AIG is (was?) one of the largest insurance companies in the world, with a finger in nearly every line of business that could be called insurance, including, fatally, credit default swaps, or CDSs. A CDS is a form of insurance in which the issuer (AIG) guarantees that a bond will be paid off even if the borrower defaults. AIG wrote massive amounts of this insurance on bonds backed by American residential mortgages, allowing holders of these bonds to treat them as very safe and stable AAA rated investments. In the clarity of hindsight, AIG was amazingly foolish. They apparently did not consider that if the real estate market went south then all those mortgage bonds would be in trouble at the same time.
Of course it did go south, and AIG had hundreds of billions of dollars of insurance claims that it could not pay. This being one of the most extreme examples of Too Big To Fail that could be imagined, the US Government stepped in, took AIG over, and proceeded to pump in enough money to make good on its debts. There may have been, at first, a hope that AIG could be saved as a going concern, but it soon became clear that the only practical game plan was to stabilize the situation long enough to sell off the many sound operations that AIG owns and wind down, in as orderly and cheaply a way as possible, the CDS business. The money thus raised and saved won’t be enough to make the taxpayer whole, but it’s a lot better than nothing.
One of the big challenges with that sort of plan is that it is very hard to keep people working at a company on its deathbed. This is particularly a problem for white-collar companies like AIG, which own no factories or equipment. The employees are the company, and if they start fleeing the sinking ship, then it’s all over. So AIG did what companies in this situation often do, use what are called retention bonuses to keep key people at their desks. The deal is usually not much more complicated than a promise that if you keep working here until X date we will pay you Y dollars. This is relatively common and is a typical feature of many bankruptcy reorganizations.
There. If you kept awake for the past three paragraphs you now understand more about AIG than the vast majority of your fellow citizens, journalists and elected representatives included.
Which is not to imply that a lack of knowledge amongst the masses has led to a lack of strong opinions. According to a recent poll 77% of Americans think the government should take the AIG bonuses back and 71% believe that financial institutions do not need to pay bonuses to hire and retain employees. Remarkably, although 57% said that they had read or heard “a lot” about the topic, fully 35% of those polled thought that Congress had spent too little time on AIG.
It’s hard to imagine how Congress could have spent more time on it. Last week a bidding war broke out over who could concoct the most punitive venting of the public outrage. Steve Israel (D-NY) and Tim Ryan (D-OH) probably won this with a bill to tax the bonuses at 100%. Senators and Congressmen have been frantically elbowing their way to the nearest TV camera so that they can tell the American people that the American people are outraged about the AIG bonuses.
It’s telling that they almost always start their remarks by noting how angry the citizenry is, rather than by saying that they themselves are angry. A cynic (e.g. me) might speculate that they privately know better, but too scared of the poll numbers to say so.
The AIG controversy has been called a firestorm, which is a good label, but not the best one. It does have some characteristics of a forest fire, started unintentionally by irresponsible people, unnoticed or ignored while still small enough to put out, and now raging beyond control. But there is a better term for this. This is a witch hunt.
Like witches in Salem or communist infiltrators in the 1950s, Wall Street operators are now popularly thought of as a mysteriously sinister force attempting to undermine our way of life. Once started, witch hunts are hard to stop. When the angry townspeople arrive at your doorstep with pitchforks and torches, chanting “Burn the witch!”, your only choices are to start chanting too or risk getting burned.
So everybody in Washington is chanting as loudly as possible. This includes, rather deftly, the Obama administration, which by all rights should be fleeing the angry mob. AIG, after all, is a ward of the state. The CEO was selected and installed by the government with the remit to minimize damage to the taxpayer. There is considerable evidence that the Treasury Department knew about the bonus scheme from day one and approved it.
And yet with a little double talk, and the aid of a friendly media, the administration has succeeded in getting out the story that they had nothing to do with this. A recent poll found that only 12% of Americans thought the administration had a lot of control over the bonuses and 51% thought they had “not much” or “no” control.
If you are wondering what this has to do with bad personal finance advice, the answer is that, directly, nothing. But it is a symptom of the same core problem, a widespread and shameless ignorance of the ways of money. Ours is a nation where how Hollywood works is common knowledge but Wall Street is a mystery. And not knowing how Wall Street works can be just as damaging to the economy as not understanding the basics of personal finance. There is still plenty of opportunity for the government to take action that will make our economic situation much, much worse.
As has been said many times, the problem with democracy is that you get exactly the government you deserve.
[Torchlight parade photo by Ensign beedrill.]