The Outrage About Outrage

$165 million in bonuses was distributed among the staff at the Financial Products Division of AIG. Those are the good people who brought you the current financial panic and have resulted in AIG receiving $170 billion in US government bailout money (so far).

To the average guy a bonus is something you get for a job well done — an unexpected something, given by grateful bosses to hardworking, successful employees. Sports fans have come to know of bonuses as a means of generating incentive in players to meet high performance goals. A-Rod makes it 50 homers, he gets to spend a night in the cage with Madonna, that sort of thing. In the case of AIG, though, it sounds like these folks were rewarded for driving a respected international corporation and, by extension, the entire world economy, to the edge of collapse. Seems pretty outrageous. How could the government allow this?

I’m not going to try to parse the machinations of the deal to give these bonuses other than to say it seems to be a product of the prior administration (with some advise and consent by Ben Bernanke, Tim Geithner, and some others still hanging around the water cooler in DC). All the plans, in place before Barry came into office, are completely consistent with every other action taken by the former administration. They all had the effect of concentrating enormous amounts of taxpayer cash more or less directly into the hands of a relatively few number of hands at the top of the income pyramid while the entire edifice of political and corporate structure began to teeter below.

Here’s the thing, the guys at AIG getting these bonuses are splitting up one tenth of one percent of what AIG has received (so far). “Distasteful”, to quote the current straw man, recently appointed AIG chairman Edward Liddy, but not really all that outrageous. What I suspect will soon become the real outrage will happen as we start to understand more about where the $170 billion (so far) has gone.

The next meme to start popping up in the political and financial discourse will be “counter-parties”. AIG was primarily an insurance company which sold variations of just about every sort of insurance devised. A counter-party is the recipient of a check when a claim is made on the insurance coverage. In other words, if I have hurricane insurance on my house, then a hurricane blows down my house, I am the counter-party who gets the check from my insurance carrier to cover my lost house. Calling me a counter-party is a fancy way of saying I bought the insurance to protect myself.

This will become important because AIG has been infused with $170 billion (so far) basically to pay off claims on stupid risks taken by the Financial Products Department. They insured the stupid loans bundled together in instruments created by the banks. Most of the bad instruments are held by JP Morgan-Chase (Goldman, Sachs), HSBC (not a US bank), Wells-Fargo (Wachovia), Bank of America, and Citigroup. So really, the money that went to AIG (so far) theoretically is being used to pay claims against the debts (mortgages, credit cards, etc.) going bad at those banks. But wait a minute, those banks also received direct infusions in the neighborhood of $170 billion (so far) also.

From an accounting perspective, these companies have all been preserved after years of very bad management, taking huge risks, huge personal paydays for the folks who did the deals, and we are paying the bill for its failure. The phrase “privatize the profits, socialize the losses” was one I heard quite a bit while Randi Rhodes was still on the air and it’s starting to feel more and more like she was right. “They” get to keep the money when “they” make it, we have to pay for it when “they” lose (although that payment still goes to “them”). I understand and agree with the notion that in a severe recession/depression, the only viable source of capital infusion is the government. No one else is spending their own cash and in a world that revolves on the use and reuse of money only the government has sufficient resources to force a change. How that money gets spent is another issue.

What we are seeing now are the continuing consequences of the Bush administration’s outrageous philosophy come full circle. Barry was stuck with it on January 20th and in the absence of a signing statement to the contrary, he is bound by law to carry it out pretty much as he is doing. Personally, I’d feel better if every American instead, was instead given a portion of the $340 billion (so far) for specific use towards either their mortgages or their credit cards or some other bank originated debt. That way the banks are in the same spot as far as getting their cash infusion and at least the people are using their own tax dollars to wipe the debt off their own books. The debts now don’t go bad, AIG doesn’t have to pay the claims, and instead investigations into a foolish, probably criminally fraudulent insurance enterprise can proceed. Wouldn’t THAT be outrageous??