Is the AIG Bonus Scandal a Mere Distraction?

For an excellent primer on the financial crisis, watch the video below:

The Obama administration is currently seeking all legal means to prevent AIG from using federal bailout money to pay $165 million in contractual bonuses to its executives.

Today’s opinion column in the Wall Street Journal called the bonuses scandal a distraction:

[Obama] and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

I certainly agree that the “larger outrage” is just that.

But the bonus scandal is not just a distraction. It’s not just a politically-motivated attempt to throw some water on the rage that burns inside taxpayers’ hearts.

It has a great deal of value beyond saving the federal coffers $165 million (which, admittedly, is not a lot of money in the grand scheme of things).

The real value in nullifying the bonuses is the message that it sends.

* * *

Alan Greenspan recently admitted that he had made a “mistake” in believing that banks, operating in their own self-interest, would never create such a poisonous economy that they would themselves collapse. Greenspan called the mistake:

“a flaw in [my] model … that defines how the world works.

I still do not fully understand why it happened.”

Well I have a pretty simple theory.

Greenspan’s mistake was failing to recognize that there is no such thing as corporate self-interest. It’s an illusory concept.

When it comes down to it, the corporation is run by a board of directors, each of whom acts in their own personal self-interest.

That personal self-interest can generally be summed up as: making as much money as possible as quickly as possible.

When these personal interests overlap with what we perceive as the “interests” of the corporation, we are fine and dandy. The corporation makes money and the shareholders make money. The system flourishes. The economy grows.

The system becomes poisonous when the board of directors is willing to sacrifice the corporation for short-term gain. That’s precisely what happened here.

It’s not that the “banks” would never allow “themselves” to collapse. There is no “themselves.” There are just the individual directors that were perfectly willing to allow the banks and insurance companies to collapse if it meant a quick dollar in their pockets.

They milked and milked their golden calf for all the money it could give. When finally the milk ran out, they dispatched it to the slaughterhouse. This despite the fact that shareholders were relying on that cow. So were insurance policyholders. But these people never factored into the executives’ self-interest equations.

* * *

Some argue that to deny contractually-obligated bonuses would be a mistake. They say that doing so would cause these executives to leave their posts for greener pastures. In short, it would mean that talented individuals would find other jobs at precisely the time when we need the best people at the helm.

And it’s true. These people do have remarkable talent.

But they also have few – if any – scruples when it comes to using that talent.

They have demonstrated their astonishing ability – and willingness – to take legally dubious and ethically debaucherous steps to enrich themselves, personally, at the expense of the companies they work for and the economy as a whole.

At best, these men and women have shown reckless disregard for their shareholders. They have failed in their fiduciary duty of loyalty to millions of hardworking Americans (and Canadians) who hold stock in their company.

They have shown a duty of loyalty to one thing only: their own wallets.

Are these the people we want to keep at their posts?

* * *

This brings me full circle to my original point. There’s more to the denial of these bonuses than just distraction.  It’s a warning message.

Under our old system, these directors had nothing to lose. They knew that they would earn huge bonuses while the bubble was expanding. They made millions. And they knew that in the near future, when the bubble was set to burst, they would STILL get their contractually obligated bonuses.

And now AIG wants to fulfill that depraved fantasy.

Retroactively canceling the bonuses (e.g. through legislation) would send the message that acting in personal self-interest without regard for the corporation’s interests – let alone the wider economy’s interests – will get you nothing in the end.

That’s probably precisely the message we want to send to the next generation of corporate executives.

About the Author

Lawrence Gridin
Lawrence Gridin is currently a law student at the University of Western Ontario, graduating in the class of 2010. He completed his Bachelor of Science at the University of Toronto, majoring in Psychology and History. Lawrence volunteers at Western's Community Legal Services and has participated in the clinic's outreach program. His diverse interests include social justice, 20th century history, photography, boxing, and politics.

2 Comments on "Is the AIG Bonus Scandal a Mere Distraction?"

  1. Excellent analysis.

  2. hey what’s the bonus ?

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