[corp-focus] Lessons from AIG

[robert weissman]

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Lessons from AIG
By Robert Weissman
March 19, 2009

Watch out if you live in or visit Washington, D.C.

If you see a camera or microphone, be careful not to be trampled by a 
politician rushing to shout their "outrage" at AIG, and its brazen 
scheme to pay $165 million in bonuses to employees at the company unit 
responsible for driving the company to the edge of insolvency.

Maybe the politicians really are outraged. (They definitely know their 
constituents are.) But it would have helped if they had expressed some 
outrage -- and opposition -- during the decades-long period of 
deregulation that brought us the AIG collapse and the financial meltdown.

It is indeed unfathomable that AIG went ahead with the bonus payments, 
and that the Treasury Department and Federal Reserve failed to act to 
stop the bonus payments before they were made.

What is vital now is that the public's righteous anger is not expressed 
only as "no." There are a lot of things to which We The People do need 
to say "no." But we need a lot of "yes's," too. We need to demand that 
policymakers impose public controls over the financial sector. The 
financial sector restraint, shrinkage and displacement agenda is long 
and diverse, but there are a number of lessons that flow directly from 
the AIG debacle.

First, the government must exercise much more direct control over the 
firms it is bailing out (many of which, like AIG, are very likely to be 
subjected to government takeovers of one kind or another in the coming 
months). If the government exercised control commensurate with its 
ownership stake, it could simply refuse to permit outrages like the AIG 
bonus payments to occur. Beyond preventing outrages, there should be 
affirmative demands imposed on the beneficiaries of bailout funds. These 
should include, for commercial banks, the mandatory write down of 
principal on home mortgages where the outstanding loan amount now exceed 
the value of the home, and the end to usurious interest rates on credit 
cards.

Second, there must be far-reaching reform of compensation arrangements 
in the financial sector. Never again should anyone get away with saying 
this is a symbolic issue. The AIG bonus payments, and the manic response 
from the financial sector to modest executive pay restrictions added by 
Senator Chris Dodd to the financial bailout reauthorization legislation, 
demonstrate that the guys on Wall Street certainly don't think it's 
symbolic. Real reform must go beyond giving shareholders a say on pay to 
imposing public controls. There should be high tax rates on excessive 
compensation. Most importantly, there should be a prohibition on 
incentive pay that is linked to short-term performance. Bonuses based on 
annual performance give traders and others an incentive to take 
unreasonable risks -- threatening the viability of their firms, and the 
overall financial system.

Third, the regulatory black holes in the financial system must be 
eradicated. One black hole concerns regulation of financial derivatives 
-- the exotic instruments that threw AIG into virtual insolvency. During 
the Clinton administration, Fed Chair Alan Greenspan, Treasury Secretary 
Robert Rubin and Deputy Treasury Secretary (now director of the National 
Economic Council) Larry Summers crushed an effort by independent-minded 
regulators to adopt modest regulation of financial derivatives. In 2000, 
Congress prohibited such regulation by law. When regulations are finally 
adopted this year, as they almost certainly will be, they should 
prohibit certain kinds of financial derivatives altogether, and require 
that new ones prove their safety and social value before being placed on 
the market.

Fourth, we need a revitalized antitrust and competition policy to break 
up and shrink the size of the mega financial institutions (and, not so 
incidentally, we also need to shrink the size of the overall financial 
structure). These too-big-to-fail institutions are, as has been said, 
just too big. Or amended: they are too big and too interconnected. Their 
very existence poses unacceptable social costs, made worse by the fact 
they take greater risks knowing that they benefit from an implicit 
public insurance.

AIG itself has acknowledged the problem. In a company presentation 
apparently prepared to persuade the federal government to keep the 
bailout funds coming, AIG explained, "what happens to AIG has the 
potential to trigger a cascading set of further failures which cannot be 
stopped except by extraordinary means."

AIG CEO Edward Liddy has drawn the proper conclusion: "Where safeguards 
are lacking" -- and it should be added, it has proven far beyond the 
capacity of regulators to impose sufficient safeguards -- "such 
companies need to be restructured or scaled back so they no longer come 
close to posing a systemic risk."

Finally, renewed attention must be paid to corporate structure and 
prohibitions on whole categories of activity. Insurance companies should 
be prohibited from operating affiliates that function as de facto hedge 
funds. Commercial banks husbanding depositors' assets should be 
prohibited from operating securities firms (as was law until 1999) or 
making securities firm-style speculative bets.

Will the outraged politicians demand these and other reforms? Will their 
outrage last once the media move on to the next story? That will depend 
almost entirely on whether an organized and focused public demands it.


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>.

(c) Robert Weissman

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