Rewarding failure

If AIG were in the public relations business instead of insurance, it surely would have gone broke years ago.

Take the reaction to its decision to go ahead with $450 million in bonus payments, including $165 billion paid out over this last weekend, to executives of the business unit whose recklessness almost wrecked the company. Also over the weekend the firm disclosed that had to sue $34 billion in bailout money to make good on credit default swaps the unit has written that had gone bad.

President Obama was not pleased. AIG finds itself in this fix, he said, due to greed and the aforementioned recklessness. ". . . it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the American taxpayers who are keeping the company afloat?" the president asked.

He instructed Treasury secretary Timothy Geithner to "take every legal avenue to block these bonuses."

The president’s top economic adviser, Lawrence Summers, was also steamed: "The whole situation at AIG is outrageous. What taxpayers are being forced to do is outrageous."

Fed chairman Ben Bernanke, who wields unrivaled economic clout, said, "Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG."

Even the most shortsighted derivatives trader can see that this sort of reaction is not good. This is not just verbiage coming out of Washington. These three officials, standing in for the taxpayers, basically own AIG. Thanks to $170 billion total in bailout money pumped into the giant insurer, the American public owns 80 percent of the company.

AIG CEO Edward Liddy, who is technically our guy since he was government appointed, offered a couple of defenses. The bonuses had been contracted for pre-crash and were legally binding and, most interestingly, this: With Treasury meddling in compensation issues, "we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses," which Liddy pointed out, are now being operated on behalf of the American taxpayer.

If there are thriving, prosperous financial houses with job vacancies clamoring to hire way AIG’s top talent, in spite of that little bad patch where they almost sank the company, a lot of unemployed Wall Streeters would like to know who those firms are. So would we all.