The public furor over the "bonuses" paid to AIG employees is directed in the absolute wrong direction.
The right question isn't "Why were employees paid these bonuses?"
The right is question is "Why does AIG even exist anymore?"
Let's start with the bonus issue. It's bogus, through and through. They aren't bonuses for performance, they are salary with name "bonus". What the government is doing passing a bill to confiscate people's salary. It's completely unconstitutional under section 9 of the constitution which prevents legislation from punitively targeting a specific person or group. Most politicians with a brain know that this legislation is ultimately going nowhere, but they can feel the political winds a blowin'.
In a futile attempt to pass constitutional muster, the bill was expanded to a range of firms broader than AIG, which would have very bad consequences if it was ever actually enacted into law. As Nate Silver at 538 puts it:
Just think about some of the implications of this.
A senior engineer at General Motors, who shepherds the production of a new hybrid vehicle that will turn out to be a best-seller, shouldn't get a bonus for that. Really?
Jamie Dimon at JP Morgan, who has managed his company's assets adeptly and kept it mostly off the taxpayer's dole, is no more deserving of a bonus than an AIG crook. Really?
An mid-level investment banker at Morgan Stanley, who works her butt off to persuade her bosses to facilitate a deal for a new wind-power company that turns out to be a big economic and environmental winner, should have her incentive compensation taxed at 90%. Really?
An administrative assistant at PNC, who is volunteering to work 70-hour weeks because of cutbacks in the company's staff, deserves a Christmas Bonus -- unless her husband happens to be a lawyer earning $250,000 per year, in which case it should be taken away. Really?
$500,000 in salary for an employee that performs badly is perfectly fine, but a $500,000 bonus for one who performs exceptionally well isn't. Really?
But the biggest reason the bonus issue is entirely irrelevant, aside from constitutionality and ultimate impact of the never-to-be-enacted legislation, is that the sums of money being talked about are so tiny compared to what's actually already been stolen from American citizens.
All these AIG bonuses added up to $165 million. This is compared to the $173 billion that AIG has received in bailout assistance. Isn't it completely, utterly bizarre that the congress and much of the media are completely silent on the issue of $173 billion being handed over to an incompetent company that is destroying the economy, but everyone is sharpening their pitchforks about a sum that is over 1,000 times smaller???
Here's what happened: The Bush Administration, and then the Obama administration after it, took a look at the panic and crisis that ensued after the collapse of Lehman Brothers and reached the conclusion that the risk of a major financial firm failing was too terrible to contemplate - The so-called "systemic risk" was too huge for that ever to happen again - And quietly decided to make the devil's bargain to bail out the bad bet makers like AIG, no matter what the cost.
Thus $173 billion has gone to AIG, which is paying back it's bad bets to places like Goldman Sachs and Deutsche Bank at a full 100 cents on the dollar. If one starts to undermine the systemic risk argument, the insanity of the government strategy starts to become apparent. The collapse of Lehman Brothers was not supervised or controlled in any way; there was no plan for an orderly sale of assets or government guarantees of anything. A controlled bankruptcy plan for a company like AIG, or the "nationalization" plans for the larger banks, by contrast, would involve government guarantees of insurance policies or accounts, and an orderly sale of assets, wherein debtors would get the cents on the dollars they deserved. Since when does the U.S. government guarantee the wild bets of incompetent traders? Since the Treasury Department became paralyzed with fear. This paralysis means the poisonous debts that are poisoning AIG and the financial system never go away - They just sort of trickle on until the next round of bailout cash is needed.
So the right question is why AIG is even around at all at this point. We've given AIG about $500 per man, woman and child in this country. Now we're in arms over pennies.
Michael Lewis, author of Moneyball and Liar's Poker, says it better than I can:
To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore. (The trillions we owe foreigners, for example.)
It seems outrageously simple to say this, but the solution starts by not giving any more money that we don't have to the people who got us into this mess in the first place - And that money isn't "bonuses"; it's bailout money.
The second step is to put in real regulations that both prevent future abuses and put a sane salary structure into the many firms where the government has a controlling interest that actually works rather than the hysterical bonus confiscation plan. Nate Silver has a sensible plan as far as salaries go:
set a soft cap for aggregate compensation that is adequate to keep a company running healthily -- say, 20% of company earnings -- and then require companies who allocate more compensation than that to match it one-for-one with paybacks of their TARP funds. This would require companies to either right their ship or control their compensation levels. But it wouldn't discourage them from paying bonuses to those exceptional individuals who are deserving of it.
And where are the regulations so desperately needed, that have been promised and not delivered? Perhaps they are coming - Maybe Geithner has them scribbled on the back of a cocktail napkin and he’s waiting until the Treasury Department holds a job fair so someone can type them up.
After having the courage to let certain firms go into controlled bankruptcy and cleansing the bad debt from the system, and having new regulations go into effect, the final piece is obvious - a plan to assist troubled homeowners so that they can actually pay their mortgages and keep their homes - then banks get paid, breathe easy and actually start lending again.
It's obvious, but perhaps too simple: People can actually figure it out. As Michael Lewis says:
I think I understand. It would be too simple. People would understand a lot of small payments to the guy down the street who doesn’t deserve them, and become outraged. Far better to throw trillions at opaque corporations, the inner workings of which no one still really understands.