James Hamilton on the AIG Bonuses

March 20, 2009

Comments

Prof. James Hamilton offers his take on the AIG bonuses. One part certainly scores a good point, IMO,

One of the reasons this is so outrageous is that the promise of such bonuses was in fact one of the very factors that caused our current problems, creating incentives for managers of AIG to get out of solid insurance underwriting and into hedge fund gambling. If anyone had supposed that AIG had “learned its lesson”, this report seemed to dash that hope against the wall like a plate of china.

I think this is right, and if the government went to AIG and told them all future bailout monies come with the string that such bonuses be prohibited in the future I’d not have a problem with it.

I do disagree somewhat with Prof. Hamilton here,

But here’s the point. AIG may have entered into contracts with its managers and its counterparties, but the U.S. taxpayers did not. A precondition for infusion of taxpayer funds has to be sufficient restructuring of pre-existing commitments to ensure that any new funds delivered achieve their purpose rather than simply prolong the problem.

Now I don’t disagree with the spirit of this view point, but I would argue that it is the responsibility of the government through Secretary Geithner and possibly Larry Summers to engage in due diligence on this point. Review these conracts and make sure they pass the smell test so to speak. To place all the blame on AIG, which I expect to act solely in its best interest, is not reasonable at all.

8 responses to “James Hamilton on the AIG Bonuses”

yetanotherjohn

March 20, 2009 at 10:08 am

Don’t just pile this on Tim. Obama rushed the bill through congress without a chance for review. He knew about the bonuses before they were paid out and didn’t use his bully pulpit to stop them then, rather did the politics as usual to hope it wouldn’t be noticed until it was and then act outraged.

Obama can’t admit his mistakes, so he will throw someone else under the bus (as is his norm). He should either defend the bonuses as right and proper or admit that it was his inept handling of his rush to “not let a good crisis go to waste”.
PD Shaw

March 20, 2009 at 10:33 am

The problem with Prof. Hamilton’s analysis is that AIG’s primary losses were not in the Financial Products Unit where these bonuses were paid. Most of the losses and most of the bailout money is going into the boring old insurance division, particularly the division which insures bank/broker trades.
Steve Plunk

March 20, 2009 at 11:07 am

The taxpayers did enter into a contract for these bonuses. Our representatives in government chose to purchase AIG stock and bail them out. If those representatives did not exercise due diligence when reviewing whether to act that does not relieve the taxpayer. Contracts are contracts and should be honored. How we deal with bonuses going forward is what matters.

Why is this so hard to understand? We should be angry with Washington, not AIG execs expecting their promised bonuses.
PD Shaw

March 20, 2009 at 11:16 am

My previous statement might need to be tweaked, but I still do not believe AIG bonuses in the Financial Planning Division evidence any causal relationship to the company’s problems. Here is where AIG’s bailout money is going:

Last weekend AIG released information about the amounts and recipients of roughly $100 billion of its government loans from September to December 2008. The utterly unreported surprise is that the staid, boring, heavily regulated insurance businesses managed to run up losses on securities lending requiring $44 billion of government support. By way of contrast, the credit derivatives widely blamed for bringing down the world’s financial system were consuming $27 billion of direct government support [and another $27 billion of indirect support, totaling $54 billion]; municipal investment agreements (essentially, deposits) made by municipalities with AIG Financial Products took another $12 billion, and maturing debt took $13 billion.

Tom Maguire
markm

March 20, 2009 at 11:28 am

If those representatives did not exercise due diligence when reviewing whether to act that does not relieve the taxpayer

No, it couldn’t be their fault. Clearly those reps were sold a bad bill of goods by a predatory lender.
🙂
tom p

March 20, 2009 at 3:16 pm

Hey Steve, I found this by Matt Taibbi: link
It is a long (and good) read… wondering about your take on it.

it begins: “It’s over — we’re officially, royally f*ck*d. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.”
odograph

March 21, 2009 at 3:34 am

PD wrote:

The problem with Prof. Hamilton’s analysis is that AIG’s primary losses were not in the Financial Products Unit where these bonuses were paid.

Time Magazine says:

The $165 million in bonus payments sent out in mid-March to executives and traders at AIG’s Financial Products subsidiary (also known as AIG FP, or the people who tried to bankrupt the world) is an “outrage,” President Barack Obama has said.

Who’s right?

I don’t doubt that PD heard his version somewhere, but I wonder if it wasn’t just a knee-jerk defense, running ahead of the data …