Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

15 March 2009

AIG Executives’ Protection Racket


Now let’s get this clear. AIG’s euphemistically named “financial products unit” was and is its derivatives cesspool. In early 2008, the financial catastrophe it had created was becoming self-evident. So like rats leaving a sinking ship, the folks whose “work” had created the catastrophe began to leave. AIG promised to pay them handsome bonuses just to stick around.

Within a year, their “work” had annihilated their unit, dragging down an otherwise healthy insurance giant and deeply wounding the global economy. U.S. taxpayers ponied up $170 billion (so far, with no end in sight) to undo the consequences of their “work.”

Now the people who brought on this catastrophe want to enforce contracts for bonuses based not on performance, but on “retention,” i.e. sticking around. They want an institution rescued and now 80% owned by taxpayers to pay them $165 million (up to $6.5 million per executive).

Think of Manhattan Mafiosi in a china shop. They recount a recent rash of burglaries in the neighborhood. They note that burglars are not often careful about breaking china. The police can’t or won’t protect you, they say, but we can. So pay us some of your profits, say 20%, just for sticking around.

Just so, our AIG financial-product wizards created—for their own profit—a system of derivatives that no one understood or could control. When it threatened to melt down, they threatened to leave. Keep us on the payroll, they said, and pay us extra just for sticking around, and we’ll protect you from the monster we have spawned.

What, pray tell, is the difference between Mafiosi and these bonus-hungry AIG executives, except for Mafiosi packing heat? The Mafiosi in our parable can even claim to have had nothing to do with the recent spate of burglaries. Can AIG’s racketeers say the same about our financial meltdown?

In my recent post on decentralization, I had several paragraphs likening our Masters of the Universe to a gang. A small gang, I implied, had brought down the world’s economy.

I struck those paragraphs as too inflammatory. I feared they might distract readers from the gist of my message: that our own private sector had imposed central control on our economy, with the same disastrous effect as the Commissars’ central control of the old Soviet Union. Gangs seldom respond to economic signals or popular will.

About eighteen months ago, I wrote a post contrasting law and justice. It described the “legal” theft of promised pensions and benefits from our “greatest generation” of workers. Though the scale is much smaller, I could think of no sequel more illustrative of the divergence between law and justice than the story of AIG executives’ grossly undeserved bonuses.

Who else but gangs gets paid princely sums for doing wrong and sticking around to see it through?

Oh, and did I mention that the rest of AIG’s hard-working folk don’t get any bonuses? Their insurance units were well run and profitable. They did no wrong. But they don’t get bonuses in the current economic climate because theirs were based on performance, not sticking around.

AIG and Treasury both say the financial-products Mafiosi have contractual rights. They say the Mafiosi have the law on their side. If so, in the words of Charles Dickens, “the law is an ass.”

If AIG’s protection racketeers think they have good contracts, let them enforce them. AIG is a private corporate group. We taxpayers own 80% of it and can tell it what to do.

So we order AIG to stonewall. We demand that it raise every defense known to lawyers’ imagination, including these contracts’ unconscionability and violation of public policy. We order AIG to hire the nation’s best and brightest courtroom lawyers and to demand jury trials, as is AIG’s right under the Seventh Amendment.

If the financial gangsters who destroyed our economy have the gall to rest on their contracts, let them find a jury to enforce them. Our legal system uses juries because they know the difference between law and justice.

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