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Emotion and business decisions – the AIG bonus program

Now really, what did you expect? Like it or not, the managers and executives at AIG have specific value in the market place. You may think that they are all worth nothing, but many companies see the AIG kerfuffle as an opportunity.

The obligations that AIG had to managers were contractual payments everyone knew about when the government took an 80 percent stake in AIG in return for an $85 billion cash infusion in September.

All of a sudden, people are outraged about the bonuses for AIG employees. Since the people are now fully invested – not by their own choosing – into AIG, the obvious problem rears it’s ugly head.

Emotion.

That’s right, emotion. Making business decisions based on emotion is a big mistake, and corporations who have taken federal bailout funds are now making business decisions based on how the event will be played out in the media.

Citigroup canceled the delivery of a new jet when politicians – and citizens – freaked out. Even I wrote that it was a bad marketing decision, not necessarily a bad business decision. Did you know that Citigroup was trying to sell two older jets worth $27 million each? The new jet was going to cost an estimated $50 million for a “profit” of $4 million for the corporate aviation division.

What’s the right business decision? I’m not sure, but I know that if I owned a project that could cut costs at the aviation division by $4 million, and the response was we can’t do that, the public would get mad, I’d be looking to find a job somewhere else.

And that is what AIG CEO Edward Liddy is arguing. AIG needs to be able to pay employees something close to the market wage for similar positions at other companies or the employees are going to leave. Employees also do not want to be under a microscope by the Marketing Department when they make solid business decisions. Would you want to stay at a company like that?

Referred to as brain-drain. Liddy writes about the issue this weekend in a letter to Geitner after AIG was bullied into implementing measures to do everything possible and legally cut scheduled bonus payments.

…I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today. On the one hand, all of us at AIG recognize the environment in which we operate and the remonstrations of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.

This is the simple reason why the government can not be involved like this. My fellow bloggers like Michelle Malkin are rightly ticked at the current situation.

Both parties in Washington created this Frankenstein. Make no mistake. President Bush, with help from now-Treasury Secretary Tim Geithner and his mentor Hank Paulson, pre-socialized the economy and stabbed fiscal conservatism in the heart with the original AIG bailout.

I’ve written about this non-solution before, and more Americans need to understand what is happening. This does seem to be the crisis the Obama administration wants to use to their advantage. Don’t let it go to waste!

Others have more today, including Malkin and LGF. Hot Air chimes in with video of Obama being outraged!

Exit question: What could have been done, or still could be done, to get government out of the way so these companies could succeed on their own? (How about massive corporate tax cuts and making the federal government smaller?)

The return on our investment (bonus section)

aig-investment

Click on the image to see how our first $85 billion did. That investment seems to be worth about $19 billion today, down more than 75 percent.

The government continues to pour our money into a bad investment. It’s kind of like a gambler who is $1,000 in the whole making another bet for $500 hoping they can take the winnings and pay off that first grand. The problem is, the gamblers keep loosing.

Realize this: the government is gambling here, pure and simple. Since the original investment of $85 billion, things have gotten even more confusing since the government has poured more capital into AIG.

AIG got another $30 billion on March 2. When do we stop?

Featured image on the home page courtesy Mike Licht at Notions Capital.

Update: Morrissey at Hot Air has more today (Tuesday).

The nasty little secret at the center of all the outrage is that the Obama administration could have stopped the bonuses by simply stopping the bailout.  They could have forced AIG into bankruptcy, which would have voided the company’s contractual compensation obligations.  Instead, the Obama administration chose to inject liquidity into AIG, following the lead of the Bush administration, which had done the same thing.  That kept AIG’s doors open, and therefore kept its contractual obligations to its employees intact.

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8 Responses to "Emotion and business decisions – the AIG bonus program"

  1. davis says:

    So what is your solution for the AIG mess? Rehashing what has already happened in not a solution. All of us taxpayers have a share in this. Are you hinting that we should give no more money and let AIG go totally belly up? Don't tell us what SHOULD have been done, that train has left the station a long time ago, and saying we should not do this again does not solve the existing AIG problem.

  2. Erik Blazynski says:

    These "bonuses" are more like compensation rather than bonus. Bonus implies that there was some sort of performance incentive associated with receiving the compensation and that is not likely the case. 

    This whole bonus blow up is just a distraction from real issues, it is time to pay them what is owed them and move on.

    I agree with Davis, what is done is done, focusing on what we should have done is futile. From everything that I have come to understand about this AIG situation we had to take over 80% of this company. As the resident wack job libertarian you would never expect such a thing from me, but without this infusion of cash the financial system really would have collapsed. Though kind of neat to see such a colamity, the novelty would have worn off quickly. AIG needed an investor to provide them capital to get out of this jam. There is only two places to get that kind of money, the Fed and the government and that is where they got the money. They are paying back money that they borrowed from the Fed, but I don't see the government being able to sell their shares, and I don't see the Fed even wanting to sell their shares. 

    So we have an insurance/investment banking insurance company that is owned by the government. I think the questions that we need to be asking is how will AIG's government ownership change the dynamics of the marketplace? I have not heard anyone talk about that, and it is important.

    -Erik

    • I seem to remember writing about how these bailouts effect business in the same industry. Some played smart, others did not. Look at the big banks that got loans to save their buts compared to banks like Rockville Savings. I've posted a quote from Bill McGurk who flat out said community banks are fine since they don't lend to people who can't pay it back.

      Why should anyone want to take a personal risk on investments these days? If you do things right, your competition might screw up and get bailed out. So much for an equal marketplace. How is that fair? If you screw up, you get in line for a bailout.

      • Erik Blazynski says:

        It is not fair. Life is not fair. You have to be big enough to get in line, and it is total BS. We have to make this about making changes going forward. To have a successful free market you have to put ground rules in place, enforce those ground rules and then let the markets work. The ground rules include anti-trust regulation and  consumer protection laws which have all been forgotten and lead to this situation. We need to restore these ground rules and restore our free markets.

      • Dimsdale says:

        I agree.  Just put the ground rules back into place, colorblind, of course, reinstate Glass-Steagall, and return to doing the business that kept these local banks and credit unions solvent and healthy while the "too big to fail" banks did their level best to fail.

        Since when did we provide a safety net for banks?  I thought FDIC was sufficient, along with good commonsense banking practices.

  3. davis says:

    Erik got it, and gets it. Some people  still do not get the fact that the problems are not in the regulated part of banking where the FDIC is doing its thing. Even the AIG mess was not in the traditional part of insurance.

  4. I like ground rules, you need to have them. But the government does not seem to have any forward thinking when it comes creating or changing them. The Sarbanes-Oxley gotta-prevent-another-Enron Act is an example. Quick tactical government decisions certainly do not seem to be helping, nor is the quick decision to provide a $100 billion-plus float to AIG.

  5. davis says:

    I like ground rules too. Still we have to deal with the hand we were dealt. And you are still speculating (" But the government does not seem……..").

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