack Obama and Congressman Barney Frank, at least in part.
The recent admission by AIG that they plan to use part of the huge taxpayer bailout they received to pay $165 million in bonuses to their derivative traders is beyond any possible justification. The fact that this sum is only a fraction of the $105 billion they received makes absolutely no difference to me. The fact that newly installed AIG CEO Edward Liddy has announced that neither he nor any of the executive officers of the company will receive bonuses for 2008 also leaves me yawning.
In defending the bonuses Liddy stated that these bonuses must be paid due to contractual obligations and that he has received advice of counsel to do so or risk being sued. My personal advice to Mr. Liddy is let em’ sue.
The president and his congressional pal Barney Frank are calling the bonuses outrageous, I couldn’t agree more. But after that unifying moment we must part company again as my outrage is not directed toward AIG.
I certainly don’t blame Liddy for the bonuses as he was only installed after the near collapse of this company. I also don’t blame the traders who are in line for the bonuses for expecting that they will be paid in accordance to their employment contracts. There is nothing illegal about them getting paid or about the company paying them. And their my friends is the problem.
In the years leading up to the collapse of the credit markets savvy derivative traders became involved in the riskiest of derivatives known as credit default swaps. This very complex form of investment is basically an insurance policy betting either a company will or will not default on its credit obligations. Traders who are well versed in this complex market can make obscenely huge sums of money for both the companies they represent and themselves, which they did. It made perfect sense to lock these traders into contracts when the times were good before the congressionally mandated introduction of welfare into the credit markets sent everything financial into a death spiral.
AIG was the largest insurance company in the world so it made perfect sense that they would be involved in this insurance-like investment. The problem with credit default swaps, as with any insurance policy, is that once the insured risk begins to go south there is very little that can be done to cut exposure. It would be like your homeowners insurance company calling to inform you they were cancelling your policy whenever the tornado warning sirens start blowing.
As the depths of the credit infection began to become apparent and the world credit markets collapsed the insured companies began to default on their obligations leaving AIG holding a 5 pound bag of ever increasing bad credit default policies. The loss was so great that it would have put this mega-company into bankruptcy and left all those that had bought insurance from them without the ability to collect on the policies they paid for. AIG also manages some of the world’s largest pension funds, which also would have gone up in smoke. Some of these pension funds include teachers unions, countless federal, state, county and local government employee unions and the pension for the US Congress. Not surprisingly there was widespread support among congressional members to keep this company afloat. But that is all they did.
Chanting the mantra “Too Big To Fail” Congress pumped more than $105 billion into AIG with no restrictions. Maybe out of tunnel vision, maybe out of panic to try to control the impact a failure the size of AIG would have in the broader market or maybe out of sheer ignorance of what they were doing, Congress had the ability to create laws that would have overridden these employment contracts and prevented this type of taxpayer funded bonus but chose not to.
Congressman Frank has said the traders involved in these derivatives should be fired rather than rewarded. He also said he would do all he could to get that done. While I agree with rescinding the reward I disagree completely with the idea that these folks should be fired and especially that Congress should in some way have a hand in that.
If Congress doesn’t want these legally contracted bonuses to be paid then it is up to Congress to pass legislation that makes it illegal to do so. Without this type of legislation AIG will be only the first of many federally bailed out companies to use taxpayer dollars to pay for employee bonuses.
President Obama and Congressman Frank made some good sound bites today. Let’s see if they are equally adept at putting together some good legislation.
Otherwise the traders at AIG won’t be the ones taxpayers will be looking to get fired.
