AIG outrage shows bailouts poor choice

Freedom New Mexico

Will future historians mark last week as the week in which the Obama administration unraveled prematurely?

It’s too early to tell. It was, however, a week in which top officials in financial corporations and government alike came off looking especially clueless or opportunistic.

One can understand outrage over American International Group (AIG), which received bailouts from taxpayers, giving out $165 million in bonuses to employees of the division that made the risky decisions that put the company on the edge of bankruptcy.

The argument that it was necessary to retain these employees because they were the only ones who would know how to “wind down” the problems they created has some plausibility, but not much.

As Steve Tobak at The Corner Office blog noted, such bonuses are not typical. Tobak checked proxy statements for companies with market capitalizations similar to AIG’s at its height ($100 billion). At Microsoft and Apple, none of the highest-compensated employees got bonuses (or salaries) higher than $1 million. At Google in 2007, when revenue grew by 60 percent and net income by 40 percent, four officers got bonuses of $1.6 million each.

At AIG, 73 employees in the division that produced the led to monstrous losses got bonuses in excess of $1 million.

Proportionally, the $165 million was chump change — less than 1/10 of 1 percent of the $170 billion AIG got from taxpayers. Why did this particular bonus package generate so much outrage?

Whatever the reason, the eagerness with which politicians from President Barack Obama on down tried to rush to get ahead of the crowd and proclaim themselves leaders in faux-populist outrage was even more egregious. Democratic Sen. Chris Dodd of Connecticut, who first denied and then admitted he had inserted — at the administration’s request — a provision in the stimulus bill to exempt previous agreements from compensation limits, was perhaps the most hypocritical. But officials of both major parties covered themselves in shame.

Subsequent digging showed that officials in the Federal Reserve and Treasury knew about the bonuses earlier than they admitted. The bill passed by the House to tax at 90 percent the bonuses at bailed-out companies was an exercise in pandering and is probably unconstitutional.

Almost lost is the outrageousness of the financial bailouts themselves. In a free market, when companies take risks that don’t pan out they pay for it. When taxpayers socialize the losses, what economists call moral hazard comes into play: people are more inclined to continue risky behavior, believing they’ll be bailed out. Paying those bonuses instead of renegotiating or rescinding them was risky behavior that a company not deemed “too big to fail” would not have done.

If this episode puts future bailouts at risk and makes other companies reluctant to take government money, that’s fine with us. Trying to avoid market discipline with funny money was a bad idea to begin with.