THE ARROGANCE OF AIG
About 15 years ago, when I was working in corporate treasury,
my company's insurance broker asked me to write a letter to him expressing my
experience in dealing with AIG as the carrier of our Liability and Workers Compensation
coverage. My response was that the AIG representatives behave in such an
arrogant manner that one would think that you were dealing with the Department
of Motor Vehicles. The recent announcement that AIG would be paying in excess
of $165 million in bonuses convinces me that nothing has changed.
Remember, AIG is a company that has required tens of billions
of dollars in bailouts from the government in order to avoid cascading failures
to the world economic system. In addition, AIG's losses have been larger than
the GDP's of many medium countries. Yet, the executives of AIG have the arrogance
to believe that they are entitled to huge bonuses. Yes, I said entitled. Executives
at AIG believe that they entitled to receive a form government transfer
payments similar to the welfare system. However, these payments go to those who
are well off: Welfare for the rich. The
executives will claim that government money isn't paying the bonuses. If that
is the case then AIG doesn't need the $165 million and the government payments
should be reduced by value of the bonuses.
I fear for the future of the United States. We have gone from
a country where Adam Smith's enlightened self interest has changed into the
arrogance of greed. I cannot think of
any behavior which could do more to convince Americans that there is something
wrong with the capitalist system. The executives' actions could not do more for
advancing socialism than they could if they were on the payroll of the Socialist
or Communist parties.
Yup... When has the ruling class ever been able to reign in their greed until the villeins are at the gates with torches and pitchforks?
March 15, 2009 4:25 PM | Reply | Permalink
I mentioned somewhere else that many should remember those immortal words of Lenin around 1916:
WHAT THE HELL IS GOING ON HERE, ANYWAY?
I am with Miguel on this one.
March 15, 2009 5:44 PM | Reply | Permalink
The bonus figure is actually now (Sunday pm) $450 billion. marketwatch link
March 15, 2009 6:16 PM | Reply | Permalink
(...$450 million - AIG would love it if it was 'b')
March 15, 2009 6:18 PM | Reply | Permalink
Oh heck, maybe they should go for it, $450 Billion..?..whats a few more zeroes to the US taxpayers anyway...
March 15, 2009 6:21 PM | Reply | Permalink
I believe you mean $450 million. Either way it is over the top and is a threat to the free enterprise system. Regulated capitalism provides strong long term growth with manageable business cycles. Unfettered capitalism lead to the arrogance of greed and the market discipline of depression.
March 15, 2009 6:22 PM | Reply | Permalink
Why shouldn't AIG execs be arrogant? Haven't they (and we) been told that the collapse of AIG is not an option? Haven't they been told that not only would the U.S. economy collapse along with AIG, but the economy of the whole world as well? So, how can the government expect to produce any credible threat to AIG while also telling them they will be rescued, no matter what?
AIG execs are like any other extortionist who says; "give us your money of suffer the consequences." All this AIG fiasco does is to put the exclamation point on the fact that the entire financial industry need to be subjected to wholesale anti-trust action. That's the action the Obama administration needs to take. Break them all up! It's clearly a matter of national security, isn't it?
What did that Dem. congressman say (I don't recall his name): Any private entity too large to let fail, is too large to let exist. The correctness of that simple logical seems inescapable.
March 16, 2009 9:13 AM | Reply | Permalink
Other information is online at AIG. AIG: Is the Risk Systemic? is an outline of the different units within AIG and their importance or rank in the insurance world.
One of the units is AIU, American International Underwriters, which is the commercial insurance provider. The following blew me away as I have not heard this mentioned:
Has anyone else heard this?
March 16, 2009 10:35 AM | Reply | Permalink
EM,
Here's how I see it.
THIS FUCKING OUTFIT LOST 60 BILLION DOLLARS IN THE LAST QUARTER. NO ONE THERE DESERVES A FUCKING PAYCHECK OR THE JOB THEY HAVE, LET ALONE ANY KIND OF BONUS! YOU OR I WOULD BE IN PRISON.
The "SOUL EATING BASTARDS" (read corporations) strike again.
("caps intended" I haven't figured out all that html stuff yet or it would be bold, italic and bigger)
March 16, 2009 11:27 AM | Reply | Permalink
Yes, that is the most mind-blowing aspect of this fiasco, the notion that you can literally destroy your company and earn a huge bonus for doing so. Of course, it's not an activity unique to AIG as it seems to have permeated all of corporate America. Who doubts that such executives have only done what was fully expected of them. That they show crazy growth numbers and thereby get every executive in the firm rewarded with bonus money. It's a get-rich-quick scam no different than Bernie Madoff's, except that this one is still operating.
