Tuesday, March 17, 2009

AIG money and the bonus fiasco

Let's set aside AIG's devotion to the inviolability of contracts and the government's idiotic populist furor over the $165M (out of $170B bailout, less than 1/10 of 1%) that AIG paid to certain senior executive as bonuses. Instead, assuming that AIG does have contractual obligations it is adhering to, let's ask the real question:

Why are these people entitled to the money?

In other words, what bonus system is so perverse that it effectively rewards colossal failure? How are such bonuses calculated? Is the incentive only to make a deal, without regard for whether the deal financially benefits or harms the company? Did the employees of AIG's financial products unit only have incentive to churn financial products without regard for whether those products benefited the company?

Wongdoer supposedly could shed light on some of this -- he's been a Wall Street stooge for decades. But the fundamental issue remains: how bad are these contracts that the executives can be contractually entitled to large bonuses when they affirmatively harm their employer?

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