The Lesson from AIG

The recent fracas about AIG's bonuses is a symptom of what is wrong with Democracy. AIG has been the receipient of $180 billion of bail-out money. It used $165 million of that money to pay contractual bonuses to its employees.

This touched off a firestorm of protests from the public. Frightened by the angry mob, the House of Representatives recently passed a law to tax away 90% of the bonuses.

In my opinion, this law, if implemented, will probably make the company go bust. Thousands of its hardworking salesmen, managers and other employees have been promised bonuses if certain objectives were reached. These bonuses are contractual. If bonuses are given to the people who did dumb things that caused the company to go under, then I think its wrong. But it is unfair and unwise to deny bonuses to employees that they were legally entitle to in accordance to their employment contracts.

If you were promised Y dollars for doing X, then you have to pay them if they have done X. What Congress is doing is to break the contract. Now, employees will be inclined to leave companies that received bail-out money because they contracts are no longer sancrosant. The ones that are likely to find alternative employment elsewhere will be the best ones.

A financial company is not like other companies, say a mining company. In a mining company, your principal asset is your mine. But in a financial service firm, the principal assets are its employees. While a mine cannot walk out the door, AIG's employees can!

This is something the Mob cannot understand. All they know is that taxpayers' money was used to pay bonuses. Now that their employees know they won't be getting paid what they are promised, the best ones are going to resign. How is AIG going to survive a drain of its employees?

This tax law that Congress recently passed may doom AIG. This means that the $180 billion of taxpayers' money that the government poured into it will go down the drain. The US government, and by extension taxpyers, now owns 80% of the company. Its actually in the taxpayers' interest for AIG to retain its good employees so that the company has a better chance of survival. Edward Liddy was appointed to make the tough decisions required to ensure the survival of the company. Its best to let him decide on management issues like compensation and not the Mob who does not understand the business.

It will also affect other companies that accepted bail out money. If contracts are no longer sancrosanct, then its going to be hard to retain and recruit talent.

Liddy had told the Obama administration of his intentions of paying bonuses. I think the Obama administration understood the rationale why they had to be paid. But he and the other votrepreneurs did not have the guts to explain it to the Mob that elected them. Instead Obama told them, "(The House vote taxing AIG bonuses) rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat.

In the end, this is a symptom of a larger problem — a bubble-and-bust economy that valued reckless speculation over responsibility and hard work," he said. "That is what we must ultimately repair to build a lasting and widespread prosperity."

He is of course not leading the People but is following them. Obama should have used his eloquent oratorical skills to convince them why paying AIG's staff what they were promised was necessary in order to turn around the company now 80% owned by taxpayers.



If as I predict, talented employees leave, the firm is likely to go bust then taxpayers will not get their money back from their "investment" in AIG. The problem is that when governments run companies, they no longer run it for profitability. They run it in a manner whereby the votrepreneurs (politicians) get votes which of course tends to screw things up for the companies they control.

That is one reason why I was dead set against bail-outs in the first place. See my earlier article, "Let the Big 3 Automakers go bust.

Looks like I may get what I wanted - letting nature take its course and allowing failed companies to fail. Too bad for the US taxpayer that in AIG's case, he has to lose $180 billion for nothing.