Outrage Spreads over AIG Payouts "Too Big to Fail"

by Jordan Yerman | March 16, 2009 at 06:51 am

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The Financial Post calls AIG's payment of $93 billion (half of its bailout package) a "potential public relations nightmare". I'd replace "potential" with "actual".

If NowPublic reactions are anything to go on, it's very safe to say that people are pissed off. Very pissed off.

The revelation on Sunday by American International Group Inc was another potential public relations nightmare, coming on the same weekend that the Obama administration expressed outrage over AIG's plan to pay massive bonuses to the people in the very division that destroyed the company by issuing-billions of dollars in derivatives insuring risky assets.

American International Group Inc., under pressure to reveal how it spent taxpayer funds since its September bailout, said $105 billion flowed to U.S. states and banks including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG.

So, if I'm reading these articles correctly, AIG now exists solely to pay back losses. We're talking massive sums of money here- should the bailout package just skip AIG and move straight to its subsidiaries? The larger question: why should AIG remain "too big to fail"? By shoveling more money into the floundering insurance giant, we're really just allowing them to fail another day, and management has proven all too fallible.

The idea didn't get much traction (not surprisingly), and now some are pointing out that the opposite seems to be happening. Our solution to dealing with companies that are too big to fail has been to make them bigger and bigger, and pass off the question of "too big to fail" to other politicians in the future -- at which point the problems will likely be even bigger and harder to deal with. Propping up companies that are too big to fail, without a clear path towards making them small enough to fail, is a recipe for a future disaster.

Meanwhile, the White House is looking at available legal means to block AIG from handing out over $165 million in bonuses. At this point, the bonus is "you still have a job, dude". Bonuses usually refer to a reward for performing a task well. Under US law, the company in debt must pay back its lender or lenders before it can even pay its own staff, so what's up with these bonuses?

AIG isn't calling them bonuses, as the recipients are technically conractors and therefore supposedly entitled to recoup losses. These recipients are also at ground zero for AIG's collapse. It's also clearly an attempt at an end-run: these "contractors" are not investors, and these payouts are clearly bonuses. Do these contractors care what the American public thinks? Not likely.

He also called the payments "an outrage" as he announced help for small firms hurt by the deep recession.

He has told Treasury Secretary Timothy Geithner to "pursue every single legal avenue to block these bonuses and make the American taxpayers whole."