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The Dangers of AIG Outrage

Today, everyone -- from Bill Kristol on this blog to President Obama on TV -- is mad about the taxpayer-financed bonuses the American International Group (AIG) just revealed it awarded its derivatives traders. The early reporting, which indicates these traders got hefty sums and are slated to get even more at a time when ordinary folks are losing their jobs, sounds pretty galling.

Still, while frustrating on principle, the bonus issue is really pretty tiny in practical terms. In this era of big numbers, which President Bush began and Obama has brought to spectacular heights, $400 million -- the amount of paid and promised bonus and retention pay for AIG’s financial products division -- is miniscule. It’s a rounding error, even in the limited context of the money the government sent AIG’s way. Infuriating, sure. But hardly notable in terms of the bailout or the budget.

Going forward, what worries me more is what people are saying about where AIG directed the rest of the $100 billion-or-so of expenditures it detailed. Most of it went to other financial firms. Some of them foreign. Shocking! But that, sans irony, is the reaction among some.

Where did we expect the money would go? Direct deposited into the 401(k)’s of single mothers whose jobs got outsourced? Their plight, of course, matters. But AIG’s bailout -- and the ongoing bailout of the rest of the financial sector -- is about saving critical financial institutions so they can keep money flowing through private channels of capital, channels that don’t begin or end at America’s borders. Try to get a car loan with no money moving through the system -- and see what happens to all those 401(k)’s when no one can.

The very details of AIG’s recent payments -- $11.9 billion to French firm Societe Generale, just behind the combined $12 billion take of now-merged Bank of America and Merrill Lynch -- demonstrate how globalized international finance has become, and how fixing the mess means worrying about our neighbors as well as ourselves. The details also show that AIG had enormous outstanding liabilities owed to banks and other financial firms. Allowing the company to go under would not only have shattered confidence across the developed world, it would have wiped out chunks of the American and European financial sector.

Americans need to brace themselves for a lot more money going to a lot more big-name banks and financial institutions. Bonuses aside, if populist-nationalist anger destroys popular tolerance of measures to save the financial system -- a process that will offend many Americans’ sense of fairness and principle but that is nevertheless essential -- then this country has a lot more trouble ahead of it.

By Stephen Stromberg  | March 16, 2009; 6:09 PM ET
Categories:  Stromberg  | Tags:  Stephen Stromberg  
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Comments

A good start would be to nationalize the banks. Why should financial institutions be able to shamelessly rip off the public only to be bailed out by it? And then, to top things off, give bonuses to the thieves and incompetents who ripped us off, giving the excuse that the bonuses are designed to retain "the best and brightest"? The best and brightest thieves, that is. We should nationalize the banks first, and then the stock exchange. Call it socialism, at long last coming to this bastion of thieves and rip-off artists. It's way overdue.

Posted by: RichardKefalos | March 16, 2009 7:10 PM | Report abuse

While the money paid in bonuses is relatively small it says a lot about how the management views its fiduciary responsibilities to the shareholders let alone the kick in the teeth it gives to the taxpayers. I don' know about you, but $165 million would pay my taxes for about 4,125 years. Not a small sum in my book.

The company I work for which is still solvent and will still make a profit this quarter because both management and the employees are making sacrifices. Our senior executives are forgoing all bonuses this year. I heartily applaud them for doing so and proves that they care about the company and take their responsibilities to the shareholders seriously, unlike AIG and the Wall Street cretans. The employees have forgone their 401k employer matching funds and vacation time has been cut in half. We're all doing our part to keep our company going, but apparently it's just business as usual in the banking industry.

Sooner or later people are going to get fed up with the bankers and they are really going to come after them. I see jail time in their future.

Posted by: troyd2009 | March 16, 2009 7:12 PM | Report abuse

The problem with AIG making these big payouts to other banks is that a lot of them were people who bought CDOs and CDSes as a means of gambling. These are the "financial WMDs" that Warren Buffet spoke of. People who bet on (say) Lehman Brothers failing, even if they had no equity stake in Lehman, and got paid off when it failed anyway.

I think there's a broader fundamental issue with the notion of insuring against losses in the financial sector. You get into this situation where a lot of money is being made on paper - for example, in terms of stock prices. And then those unrealized profits are insured, so when the stock price falls - boom, you get the money anyway. Ultimately, that's not sustainable. Especially if the taxpayer is on the hook when the insurance company gets bailed out.

Where is the incentive for the people buying and selling insurance to restrain themselves if the government is always going to step in and make the full payout on the insurance?

Plus, then you get this problem where (say) a hedge fund can take out insurance on a company, then sabotage the company by shorting it's stock, then collect the insurance on it - and have the insurance company get bailout by the taxpayers.

