AIG Bonuses

On the way to the gym, I heard a Foxnews account of Senators expressing indignation over AIG paying bonuses to executives.  While running on a treadmill at the gym, I watched a CNN account that was similar in tone and substance.  They got the story wrong, but many economists got it right.  Those that signed the Emergency Economic Stabilization Act (TARP), members of Congress and President Bush, should have been more careful in writing it.  They did not have the knowledge and incentives to run AIG and other recipients of bailout money, nor does the Department of the Treasury, nor does the Federal Reserve.  The members of the Congress who are expressing indignation should be ridiculed for hypocrisy, demagoguery, and foolery. 

Over two hundred economists signed an open letter to the Congress prior to the signing of the Emergency Economic Stabilization Act (TARP).  They are named at the end of the letter.  They wrote,

To the Speaker of the House of Representatives and the President pro tempore of the Senate:


As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If  taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects.  If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity.  Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come. 

Their foresight in opposing the ill considered, rushed legislation should earn them respect and a larger policy voice in the future.

The best A good example of hypocrisy and demagoguery is Chris Dodd, as we learn from FoxBusiness via Russ Roberts at Cafe Hayek ("Awkward").  Dodd voted for the TARP legislation.

Senator Chris Dodd (D-Conn.) on Monday night floated the idea of taxing American International Group (AIG: 0.9468, 0.1667, 21.37%) bonus recipients so the government could recoup the $450 million the company is paying to employees in its financial products unit. Within hours, the idea spread to both houses of Congress, with lawmakers proposing an AIG bonus tax.

While the Senate constructed the $787 billion stimulus last month, Dodd unexpectedly added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009,” which exempts the very AIG bonuses Dodd and others are seeking to tax. The amendment is in the final version and is law.

Also, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to opensecrets.org.

Senator Charles Grassely graciously provides the best example of foolery, calling on AIG executives receiving bonuses to resign or commit suicide.  Grassely also voted for the TARP legislation.  Like Dodd, he voted for the TARP legislation.  Because I quoted and linked to Russ Roberts yesterday, I will only provide the link today ("Grassely is Unhappy").

Did your representatives vote for the Emergency Economic Stabilization Act?  The Senate vote is here.  The House vote, here.