The Bigger They Are The Harder They Should Fall: Let AIG Die and Let’s Get on With Renewal

Just when you think AIG couldn’t look worse, the crack team of greed-parasites (formally known as “the management team”) one up themselves. This just in: after causing a huge furor by admitting they were contractually obliged to pay about $165-million in retention pay “bonuses” to the “we destroyed the company / financial system unit” (formally known as the financial products unit), it turns out the actual figure is much higher: $218 or $220 million, depending on which documents are consulted. This includes “bonuses” of more than $1-million to 73 employees, five of which received “bonuses” of more than $4-million. This was discovered Saturday by the Attorney General of Connecticut. I kind of get the feeling the fine people at AIG were hoping they might just slip this one under the radar. For the Globe’s coverage, click here. 

Look, it’s all well and good to be outraged but there is a much more important lesson to be found here. What is happening right now at AIG is exactly the reason why governments should not prop up failed companies — no matter how big they are. AIG did not fail because of some act of God. It failed because it was grossly mismanaged and because the management team adopted a business model no sane and responsible person could ever reasonably adopt. Unless that sane person is also willing to gamble — and we know these guys are gamblers — that he can count on the government stepping in to pick up the pieces if everything goes to hell. That’s exactly what happened and now these guys are going to continue to do exactly what they were doing before — bleeding the company and the economy dry. It worked for them so far, why would they stop now?

So let’ be clear, as enraging as the retention pay “bonuses” may be, they are not the problem. The problem is the US government’s decision to prop up this rotten to the core company and prevent it from failing as it was meant to fail. If it really means the whole financial system goes with it, so be it. If the system is that broken, propping it up and protecting and entrenching the very people who destroyed it is not going to fix it. In fact, it is likely only to delay the genuine renewal which is so desperately needed. Sometimes you’ve got to burn the tree, to save the forest. 

Maybe a metaphor will help. Let’s say, a bridge crucial to everyone’s well-being, thanks to glorious mismanagement, has become so rotten and in such great disrepair that one day it becomes clear it will collapse. In a panic, quick measures are taken to reinforce the bridge as best as possible. Of course, no one really knows how rotten the bridge is, they just do whatever the can to make sure it doesn’t collapse in the here and now. Then, after all the work, they discover the bridge is still unreliable and the guys who managed it are still mismanaging it. Moreover, so long as they keep trying to patch up the old bridge, everyone is afraid to use it. Remember also, if by some impossible stroke of luck, they manage to reinforce the bridge enough that some people start to use it again, it will still just be a rotten bridge with a patch work of reinforcements waiting to crumble. In other words, after years of repair and struggle, the situation will hardly have improved.

That rotten bridge is the financial system right now. Better to let it collapse and start work on building a new and better bridge instead of wasting time, energy, and resources (borrowed from future generations) to prop up this rotten bridge. Sure, while the bridge is down, life won’t be easy. We will need to figure out new ways to get across the river, maybe use older underused methods, but life won’t end. Eventually through hard work, patience, and ingenuity a new bridge will be built and new — and probably better — ways of crossing the river will be found.

Yes, this is the worst financial disaster since the Great Depression, but remember, since that time, we have had an era of unprecedented economic growth. We would have to fall very very far indeed before we approach anything like the economic hardships encountered then. Previous generations suffered great hardships to make our lives better; surely, we can bear the inconvenience of properly fixing this mess now — instead of mortgaging the well-being of future generations. 

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