March 16, 2009

Clever Outrage

"The AIG Bonuses are Outrageous" seems to be the message of the week from the White House, Fed, Punditry, and Congress. The coordinated rage at AIG about $170m in bonuses seems almost engineered - actually, maybe it is engineered.

The concerted political messaging against the AIG bonuses feels like clever misdirection to me. Washington politicos are trying to control the headlines this week, to make sure public anger is channeled towards AIG executives instead of toward European bankers.

If they did not foment domestic rage, we would probably be facing a replay of Smoot-Hawley.

Imagine if the week's headlines said: "America Secretly Bails out Europe." Americans are not feeling charitable enough to save an all-American name like GM. How would they respond to a bailout of such unfamiliar (and snooty-sounding) institutions as Société Générale, Deutsche Bank, BNP Paribas, Crédit Agricole, Barclays, Dresdner Kleinwort, UBS, DZ Bank, Rabobank, KFW, Banco Santander, Danske, Royal Bank of Scotland, and HSBC?

For many months, Treasury has been trying to avoid revealing the fact that much of the American-taxpayer-funded bailout is going to save the largest banks in Paris, Frankfurt, and London. If the populist rage turned against our trading partners, the march towards protectionism - and a complete replay of the Great Depression - might be unstoppable.

Now that keeping a lid on the secret of the American-funded European bailout has proven politically untenable - this weekend AIG is finally revealing that a large portion of its bailout is going overseas - our leaders have identified a different object of popular rage to take our eye off the ball.

Our anger is being purposefully directed at 400 bonus recipients at AIG. Even though the amount is only $170m - a tiny tiny fraction of American bailout dollars - it is something we should and safely can get angry about. And something to take our mind off all the real amounts of money going overseas.

The Great Depression was not caused by withholding some bonuses from some executives.

Posted by David at March 16, 2009 06:50 AM

In the good times, when AIG was making most of it's money from foreign banks, I didn't hear of any complaints.

Posted by: RichB at March 17, 2009 04:36 AM

Right - actually that's not quite true. Remember in 2005 that AIG was caught up in an Enron-style accounting scandal that ousted CEO Hank Greenberg.

AIG has been selling accounting scams for a long time. Here are a couple links that explain the AIG CDS scam.

Of course, the headline that 'regulation destroyed AIG' is ridiculous. I like the quote from AIG's annual report that

"Approximately $379 billion ... notional exposure of AIGFP's super senior credit default swap portfolio as of December 31, 2007 represents derivatives written for financial institutions, principally in Europe, for the purpose of providing them with regulatory capital relief rather than risk mitigation."

AIG's brazen skirting of regulations was right there in the annual report - they made no bones about the fact that they provided no real risk protection. The European banks were not naive victims.

Posted by: David at March 17, 2009 06:41 AM

Today Huffington Post is reporting that the Fed has also been pumping hundreds of billions into European central banks directly.

Posted by: David at March 17, 2009 08:47 AM
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