James Hamilton on the AIG Bonuses
Prof. James Hamilton offers his take on the AIG bonuses. One part certainly scores a good point, IMO,
One of the reasons this is so outrageous is that the promise of such bonuses was in fact one of the very factors that caused our current problems, creating incentives for managers of AIG to get out of solid insurance underwriting and into hedge fund gambling. If anyone had supposed that AIG had “learned its lesson”, this report seemed to dash that hope against the wall like a plate of china.
I think this is right, and if the government went to AIG and told them all future bailout monies come with the string that such bonuses be prohibited in the future I’d not have a problem with it.
I do disagree somewhat with Prof. Hamilton here,
But here’s the point. AIG may have entered into contracts with its managers and its counterparties, but the U.S. taxpayers did not. A precondition for infusion of taxpayer funds has to be sufficient restructuring of pre-existing commitments to ensure that any new funds delivered achieve their purpose rather than simply prolong the problem.
Now I don’t disagree with the spirit of this view point, but I would argue that it is the responsibility of the government through Secretary Geithner and possibly Larry Summers to engage in due diligence on this point. Review these conracts and make sure they pass the smell test so to speak. To place all the blame on AIG, which I expect to act solely in its best interest, is not reasonable at all.