The Government and Your Money

The public is infuriated over the bonuses paid to employees of AIG, and rightfully so. It is incomprehensible that taxpayer money is being used to reward employees of the same unit responsible for the misguided bets that eventually spelled doom for the insurance giant. Unfortunately, the public has only seemed to focus their anger on AIG and its employees, without placing due blame on our elected officials in Washington. Meanwhile, elected representatives have been publicly spewing their “outrage” over the bonuses and proceeding with a plan to tax 90% of certain incentive payments over $250,000. The federal government needs to accept their due blame and move quickly to correct their errors.

The truth is that taxpayer money ended up in the hands of AIG employees only because elected officials voted to provide bailout funds without necessary taxpayer protection; they hoped that simply throwing money at the problem would fix it. I agree that it was completely necessary, in order to avoid a financial Armageddon, to ensure that AIG did not suffer a meltdown; the failure of Lehman Brothers nearly spelled ruin for our economy. But that does not mean that the government is justified in simply allowing the company to accept taxpayer money and operate as a going concern. Federal Reserve officials have complained that they do not have the necessary tools needed to implement an orderly liquidation of a large financial services company such as AIG; the options to a company are either solvency or bankruptcy, with little room in the middle. Funding the bailout in a manner that allowed AIG to continue operating as a going concern forced the company to honor contracts, including employee retention bonuses. The government knew this; in fact, Senator Christopher Dodd added language to the federal stimulus bill explicitly requiring that companies receiving bailout money continue to honor their previously existing employee contracts (including bonuses). After taking majority ownership of the company in September, and knowing that they structured the bailout so that the company would be forced to honor all contracts on going forward, how can elected officials now claim title to victim alongside the US taxpayer?

I am afraid that we are flirting with Japan’s mistakes at the onset of their “lost decade.” Ian Stewart of Deloitte notes that Japanese “government support was not conditional on better risk management and the behaviors that led to excessive risk-taking persisted.” Nearly twenty years later the US government is providing capital to failing financial institutions without necessary readjustment, including the reorganization of misguided employee payment policies. AIG has failed as an institution, and needs to be operated as such while simultaneously minimizing the overall harm to the economy; this means that all stakeholders, including AIG employees, need to accept pain as the company is wound down. It is the responsibility of government to ensure that the necessary laws, regulations and requirements are in place to ensure this happens.

How did AIG get into so much trouble in the first place? They issued promises to pay contracts in the future that they subsequently did not have enough money to honor and they operated a weak risk management system to monitor these contracts. Does that sound familiar? The Government Accountability Office, a non-partisan government body, estimates that in the second half of this century, under current federal programs, federal government debt held by the public will represent over 600% of GDP, our annual domestic output. Meanwhile, our elected officials are spending taxpayer money without necessary taxpayer protection in place. We do need to spend federal money to recover from the current crisis, but not on policies that reward and protect the same misguided behavior that got us into this mess.