Surprise, surpise. The Washington Post reports this morning that officials at AIG have failed to return the ill-got bonuses they pledged to return earlier this year. That pledge came after a firestorm of protest erupted at the news that the very same individuals who drove the company into a ditch had awarded themselves $45 million in bonuses. They have so far only returned about $19 million.
Normally, the government does not tell companies how to provide remuneration to its employees. But, there was nothing normal about the goings on at AIG. In the interest of short-term profit, the company was at the center of a variety of financial transactions that produced wealth on paper, for themselves and others, but which contributed precisely nothing to the economy. Then, when the schemes came up short, and the company was tottering on the edge of bankruptcy, they turned to the federal government to bail them out. Taxpayers, who continue to struggle with their mortgages and job loss, had to foot the bill for those bonuses. We have a right to insist that the money be returned.
The government also has an interest in changing the corporate culture at AIG. This is not so easy. Greed is what drives capitalism, not matter how much Michael Novak, George Weigel and Robby George try to wiggle that greed into a virtue, citing the creative power of capitalism. The credit default swaps and the derivatives and the other financial mechanisms that reaped such huge rewards for Wall Street were certainly creative but the only thing they created was an environment in which the rich, and especially the rich with insider access and information, got even richer.
Two solutions recommend themselves. You will recall that the stated purpose of these bonuses was to retain qualified employees. The government, which still owns most of AIG, should insist that anyone who does not return his or her bonus by January 1 will be fired. Call it retention bonus return. (Would that rendition, rather than retention, was a possibility!)
The other solution is to raise taxes on financial transactions, to make these convoluted financial mechanisms less attractive to greedy minds. The free enterprise crowd is always telling us that higher taxes will diminish incentives, but why should we provide incentives for ponzi schemes? For all the complaints about taxes, the government actually takes in a lower share of GDP today than it has through most of the post-World War II era. You and I may pay more because we do not have armies of lobbyists, lawyers and accountants to get us special tax treatment. Large companies find loopholes that provide precisely the wrong kinds of incentives. The Obama administration has already bitten off a lot from health care reform to climate change legislation, a radical simplification of the tax code that would level the playing field is something they should consider, if not for the coming year, than as a plank for the President’s re-election bid. There is no reason that populist anger should be exclusively the preserve of conservatives and directing some of that anger at the very rich would be salutary.
The executives at AIG stole Christmas for millions of unemployed Americans and now they wish to hoard their ill-gotten profits. They are the Grinches and the Scrooges of our time. The Congress is currently scraping up funds to pay for health care. Our national priorities need to change. Forget the Christmas duck or ham. It is time to eat the rich for Christmas.
AIG is an insurance company and insured many of the mortgate securities of Goldman Sachs and others through what are called Credit Default Swaps (CDS.) This is not your normal insurance business but like insurance nonetheless and till the housing collapse was extremely profitable. It will be interesting to see just how much AIG knew before hand. The securities that were classified as AAA by the rating agencies of bonds were essentially junk but AIG did not know this. So Goldman Sach and others got paid 100% on the dollar instead of the 20-40% they expected to get if the CDS's were not paid off. All these Democrats stick together.
So essentially the AIG bailout was a payoff to Goldman Sachs and like companies and these companies have heavily donated to Obama and the Democrats. Contrary to wide spread perception, the Democrats and Obama are heavily in bed with much of Wall Street and any public spats are for show.
So point the finger at our current president if you are going to blame anyone. The public chastisement is for show and nothing else.
The fact is, our bondholders own AIG (China - since we borrowed the money from the bailout rather than using tax money) and they will be repaid as AIG is liquidated. Until liquidation occurs, the Treasury owns AIG and can call the tune.
Of course, the reason we borrowed the money is because taxes on the wealthy (especially Dividends) are at historic lows for this era in history. This is all the more justification for eating the rich. Indeed, this will happen in a year, even if Obama and the Democrats do nothing. Frankly, I hope to get through to Austen Goolsbee with the message that raising taxes on rich people now will stimulate the economy now, rather than in 2011.