Watching the Economy by Clint Burdett CMC® FIMC

March 2009 - an editorial

AIG's Bonus Brouhaha

By Clint Burdett CMC

3/19 Correction: AIG's Liddy testified to the House Financial Committee that retention bonuses were paid to employees who met targets to reduce Financial Products Division book of business and were part of the plan supervised by Federal Reserve. This detail was lost in the press rollout of the March 15th payments. Making the public angry makes Congressmen angry and can derail your best efforts. So I have revised my editorial.

I rarely attack someone's idea; great strategies require honest, open dialogue and all ideas should be respected, but ...

The way AIG bonuses discussed in March 15ths newspapers and morning shows were revealed was distasteful as evidence builds that AIG's selling of credit default swaps (very complex "insurance contracts") without maintaining collateral is partially responsible for banks restricting credit. Until AIG paid off their CDSs, the banks did not know where they stood. Fed Chairman Bernanke's anger towards AIG during Congressional testimony had to be well informed. He was honest and articulate on CBS's 60 Minutes.

News leaks from AIG Financial Products Division suggest they'll unload the rest of their toxic collateralized debt obligations (CDOs - the assets) by year’s-end and the associated CDS (the insurance contracts) will be terminated. Liddy testified that AIG is working its way out from under its problem, but tax-payer monies were used to pay-off AIGs CDS obligations or meet collateral calls.

The AIG bonuses management are a watershed as both angry political parties now act in concert. Given the appearance that a few well-paid, clever individuals created these crises in the banking and mortgage sectors, if the public sees our government leadership as NOT enforcing accountability, then our political leadership will be toothless. The political backlash aimed at AIG and those in the Government or Federal Reserve that are supervising AIG Financial Products wind down has hurt the effort to build confidence in the recovery process. It is a self-inflicted wound.

Liddy's statements that they need to keep the "best and the brightest" hurt the public's confidence. It appears those few clever gamblers at AIG have them and us all over a barrel.

In my life experience , "a few bad apples spoil the barrel," and the ones with integrity trying to clean up the mess will be overwhelmed by reaction to the few who caused the mess. Cooler heads will suffer. My daughter summed it up: bummer.