Too big to fail?

Risk Management, May, 2009 by Morgan O'Rourke

Every drama needs a villain. Star Wars had Darth Vader. The corporate accounting scandal had Enron. And lately it looks like the financial collapse has AIG. But before everyone readies their pitchforks and torches, I think a little perspective is in order. It seems that the populist rage toward all things MG is a bit misguided.

Now before I explain, let me start by saying that I am no AIG apologist. At best, the company's financial practices displayed a shameful level of arrogance and irresponsibility and their inability to practice even the most basic risk management has been instrumental in perpetuating this economic collapse. The fact that this behavior comes from a company with the once-exalted stature of an AIG would be shocking if previous cases of corporate greed and malfeasance hadn't already desensitized us to these sorts of events. Sadly, we expect corporate America to let us down and AIG certainly has done that at a level rarely experienced in the country's economic history.

But the recent bonus controversy has sparked more than just weary sighs. Outrage was the word of the day on Capitol Hill, in television studios and in offices everywhere. Resignation turned to anger at a level usually reserved for rapists and murderers. In his testimony before Congress, MG CEO Edward Liddy read death threats from people who wanted "all the executives and their families" to be "executed with piano wire around their necks." MG's Corporate Security issued an internal memo advising employees to be vigilant against possible threats, with safety tips that included concealing any identification or apparel with the AIG insignia, travelling in pairs, parking in well-lit areas and reporting any suspicious or out-of-place individuals in or around MG facilities. Basically, all employees were to live in fear because of the mistakes the company's previous leadership. After all, just because a receptionist or a data entry clerk might want to make a living and provide for his or her family, it is no reason they should be doing so at MG. Somehow, even working for the company has become a capital crime.

And all because of what? $165 million of bonuses that amounted to 0.1% of the total bailout paid to the company so far? Not only were these payments more like contractually obligated salary disbursements, but in many cases, these "bonuses" were for people who were trying to help MG extract itself from this mess and who were not responsible for the toxic credit default swaps in the first place.

The real problem should not be with AIG's current employees. Most of the guilty parties are long gone. The real problem lies with our understanding of what a bailout means. By deciding that companies are "too big to fail" and must be saved, we are basically saying we want the company to be able to continue doing business the way they always have and we are willing to give them extra billions to do so. If no stipulations are put in place for how that money is spent, then how can we turn around and blame the company for doing just that? It would be like giving candy to a child and expecting her not to eat it (or, if you're feeling less charitable, giving heroin to junkies and then being outraged when they get high).

If the goal of these bailouts is to give AIG enough working capital to keep them afloat until they can return to economic viability, then we need to allow them to do what it takes to retain the employees that can help them reach that goal. After all, I'm sure MG is not being inundated with job applications these days, even with unemployment on the rise. We also need to expect that they will have to make payments to financial institutions with this bailout money. This is not some sort of conspiracy--this is AIG paying on its obligations.

Anger towards AIG might feel right, but if it leads to knee-jerk policies and restrictions it becomes counterproductive to the long-term health of the company. If we are going to get this upset with what it takes to get MG back on its feet, we might as well have let them go bankrupt in the first place. Considering all the money that taxpayers have invested in MG so far, it is in our best interest that they succeed. We could burn down their village, but then all we would be left with is ash.

Dig it.

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