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March 17, 2009

AIG: Too Late To Defuse an Exploded Bomb

Category: Rants – Tom Harrison – 9:02 am

Ok, I’m off-topic on this one, but I’m a little ticked off, and I always like to vent my frustration in a public place. AIG has a problem with bonuses. Obama has asked Geitner to see what legal recourse we have. Andrew Ross Sorkin of the Times is defending AIG‘s right to give bonuses because they are contracts. I am as mad as the next guy about 400 people getting $165M in bonuses ($412K each, on average). But I accept that their contract may require payment.

What I don’t accept is that the top leaders of AIG and other companies who failed to identify and stop the problem, and wrote bonus contracts like this are so precious that any manager in their right mind would believe there’s a need to retain them. The main defense for propping up companies that played this game seems to be that they are the experts.

But experts at what? For example, Sorkin states

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

Huh? They didn’t build the bomb, they just provided the manufacturing facility for scores of their employees (something like 400 of them, perhaps?) to create new financial instruments that blew up in their faces. Experts? Just as there are many skills with little value in today’s economy, perhaps this kind of trader is amongst them. Further, this horrible outcome suggests a degree of competence that in any normal job would result in being fired.

Diffuse this bomb? Sorry, too late for that — is has already exploded. All discussions I have heard suggest that there is no longer any feasible way to deal with credit default swaps. Somebody’s going to lose but in the absence of certainty about who and how much that loss will be, newly defaulted swaps are just continuing to drain the coffers of the companies that bought or sold them. No one wants to touch the big, heap of stinking dung in the corner.

All that can be done now is to get rid of the culprits, clean up the mess as best as possible. And make damned sure it doesn’t happen again.

Perhaps the creators of this dung were merely caught up in the frenzy. I can accept that. But while millions of others lose their jobs, these people who should have been smart enough to see the problem are not only keeping their jobs, they are getting rather sizable bonuses for horrible outcomes.

This doesn’t happen in the real world — in the real world when a project you work on fails, you tend to lose your job, even if you had little to do with the failure. And so do the people who approved the project, as in so doing, they demonstrated a failure to understand something important about what they do. Companies that fail to penalize failure of people ultimately suffer their own failure.

However, it is true that AIG and the other companies involved are special. They cannot fail. I believe this is true. Indeed, if these people have contracts that promised them bonuses, then the must be paid. That’s the way it is.

But the fact that the people in the divisions that caused the failures are still employed is beyond my comprehension. That they get bonus for failing is beyond my comprehension. The executives have failed to take action, the board of directors has failed to take action. At what point will the stockholders assert their authority and fire the board of directors, replacing them with leaders who don’t have the kinds of “skills” that got us where we are?

By the way, the US is the primary stockholder.

Now, back to your regularly scheduled green programming.

1 Comment

  1. When you’re deemed “too big to fail” you can pretty much do what you want. They were awarded bonuses to continue what they saw as business as usual, not to change, just to survive.

    Comment by Mr. Green Gear — March 20, 2009 @ 8:45 am

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