Shareholders do not control (other than the hyper-rich few) large corporations. The Boards (through which, the hyper-rich exercise their control) are essentially autonomous. Boards also are highly incestuous, the CEO of one corporation usually sits on the Board of someother corporation. They all blow each other kisses by voting to provide these insane compensation packages, while the shareholders and employees (and now, we tax payers) receive the screwing.
The whole corporate system is corrupt and in need of a sweeping overhaul. Specifically, vigorous prosecution of criminal executives, new legislation empowering shareholders over Boards of Directors, strengthening of Unions, and anti-trust action breaking up the unhealthy level of corporate consolidation are what's needed.
March 16, 2009 1:12 PM | Reply | Permalink
In September of 2008 I wrote:
As an economist I have always believed that “Market Discipline” would provide the means of preventing excess risk and imprudent actions on the part of corporate executives. I believed that ENRON and World Com were aberrations. I did wonder, however, how these aberrations could occur.
The recent meltdown in the mortgage markets has convinced me that the excessive risk taking is not an aberration. Rather, it is built into the very fabric of the modern financial system. How this came about is very simple:
For “Market Discipline” to work the participants and decision makers in the system have to be subject to both the rewards and the potential losses from assuming high risk. When the decision makers are subject to the potential losses they tend to act in a prudent manner. The problem lies in the fact that the remuneration systems in place in today’s markets provide very high rewards to executives who engage in successful risk taking. On the other hand, if the risks are unsuccessful, there is no penalty to the decision makers. They may lose their jobs, but their separation packages have such high payouts that the losses are limited. Just look at the Fannie Mae and Freddie Mac CEO’s. The payouts are in excess of $10 million each. Bears Stearns had similar arrangements and I’m sure that Lehman executives will also come out well off. The biggest losers are the shareholders and the public. The people making the decisions are not the risk takers and have no incentive to be prudent decision makers.
Lets face it, if you are allowed to gamble with someone else’s money and are allowed to keep a high percentage of the winnings while getting paid for doing the gambling if there are losses, why wouldn’t you make the riskiest bets. In fact, looking out for your own self interest, you’d be dumb not to take inordinate risks. For you it is a win-win situation.
March 16, 2009 5:38 PM | Reply | Permalink
Among the conditions required for stable free-markets are:
1) All participants have equal access to information affecting the market (no insider information).
2) No participant has greater ability to affect the market than can any other participant (no market gorillas).
3) All participants behave in a rational manner without emotionalism (such as, greed and fear).
The problem with free-market theory is that it's based on an academic fantasy. It runs counter to observed human behavior. It just takes the right combination of the above flaws to catastrophically inflate or collapse a free-market. Regulation of markets is essential to prevent such instability.
Interestingly enough, however, I see a potential political silver lining to the AIG fiasco. Republicans have been attacking Obama's agenda by claiming it amounts to socialist redistribution of wealth to the working-class and is therefore unfair to the wealthy. I suspect that argument will now have much greater difficulty in building sympathy for the rich among the working-class.
March 16, 2009 6:36 PM | Reply | Permalink
My article was addressing item 3 of your response. However, I have written other articles addressing item 1. Perfect Knowledge also includes the assumption that there is perfect knowledge regarding the product that is being bought or sold. It is clear that the fault was not so much insider trading as it was insiders not knowing what the risks and returns were of the products they bought and sold.
March 17, 2009 1:22 PM | Reply | Permalink
Correction. The Arrogance of Corporate America.
C
March 16, 2009 12:13 PM | Reply | Permalink
Hey, if you give crack to a crack addict, they're going to smoke it, right? We gave billions of no-strings money to an entity that contributed to a global economic meltdown. What they hell did we expect? Of COURSE they were going to do exactly what they did.
The hypocrisy being shown by our government is staggering. Remember that this bail-out was shoved down our throats with no government oversight built in to it. How the government can act shocked at the result is an exhibition of Masterpiece Theatre.
March 16, 2009 1:09 PM | Reply | Permalink
Short version: You knew I was a snake when you picked me up.
C
March 16, 2009 1:22 PM | Reply | Permalink