It's like Double Indemnity. In the current financial world, the hedge funds are totally capable of taking out insurance on some bank, then "murdering" the bank to collecting the insurance payments.

Posted by: tjk1 | March 16, 2009 7:16 PM | Report abuse

While these bonuses are outrageous, there is a much more fundamental outrage that is getting no mention, at all, much less an appropriate level of attention.

This outrage centers around the fact that America not only had nothing in place to avoid the current bailouts of companies "too big to fail" - even after the experience of previous bailouts - we aren't even discussing plans to eliminate any necessity for future bailouts. Amidst the blamefest, political grandstanding, and the administration taking advantage of the crisis to advance its socialist agenda, this hasn’t even risen to the level of becoming an issue for discussion.

Should companies “too big to fail” need be required to meet conditions that effectively protect taxpayers against having to choose between bailouts or collapse of entire sectors of the economy? Must government itself be Constitutionally disallowed from creating programs, like the Community Reinvestment Act, that virtually demand irresponsible behavior from these same institutions?

One thing is certain, so long as crisis like the current one provide political and economic opportunity with little risk to the perpetrators, public choice theory suggests that the special interests in government and without will screw the diffuse taxpayer at every opportunity, creating and expanding such opportunities as far as possible.

This is the real outrage.

Posted by: RUKidding0 | March 16, 2009 7:23 PM | Report abuse

Too big to fail is being used to cover a lot of sins and excuse a lot of greed. Italy's economy might be really shaken if they shut down the Mafia but at some point you have to say 'This is wrong' and no amount of rationalization will make it right.

Posted by: mgferrebee | March 16, 2009 7:42 PM | Report abuse

I suggest that we keep to the positive, sunny side of the bonus issue. The best way to do that would be to have a raffle for AIG bonus recipients, and lynch the first five out of the barrel, right there in the AIG lunchroom.

This would concentrate the mind of the AIG traders. You want your bonus? Sure, you have a 1-2 % chance of being lynched.

Posted by: storageboy | March 16, 2009 7:43 PM | Report abuse

The bonus payments are a distraction and a drop in the bucket to the hundreds of billions of TARP money sent by AIG to foreign banks.

Posted by: Bubbette1 | March 16, 2009 8:22 PM | Report abuse

KEEP IT SIMPLE: TELL AIG: 1) EITHER GIVE BACK THE BONUSES, or 2) GIVE BACK THE BAILOUT MONEY!!!

Posted by: benighse | March 16, 2009 8:47 PM | Report abuse

I don't read Kristol, so I don't know what he had to say. I do know that Stromberg has missed the point of the country's anger completely.
Mr. Stromberg, the amount may be miniscule from some perspective and enormous from others but the scale of the price is not the target of the anger. People are angry because the very people who contributed an enormous amount to the current crisis are about to be rewarded. Had they been left to suffer the consequences of their own actions they would have nothing and the economy would be even worse than it currently is. Instead, in an unprecedented and desperate act, they were bailed out by the government, saving them their jobs. Now those very same people demand to be paid huge sums of money in exchange for their failure. If you're not angry about that, then there is something wrong with you.

Posted by: lostinthemiddle | March 16, 2009 9:11 PM | Report abuse

"saving critical financial institutions so they can keep money flowing through private channels of capital, channels that don’t begin or end at America’s borders." - critical for what? so you can get your car? That's the only way of getting a car? Circulating money through an international system where the only players are massive and too big to fail?

Watch out for pike wielding bikers Stromberg!

Posted by: dougdupin@yahoo.com | March 16, 2009 9:52 PM | Report abuse

So anger over the AIG bonuses is dangerous? To whom? Arrogant elitists like Stephen Stromberg (Harvard, class of '05) and his classmates?

And all because the smelly peasants are upset that a measly few hundred million went to the greedheads who got us into this mess.

Perish the thought.

Posted by: PeterPrinciple | March 16, 2009 10:45 PM | Report abuse

Government intervention is needed and is good in cases such as this. Regulation is not a black and white issue, there are gray areas first of all. That means that regulation and government control is absolutely needed and good when it comes to keeping people and companies honest and above board with their policies, spending, polluting, investing and so on. Republicans are pretty stupid when it comes to this ideology and brain wash their ignorant followers and try to brain wash the voters with non sense about 'keeping government our of our business' well when the government is trying to enforce the rules and are 'kept out of our business' by republicans, the stock market is out control, pollution is out of control, banks are out of control and criminals like AIG are out of control too. THIS is one of the many reasons why Democrats are the superior choice for our leadership, because we believe in government regulation and oversight where and when needed. This money is our tax money meant to keep AIG afloat so insurance claims and the infrastructure of the company is still funded, it was not meant for bonuses, this is why the government needs to be involved in oversight as AIG obviously cannot be trusted with our money. Go get 'em President Obama.

