Results of Government Bailouts

AIG has received $170 billion in bailouts fromt the government (in 3 separate installments). AIG has announced that it will pay $160 million in bonuses to some of its execs. The Government appointed AIG Chairman, Edward Liddy, has said that these things are necessary to keep top talent.

I feel like I don't even really need to say anything to highlight the lunacy. But, this is a part of my grade so.... here goes.

First of all, I'll issue a simple appeal to reason. Should the executives that brought this gigantic corporation to the point of collapse, to the point of needing $170 billion (at least) to stay afloat, be given extra money while millions of Americans have seen their retirement accounts dwindle to 0? These execs were given bonuses so as to keep the "skilled" execs on board. Call me crazy, but I probably wouldn't consider any of the AIG execs remarkably skillful. You are REWARDING people that are the architects of a corporate failure of enormous proportions. Enough said on that front.

Now, let me highlight several economic... short comings (I'll be nice) with this government sanctioned business decision.

First of all, it is necessary to point out that the US government funded these executive bonuses. What I hear, mainly, from democrats I know is that the collapse was caused by greedy businessmen and bankers. I will save my analysis on that point for another post. However, here is an example of the government providing incentives for businessmen. The government is telling us that, no matter what the execs do, no matter if they succeed or fail miserably, they will be rewarded with millions of dollars.

This is an egregious example of an extremely important concept: moral hazard. Moral hazard was implicit in the security packaging of Fannie and Freddi; moral hazard resulted from the government bailouts of companies like AIG, the banks, the Big Three, telling us that, if you're big enough, we won't let you fail no matter how many poor decisions you make. Essentially, the government has rewarded both individuals and companies that make poor decisions. This sends the message that the government will fund you if you take horrible risks. This is moral hazard.

Secondly, these exec bonuses will keep these people at AIG. If they are truly talented, their expertise could be bought by successful firms on the cheap after the failure of AIG. But, instead, they are tied up managing a "zombie company" (credit to Tom Woods for the apt nick name; READ MELTDOWN). Peter Schiff's earlier video, on the downfalls of TARP, adresses this issue nicely. These talented execs could be bought by emerging firms. But, the government is picking winners, investing in AIG. Behind the rhetoric that this is good for the American people lies the truth: people are hurt by these actions, and not even just the taxpayers. Companies, competitors of AIG, could be benefitting from AIG's downfall. But, because the gov't essentially owns AIG, they really don't have a choice but to support them. This means that the government has a vested interest in the success of AIG. The success of AIG means the loss of benefits (cheap execs, new customers) for competing companies. This, ergo, means that the government has a vested interest in hurting AIG's competitors. This is corporate cronyism at its worst...