The AIG Grilling

Having watched most of the grilling given to the AIG CEO, Edward Liddy, today I have a few thoughts:

First: Liddy tried very hard to explain his decision to pay out those horrible bonuses. He argues that it was a risk management technique. His plan is to eliminate the division that caused all the problems, but since that is common knowledge he wanted to retain enough staff to wind down the book of business in an orderly fashion. He feared a mass exodus of employees and a consequent collapse. So he honored the retention contracts which are paid to employees who successfully wind up their positions at minimal loss to the company. I think he could have challenged them, and he could have hired new people to do the job – Wall Street is awash with traders right now. Nonetheless his motivation was not off the wall.

Second: There really is a gulf between the Wall Street culture and the rest of America. Wall Street, largely because of its old partnership roots, is infested with an ’employees first’ mentality. So it thinks nothing of paying vast amounts to its employees and minimizing, or at least having a lot less concern with, shareholder interests. This has changed radically recently with respect to shareholder returns, but those huge payouts are not unusual. Getting a million dollar bonus on Wall Street is very common. My view is that it’s OK to get huge pay if you have your own equity at stake, or if you genuinely produce extraordinary results. But the huge leverage of the investment banks meant they could pay vast bonuses even to average performers [it was easy to produce big returns on equity since there was practically no equity compared with all the assets being churned]. Further: this attitude toward pay infected the other banks after deregulation enabled them to enter into the old investment banking business. Those banks did have shareholders rather than partners, but needed partnership pay structures to compete for employees. The result was that the entire industry slipped into the big payout realm. A consequence of which was the run up in leverage even in the more traditional banks.

Third: Wall Street has an attitude problem. No really! We have to stop obsessing over Wall Street as if the folks there know much. They obviously don’t. AIG tried to keep its ‘key’ employees because it feared it would face a ‘brain drain’. This is an extension of the idea that anyone who works on Wall Street is some kind of financial demigod. After all they are paid copiously, so they must be. Well, that’s plainly silly. These demigods just ran the ship aground. They had no idea where they were going. What was simply arrogant pompous bellicose and vapid jargon, we mistook for intelligent conversation. They actually had no notion of risk management. Case in point: AIG’s master risk managers took on all sorts of risk without hedging it one jot. Oh well.

Fourth: It’s always fun to watch Congress do its Congress thing. The politics are amusing. All the Republicans were asking questions to try to pin the whole mess on Geithner. The lengths and contortions they went to was worth a highlight reel in itself. And I give Mr. Liddy his due: he parried them very well. Meanwhile all the Democrats were trying to whip up populist rage, even going so far as to accuse AIG of criminal activities. Nothing much came of the posturing, but I am sure some good photo-ops emerged for future campaign use.

Fifth: For opponents of proper nationalization this was not a good day. Even though we have taken a majority ownership taxpayers are being ill served by the bureaucrats who are acting as liaison with AIG. Someone from the FEc its in on every strategic discussion and can make the government’s attitude well known. Yet the bonuses went unopposed. Clearly we still cow tow to the big boys of Wall Street. We give them too much credit. Proper nationalization, where the government calls all the shots at the strategic level, could have – I venture to say would have – prevented this mess. The way we have taken over AIG is timid and half hearted. they think of themselves as a private company still. I hate half measures. they are doomed to fail. Either do something, in this case take over the reins of power, or don’t, in this case let AIG fail. But don’t get stuck half way. You get all the blame and none of the reward. Are you listening Tim Geithner?

Lastly: The fun part of the day came when some women protestors held up pink signs and made a nuisance of themselves. The committee chairman demanded that all there slogans and signs were seized. Whereupon Barney Frank quipped that it was a just as well that the slogans were not on the women’s T-shirts. For him that would have been a particularly sensitive dilemma.

Overall, as a spectacle the event was fun. It achieved very little other than as a safety valve. The people’s representatives blew off steam. That may help lower the temperature a bit so we can get on with working our way through our economic problems.

But, boy, do we have a way to go.