AIG--My Very Own Rick Santelli Moment

The AIG bonus episode pisses me off.  But not for the reason it ticks off most other people.  Yes, it's outrageous that the shmoes who drove AIG off a cliff are getting a bundle of cash.  But what really bothers me is that this silly episode is what gets Congress (and other people) all worked up.  For goodness sakes--it's just $165 million.  That's chump change for the federal government and especially in the scope of the bailout.  Put another way, it's about 55 cents per citizen, whereas TARP is about $2,333.33 per citizen.  

I understand the Congress is responding in part to a perceived public anger.  But there's an utter lack of perspective in the reaction to AIG.  Simply put, AIG doesn't matter.  It really doesn't.  The bonuses are disgusting, but irrelevant.  Get over it.  Lynching a bunch of Wall Street shmucks might feel good, but it doesn't help anyone.  It doesn't help people keep their homes and it doesn't restore the value of our 401(k)s and 403(b)s.  

The real question is why aren't we this outraged over things that really do matter?  Why is Congress about to leap into action (well, we'll see about that) over this piddly $165 million that has no effect on the world, when it hasn't done much of anything to help struggling homeowners?  Where is a sense of priorities?  Why wasn't Congress so energized to take serious action to help homeowners a year and half ago?  Why is legislation permitting homeowners to restructure their mortgage in bankruptcy still trying to get the Constitutionally mandated 60 votes to pass through the Senate?  

Bailouts are about economics, not moral justice.  We should be focused on what will help fix the economy.  The place to express our anger at Wall Street's excesses is not in clawing back some bonuses, but in creating a regulatory system that will prevent against future excesses. AIG is just beside the point, and if we continue to have national attention focused on things like the AIG bonus story, it only distracts from what matters.  

It also irks me that members of Congress claim to be shocked, shocked, that AIG would pay out bonuses. Congress passed the $700 Billion bailout with only the thinnest patina of restrictions and oversight.  I fear that many members of Congress couldn't be bothered to read the bill--the largest single expenditure in US history, I believe.  The executive compensation restrictions are a joke and the oversight limited.  The Congressional Oversight Panel has done yeoman's work trying to bring some transparency and accountability to the system and to get Treasury to at least explain what it is trying to do, but if Congress wanted substantive limitations to attach to firms that took federal funds, it should have said so.  I get that Congress isn't used to being in the lending business, but this is distressed lending 101--get some covenants to protect yourself.  Good grief!

Comments

[ENunan]

I agree - nice post - found it on Twitter.com. I think Congress is so enflamed because they're basically caught with their pants down. This is just affirmation that none of them knew what they were passing - they just did it. Ugh. We voted them in, we should vote them all out.

[robertdfeinman]

This was explained long ago by C. Northcote Parkinson. It is his second, and less famous law:
Parkinson's law of triviality

http://en.wikipedia.org/wiki/Color_of_the_bikeshed

"organisations give disproportionate weight to trivial issues". I always state it as the amount of attention is inversely proportional to the amount of money involved.

His more famous law is, of course:
"Work expands so as to fill the time available for its completion."

[Marc]

I think some members of Congress and the White House knew this was coming, due to the language that was put into the Stimulus.

iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

It doesn't sound like the government has a leg to stand on.

[alyx]

I understand your point and agree that the money aspect makes no sense. But it does make sense socially; I thought this talk from Dan Ariely was interesting: http://www.ted.com/index.php/talks/dan_ariely_on_our_buggy_moral_code.html

The more we publicly allow cheating to go on, the more cheating will continue and escalate. This is a simple example that people can readily understand (exactly why would a company pay a 'rentention bonus' to people no longer at the firm).

The call for effective regulation has to start somewhere. These theives have been looting, pure & simple, for a very long time. There need to be a few examples made to shame the government into setting up a useful regulatory framework and to let the financial industry know it's in their best interest to tone down the greed.

[distracted]

Thanks for the Dan Ariely link Alyx. I'm halfway through his book, and its simply fascinating.

Mr. Levitin, I understand your point, but it feels like its a least a starting point. I'm so tired of being angry, and I feel like I can't write any more letters to my representative0s to express my frustration. They aren't in the position that many sinking homeowners are in, and just don't grasp the importance of moving on this NOW. They had no problem writing a check for a bank/Wall Street bailout, but helping homeowners? We'll just have to think that one through.

Can I ask what is, I'm sure, a terribly ignorant question? Instead of bailing out banks, investment firms, and insurance companies, why didn't we just pay off people's mortgages? I understand there are inequities and inflation issues, but we have that as it exists now. But the mortgages (and the loose standards on wall street and in corps today) seem to be the root of all evil. Pay off the mortgage (convert it to a governmental mortgage or something) and the bank gets the proceeds, and the insurance companies don't have to worry about covering the mortgage insurance when it defaults. Can someone explain this to me? Thanks for any info.

[Adam Levitin]

Alyx--I'm not sure that the bonus is "cheating." It might look really bad, but unseemly isn't the same as illegal. And I'm not sure what it does to single out AIG--if we want to go with a public shaming response, let's do across the board.

Distracted--that's a fair question. The answer is that there's a lot of resistance to a bailout of anyone, banks or homeowners, but when I see the Joneses down the block getting bailed out when I acted responsible and didn't buy too much house, etc., it engenders a different sort of resentment than when a bank gets bailed out b/c I'm in the same category as the Joneses. The Congressional Oversight Panel's foreclosure report went through this question pretty well, I think--we can bailout financial institutions directly or indirectly (by helping homeowners). It would make a lot of sense to do the later way, but bailing out homeowners gets a lot of people in different kind of moral tizzy.

[Mike Dillon]

I almost tend to agree with you Professor... Personally, I think I was a tad more PO'd that the PREVIOUS AIG installment went to pay off Goldman, Merrill, etc. - kind of like pass-thru certs if I'm not mistaken....

I still refuse to believe that the vast majority of the current Wile E. Coyote ACME economic moment was caused by "those irresponsible homeowners" forcing the banks to give them loans. I mean, it's sooooo obvious that everyone that bought property during the bubble KNEW they couldn't afford it - despite the brokers telling them that they could all refinance before or shortly after the first rate adjustments. I mean, remember waaay back in, I think, 2005 when the phrase "fog a mirror" really caught on?... That WAS collectively coined by all of borrowers trying to cajole the banks into breaking open their vaults so the borrowers could all run out and intentionally "buy more house than they could afford" - wasn't it?

Sorry.. I had a bit of a sarcasm overflow earlier today and had nowhere to go with it...

[pebird]

"Bailouts are about economics, not moral justice."

Well, there is moral hazard - or at least a lack of moral hazard.

You know, 55 cents here, 55 cents there - pretty soon you're talking real money.

[Mike Dillon]

Apparently, I was thinking along the same lines as Mr. Spitzer yesterday... Is that a good thing - and if not, who is it bad for?
http://www.slate.com/id/2213942/

[Patches]

Who were the ones telling us that AIG was too big to fail? Maybe if they were too big to fail we should have had them broken up a long time ago via an anti-trust action. We know of a group of elected officials who would have fought that notion tooth and nail. Those people hate to "publicly" endorse "regulation" or "Bigger Government". They seem resigned to sneak it through instead. Like they did with Bankruptcy Reform. How about we let creditors in a consumer bankruptcy look after their own interests instead of having the UST doing it? Can we get that kind of smaller government? Only a Republican politician can call for smaller government but also call for more government oversight and regulation in getting the bonuses back in one sentence! Santelli is a dope. He doesn't want to pay for a mortgage other than his own, he says. I, you, we are all paying to help keep 401ks from tanking via bailouts.