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Monday, March 16, 2009

AIG Bailout and Bonuses

I am sure everyone has read the newspaper or the internet or watched the news on TV or at least listened on the radio and you know that AIG received billions of dollars in a federal bailout and now has announced that they are obligated to pay bonuses to the folks who work in the section of the company that drove them to the brink of bankruptcy in the first place.

You may be surprised to hear that the blame goes primarily to two groups, the board of directors, shareholders and executive management of AIG and President George Bush and his administration. Ok I will give a little blame to the Obama administration, but more on that later.

First I want to address AIG. I don't blame the traders at AIG that made the bad deals and are now getting a bonus. They did what they were paid to do. Obviously because look they are now getting big bonuses for their job performance in 2008. Bonus programs are scary things because guess what people do what you pay them to do. Give a person an incentive to perform his or her job a certain way and guess what they will find a way to maximize the payout by doing exactly what their boss asks them to do. So the moral is be careful what you ask for in a bonus program. The blame goes to the bosses who came up with the bonus plan, but this is not something that has happened overnight, so you also have to blame the board of directors of AIG who continued to allow the executives that are accountable to them to continue serving in their role while putting the future of the company at risk and while you are at it the ultimate blame goes to the very shareholder's of AIG who are now complaining the loudest. I happen to know that everyone of those shareholders gets a letter or an email every year and that letter explains very clearly their option to elect or NOT elect members to the board of directors.

The second blame goes to the Bush administration. AIG was facing almost certain bankruptcy back in 2008. The Bush administration had just gone through the very ugly failure and resulting consequences of Lehman Brothers failure, so they thought it would be a good idea to prop up AIG with a federal bailout.

What would have happened if AIG had gone bankrupt? Bankruptcy would have nullified existing contracts of the company, so those bonuses that the company is "contractually" obligated to pay would have been null and void. Many of the executives and employees would have lost their jobs (join the rest of us). The shareholder's of AIG would have lost their investment, but see blame #1 above.

You see that is the way capitalism works. Sometimes it is ugly and painful but that is what makes it work. I always had a philosophy with my kids that the greatest lessons I could give them was to allow them to fail. Guess what that philosophy works with adults also.

Some will say that the public would have lost faith in US financial industry if AIG had failed. Remember earlier I mentioned Lehman Brothers, they did fail and I bet you have not even thought about them in the past 3 months.

Ok I know you want it so the blame to the Obama administration is that they have continued to follow the misguided notion that the government should bail out big financially troubled companies. We used to live in a capitalistic economy and granted it is not always pretty and sometimes people get hurt, but the thing America "used" to be know for was our ability to get back up, brush ourselves off and get back in the game.

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