AIG wants the country to believe that it had to go forward with bonuses to employees of its failing financial products group based on two arguments. First, it couldn’t risk abrogating the contracts it had with employees, and second, it can’t risk losing these very same employees whose reckless actions led to the largest corporate loss in U.S. history.
It stretches the bounds of credulity to hear AIG talk about managing risk. This is the company that sold one half-trillion dollars of credit insurance without any thought to managing the underlying risk by maintaining adequate capital reserves, leading to a $200 billion taxpayer-funded bailout.
AIG should let more experienced risk managers determine whether abrogating employee contracts in an effort to recoup $165 million of taxpayer money is a risk worth taking. What’s entirely clear is that the issue is not really about risk, it’s about greed. How else can one explain why a company would pay millions of dollars in “retention” bonuses to employees who weren’t even retained? Or how its concerns about meeting contractual obligations didn’t also extend to the customers of the insurance it sold.
For all those free market absolutists who rail against government regulation (because it stifles economic activity), how to explain that it was AIG’s heavily regulated traditional insurance business that generated the capital and profits that were then squandered by the unregulated financial products groups?
There is a proper role for government to regulate a market that is subject to abuse, and when the abuses have externalities. When Congress is finished using the tax code as a means of punishment (a dangerous precedent), hopefully they’ll put their attention to more constructive ways of protecting our economy and taxpayers from the greed of “Wall Street”. Which unfortunately may include the need for further support of the financial institutions responsible for the current catastrophe. But while finding legitimate ways to punish those responsible, Congress shouldn’t let its populist fervor get in the way of doing what needs to be done to get our economy back on track.
