Too Late for AIG Bonus Torches

The angry mobs now forming against the idea of AIG employee retention bonuses are, sad to say, running several months too late. The opportunity to stop this sort of outrage was lost last year.

Yes, of course the bonuses are an outrage and should not be paid. I say this with all due respect to the AIG people in question – most of whom probably are not to blame for their company’s downfall and subsequent rescue by the taxpayers. In fact, some may have given up good opportunities elsewhere in order to stay behind and help clean up the AIG mess.

The problem is that this sort of thing became inevitable as soon as Washington decided AIG was too big to fail and inserted itself into the situation. Now we, the people, own this company that our leaders are woefully unqualified to manage. It should be no surprise that bad things are now happening.

Here’s what the government should have done last year: Let The Market Work! AIG took foolish risks and lost so much money it could no longer survive. Fine. That’s why we have bankruptcy courts. The Treasury could have provided some temporary financing to help wind everything down in an orderly fashion. AIG’s legitimate insurance operations are supposedly sound; if so, they could be sold to other companies.

In bankruptcy, the employees now receiving bonuses would have been left standing in line with all the other unsecured creditors while a judge divided up whatever assets were left. It wouldn’t be a pleasant process for anyone, but it would have been far better than the politically-driven fiasco we are now witnessing.

The reason this didn’t happen, in my view, is that among those creditors standing in line would have been various politically powerful organizations. The AIG bailout was, in fact, just a disguised bailout of AIG’s counterparties on big derivative trades – all of whom knew they were taking credit risk by dealing with AIG and did it anyway. They should have been forced to live with the consequences of their own choices.

The good news, if there is any, from the bonus scandal is that it may convince Congress and the public to put a stop to further bailouts. The only way to rebuild our economy is to let nature take its course. That means weak companies with foolish leadership need to die off and make room for the next generation. Too painful, you say? The alternatives are even worse.