AIG’s Muddy Waters

by James & Miel on March 18, 2009 · 0 comments

Hi All,

So, the headlines over the past two days have been flying hot and heavy over the latest American International Group scandal. Currently, Washington has been turning up the heat on AIG to force the company to divest itself of the large number of bonuses it plans on paying to its current and former employees. Are the employees entitled to this wealth?

At its face, the issue seems simple – AIG has taken gobs and gobs of money from taxpayers to keep itself from filing bankruptcy. Its seems hypocritical to pay out large amounts of bonuses when the company is not solvent.

However, the issues surrounding the AIG debacle are more complicated than it might first seem.

1) Much of the bonus funds are being paid to irreplaceable employees in the financial products division. Many of the individuals who are in line for 7 figure payouts have specialized knowledge of the complex financial products AIG was selling. Its reasonable to expect that persons with specialized skills command a higher compensation level. So, there is at least a somewhat defensible reason for some of the payments.

2) In many cases, AIG is contractually obligated to make the bonus payments. I’m not an expert, but it seems like the payments were probably set up several months before the meltdown and formalized via contracts. In other words, the bonuses are not all discretionary – the payments are legacy issues from better days.

3) AIG and Congress are financially intertwined. In 2008, AIG contributed over 9 million dollars to congressional candidates. In addition, several members of the senate and the house of representatives, like Robin Hayes (R), John Kerry (D) and Nancy Pelosi (D), have owned large blocks of AIG shares in the recent past (1). So, there doesn’t appear to be an aversion to AIG’s greed, merely that the latest payments have hit the national nerve.

To wrap this up, if you look at the latest AIG scandal in context its not as simple as it first seems.

Best,

James

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