Posted by: Hillary08 | March 16, 2009 10:52 PM | Report abuse

I can only say: "You should go to a mental institution with the rest,and kept there until you learn a little justice, fairness, and humility. You are crocked."

Posted by: bluegillfish | March 16, 2009 10:54 PM | Report abuse

Oh, please. To paraphrase Brecht, Why don't the bankers and the elite just find a new host country?

Sane bankers know who is getting bailed out, and it's not Joe six-pack. Joe is doing the bailing.

Nationalize the insolvent US banks-end the drama about compensation and soak the investors/speculators--I guarantee that the bankers who remain will then help write some regulations with teeth. Nothing like a little fear....

Posted by: protagoras | March 16, 2009 11:13 PM | Report abuse

Excuse me, but when does the class war start?

Posted by: rcl5f | March 17, 2009 12:02 AM | Report abuse

The Looting of America's Coffers"

http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html

As long as our government will bail out any large corporation, the looting will continue.

Posted by: dummy4peace | March 17, 2009 12:12 AM | Report abuse

first time i read your column; what's your name? Stromberg? Terrific. Another apologist for financial elitist sc@mb@gs. Whose butt you got your nose

Posted by: sellingpencils | March 17, 2009 1:23 AM | Report abuse

People used to laugh at me when I said we were heading toward something akin to the French Revolution... the Proletariat Revolution... judging by some of the comments flying around, I would say it won't be long until someone gets hurt or worse... all justified by anger over greed...

Were we all asleep for 10 years? These bonuses have been a common practice for years. That's why there is a contractual obligation behind them. Like the author said, did we really expect that the $$$ was going to single mothers working as nurses or schoolteachers who have been laid off?

Yes, it's galling, but if you are honestly surprised, you have not been paying attention.

Posted by: jenzinoh | March 17, 2009 2:04 PM | Report abuse

Youa re missing one important point. These "Credit Default Swaps" were not "insurance". They were declared "not insurance" in 1998 so that they would not be regulated by Phil Gramm and his cronies. Had they really been insurance, there would have been requirements for reserves to back them up so there would have been at worst a much lesser problem. Being able to sell a "not insurance" CDS, collect the premiums and then not have to put up any reserves to back it up sounds like a really profitable business.

Posted by: chuckhuffstutler | March 17, 2009 2:08 PM | Report abuse

Posted by: Hillary08 | March 16, 2009 10:52 PM

Your an idiot. I am going to do JUST WHAT YOU DID.

All democrats hug tree's. They could care less about people holding jobs. They don't care that the middle class is made to work harder to pay tax's so that hand outs can continously occr.

your a flaming idiot. Not all republicans are brain washed just like not all democrats are tree hugging socialists like you are. People like you are biggots, catagorizing all people of a single catagory as lower level.

Biggots are the worse evil of this world. it is where all the hate comes from. You sir are a biggot. You sir should be placed in jail for your hate laced postings.

I am a conservitive. Unlike you, I do not think all liberals are idiots and lowe lifes. I beleive most people are moderates, no matter what the party. I do not beleive you are a moderate though. I beleive you are an extremist. I beleive people like you are what has caused this country to be where it is today. Extremists are in both parties. You are an example of the democrat extremist. Rush is the Republican extremist. Guess what, you are just like him. Total scum

Dan

Posted by: LiberalBasher | March 17, 2009 3:27 PM | Report abuse

The outrage is not at the idea of bailing the companies out, it is at the very idea of providing bonuses to employees of firms that have lost huge amounts of money over the last year. Bonuses traditionally have been dealt out for exemplary performance. Failure to make budget does not fit into this category; in my opinion, losing less than a budgeted loss doesn't qualify, either. We have heard that the bonuses are being given to retain the top performers. Excuse me, but NO ONE qualified for this categorization last year; let the losers go and let them find another job, only this time, a real one playing with their own monies and futures.

Posted by: pbmockri | March 17, 2009 4:03 PM | Report abuse

Congressmen keeps griping about about 165 million...lets get back to the big picture...billions wasted and they are to blame in the first place and now they grandstanding again......well at least they won't have to waste the oil mens time with their photo shoot hearings now.

I don't know but I don't think the public are alarmed over this as much as the press is saying...If they are entitled to it...give it to them...at least we will know where that piddly much went.....millions are not alarming the people now after getting broadsided by the govt. throwing billions,billions and billions away and have no idea where its going or where it went...the govt is blaming everyone but their self and i'd bet any mount from here to Rocky Mount that congress is to blame for this whole mess.....

