What has AIG done wrong?
In regards to the bonus fiasco, the answer would be nothing. Here are two reasons why....
1.) Say you have a friend who spends all, or even a good portion of his money gambling. If this friend were to come to you and ask you for a loan, what would you expect him to do with the money? You of course would expect him to gamble it away. Much the same, AIG has to pay salaries and bonuses in order to keep its people employed, and to dissuade those in important positions from moving to a different company. If we can assume that this is true, the government should not be surprised that an influx of money was given out in the form of bonuses. If it truly comes down to it, would the government rather AIG give bonuses to the people who are vital to the success of the company, or would they rather those people leave and AIG completely fail? As can be expected, I did not agree with the bailout in the first place, but if you are going to give a company money to fix its problems, let it fix its problems. If it feels like the best way to fix its problems is to give incentives to the heads of the company, let it. If that does not succeed and the company fails, it is your job to have a pre-agreed comprehensive plan for them to pay back all of the money that was loaned to them. To many times, fingers are pointed outwards by our politicians, when the real problem lies much closer to those voicing their opinions.
2.) As mentioned in a previous blog entry, CEO's and other higher ups in companies are generally compensated for their worth. If a CEO, such as the one at AIG, makes millions of dollars in bonuses, that indicates that the bonuses are tied to a nonverbal promise that he will stay with the company. Bonuses are the business world's way of keeping those who do the things necessary to keep a company moving forward. Therefore, AIG paid these bonuses to keep those in the decision making positions from leaving and occupying relative positions at other firms. AIG prefers to keep those who know the company well, so that the rebuilding can be quicker, smoother and more efficient. If that is not the ultimate goal, then the government should be taking care of the whole deal, because they are incredibly good at being slower, rougher and unbelievably inefficient. AIG knows what it has to do to get on the right track, but the ideal situation is one where executives dont have to be retrained, where fixes dont have to be sought from outside the company and where markets can create an easier way out of the situation.
The ultimate slap in the face of basic economics, the moral hazard of the whole situation seems straight out of a sitcom.