Monday, February 29, 2016

AIG Absurdities

NOTE: I am copying sixteen essays from my old blog ("Random Notes") to this blog. Some are cited in other essays, but most are simply essays that struck me as interesting while I was going through my search for essays to fix broken links.

I wrote about this before, but let me point this out again.

Let us suppose your local baseball team is losing. Losing badly. Let us say they had an Orioles-level season and started 24 and 0. Next season they spend $50 million to get a 4 year contract on a star pitcher. And he pitches a number of shutouts, but the team still ends below .500. 

Would you then say they should sack the pitcher? 

Or say the next year they hire a .315 hitter, and he has a banner year and has a record .400 season. But the fielding is not up tot eh task and team just barely end sup at .500. Would you then say they should sack both the hitter and pitcher because they are paying a fortune to lose?

So, why do people object to CEOs and executives getting bonuses when a company is losing money? We understand the baseball players get money for their own performance, even if the team loses, and perhaps the same is true of executives. Maybe AIG did lose money, but maybe without the fellow getting the big bonus they would have lost far more. If a single executive can change a $100 million loss into a $10 million loss, isn't he worth $10 million? Yet politicians would be decrying paying him to "lose money" and insist we should accept $90 million in additional losses to save $10 million in salaries.

Of course, most of the AIG fervor is for show, politicians trying to show they are "hard nosed" and "good custodians of the people's money". But in reality it is all for show. They don't care about losing money, if they did they would not be paying money to failing companies. That is a sure recipe for wasting money. AIG was failing for a reason, so to complain they lost money after the bailout is absurd.

And that, in the end, is my main objection. If you are going to subsidize failing companies, then let them do what they have to do to get back on their feet, including making payments to executives they need, even if they offend politicians and taxpayers. If not, then let them fail. But do not subsidize losing businesses and then complain their management style is bad. Of course it is, that is why they are failing. If you want to subsidize companies with good management, then subsidize companies that don't need the money.


Actually, Elijah Cummings, who I am embarrassed to say represents part of my home state, made the most absurd statement:

Without taxpayer intervention, AIG would have ceased to exist and, to be blunt, all of its employees would have lost their jobs. Against this background -- and given the massive layoffs occurring at other major financial entities, such as Citibank -- the American taxpayers have a right to know why senior executives at AIG, who are frankly lucky to still have jobs, need to receive additional bonus payments of any kind to retain them at AIG
Apparently no one told Elijah serfdom is over and employees are not tied to their jobs any longer.

Had AIG folded,t hey WOUD HAVE GONE TO OTHER JOBS. And the reason AIG had to pay retention bonuses is... well... to RETAIN EMPLOYEES. It needs to pay to keep the employees it wants to stay there and not go to other jobs. Yes, some still left, but without the bonuses, presumably, more would ahve gone. Thus AIG pays bonuses to make sure they keep employees who either make them money or reduce their costs.

To listen to Rep. Cummings, you woudl think we had some sort fo serfdom or guild system where AIG employees were chained to AIG from birth to death. The reason AIG pays is to keep employees from jumping ship, and all the government bailouts in the world will not make an employee stay if another company pays better.

Then again,as I have said before, most politicians have never held a productive job in their lives, many ahve never worked outside of government, so why should I expect them to understand how the free market works?

Originally posted in Random Notes on  2009/03/18.

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