Posted by: lucygirl1 | March 17, 2009 5:35 PM | Report abuse

STROMBERG WRITES: Going forward, what worries me more is what people are saying about where AIG directed the rest of the $100 billion-or-so of expenditures it detailed. Most of it went to other financial firms. Some of them foreign. Shocking! But that, sans irony, is the reaction among some.
...............................
What a havvy twit! The condescension oozes>>> To people like Stromberg, globalist financial barons are entitled to use the US Treasury to fund whatever they want, even if the projects they undertake bring down the world economy in order to generate huge gains for a few super rich suits! It's time for America to quit this rigged game! We don't even know who is ending up with all our dollars, which amounts to our grandkids' futures! They could very well be enemies of the US or funders of our enemies! Stromberg advocates globalist economics that leech funds from earners by legalized theft - Stromberg is defending redistribution of wealth on a scale the world has never witnessed before now - at US taxpayer expense! He is advocating class war on everyone but the super wealthy financial barons! He is arguing for socialized risk and loss covered by the many by backroom mandate & privatized profits for the very few super rich who are doing their best to remain anonymous in their gated compounds & west side condos! PROTECTIONISM is the absolute correct response to this attack on our Democracy!! Little newbie propagandists from the Ivy League notwithstanding, the best way to begin the process of redefining our economy in our own best interests is to FOLLOW THE MONEY!! Make the bank bailouts completely transparent! Account for every dollar! Who got how much & what did they spend it on? It's our money!!! We have every right to know what these white collar thieves did with it.. Pencil necks like Stromberg should be run out of town on a rail, along with all the pundits at WaPo who are trying to keep us focused on Madoff & the bonuses while the globalist bankers are making off with Trillions in American Taxpayer Dollars.... They think you're too busy watching America's Next Top Model to write your (possibly corrupt, likely in collusion with Bank/Financial/Insurance lobby) Representative & demand action now. Paulson should be indicted! Geithner should get the same treatment, based on the payout to Goldman Sachs alone! This is OUTRAGEOUS!!!

Posted by: artforhumans | March 18, 2009 6:12 AM | Report abuse

I think the source of the "populist" anger that has folks wringing their hands is only partly related to AIG. We have to link this bailout with underinvestment in so many other areas of our daily lives: police and fire, K-12 education, infrastructure, health care, &c. The public is told time and time again by politicians of both parties that they can't expect too much because these services or projects are so expensive and / or should be subject to "market discipline." At the end of a long "recovery" when many families so no real gains in take-home income, folks have every right to get out the pitchforks when those who are at the very top of our society are exempted from the market discipline they ram down the throats of regular people 24-7.

Posted by: beetrave | March 18, 2009 9:14 AM | Report abuse

STOP THIS STOP STOP STOP

Its bad, yes, but its not nearly as bad as 4000+ dead Americans and 40,000 wounded
that rightly expect to be taken care of the rest of their life.

It does not even approach a crazy man that can look at 30 years of debt, our Nation broke and broken to afford tax cuts to the wealthy and brag how household wealth increased in those 30 years... well DUH!
He is certifiable.

It can't even hold a candle to a POTUS that is not even interested in who outed a CIA agent in his White House.

Yes, this is bad, but its just more of the same from the criminal era that was the Bush presidency.

He can only be punished once, and there are 4000 grieving families, millions have lost their homes, millions more have lost their jobs...

Just STOP with the AIG mess... it pales in comparison to all the rest we have endured...

This is just smoke and mirrors to keep us from understanding what a terrible thing the republicans have done to this country.

Posted by: dutchess2 | March 18, 2009 9:34 AM | Report abuse

Don't tell me not to be ------ angry over AIG's greedy executives, or any other company who gets bailout money and then squanders it on $400,000 executive vacations. I'm extremely ------!!!!!!
AIG won't be the only company in trouble for a bailout money feeding frenzy, they're just the worst so far.
So AIG now needs armed security guards to protect their employees? AIG's greedy executives have put their employees in danger? I think the employees need to be suing the (expensive designer) pants off those executives.

Posted by: momof20yo | March 20, 2009 7:26 PM | Report abuse

e bonus payments are a distraction and a drop in the bucket to the hundreds of billions of TARP money sent by AIG to foreign banks.

Posted by: Bubbette1 | March 16, 2009 8:22 PM
===========================================
The bonus payments show how out of touch the administration, congress and AIG are. The premise that these are small insignificant amounts is absurd. Many people might not earn the amounts in a lot of these bonus's in 10 years or longer. To expect people to sit back and gleefully pay taxes to fund this is more than be expected. A bonus for making the company money can be defended , a bonus for causing a global financial crisis is sinful.

Posted by: saw1 | March 21, 2009 12:06 AM | Report abuse

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