The public was right to be outraged. But the real problem was the bailout in the first place. No matter what AIG does, it will now be with taxpayer money. Obviously, even a company that the government seizes is still going to pay its employees, pay its heating and electric bills, and buy raw materials. If citizens don’t object when their government starts nationalizing companies like they do in South America, then the citizens shouldn’t be shocked when their tax dollars get spent by the government’s handpicked CEO.
By all accounts, these bonus payments were contractual obligations before AIG’s seizure. Now if the government had simply stayed out of it, and let AIG go into bankruptcy, then the standard and time-tested proceedings would have decided whether to prune back these payments. After all, when a company goes bankrupt, it means that it does not have enough assets to pay off all of its creditors. So some people have to take a hit. And perhaps a bankruptcy court would have decided that Financial Products executives should take the hit before those who had bought credit default swaps.
But the government didn’t let AIG go into bankruptcy, since the giant insurer was allegedly “too big to fail.” If a private buyer had come in and rescued AIG with an $85 billion loan, that buyer would have certainly insisted on all sorts of immediate cost-cutting reforms. Yet the federal government obviously wasn’t too concerned about its new toy.
Even though it is indeed outrageous for AIG executives to pocket those millions, it’s an even worse outcome if the government taxes it back from them. This would be an ominous precedent, where the IRS basically mugs an unpopular group just because it can.
Many financial institutions lost their heads during the housing boom. On a free market, they would have been ruined by their recklessness. Yet now these firms are kept alive, or rather, they are kept undead, as zombies. For now these giant companies all take their marching orders from DC politicians, about the only group I trust less than AIG executives.