Banking on Vengeful Duplicity
When the American International Group or AIG announced bonuses this week, it brought two basic problems with finally fixing the credit markets in perfect focus. AIG said it was lawfully obligated to give millions in bonuses to employees who had contracts which said a bonus was due. After receiving bailout monies from the taxpayer to forestall the pending demise of the company, these bonuses were both counter to common sense and seemed to be an obscene gesture toward the taxpayer who bailed them out. The responses to this act might be an excellent study in how complex fixing our credit markets will be.
Many who spoke about the credit markets on the Sunday news shows fell neatly into two camps. One camp, mostly Republicans and the Obama Administration, told us forcing AIG to violate those contracts was against the law. Furthermore, they explained how AIG reneging on those contracts would destroy the legal fabric of our society. It might even make nervous markets fall off the cliff. The second camp made the strangest bedfellows. They consisted of conservative politicians like Senator Richard Shelby (R-AL) and left-wing free-market haters. They seemed to be more Old Testament in their approach. “An eye for an eye,” seemed to be their response. “Let’em fail”, Shelby told us.
The argument for the bonuses goes something like this; it would be illegal for the taxpayer, who arguably owns most of AIG at this point, to force the company to forgo the bonuses. It is ironic how many who make this argument also wanted to see United Auto Workers or UAW contracts and agreements destroyed in bankruptcy. They also ignore the “cramdowns” banks are about to have to take on foreclosed mortgage contracts in personal bankruptcies. Other things like how Wall Street pays based mostly on a bonus and not in a normal paycheck are also argued. This too is ironic because some on the Sunday shows claimed many of the bonuses were to be paid to the derivative and credit swap traders who helped drive AIG in the crapper.
Some just want AIG and unhealthy banks to die. They envision a Federal Deposit Insurance Corporation or FDIC style takeover. Give all the depositors up to a quarter of a million dollars each, pay off the taxpayer loans and whack everything else which is left into partial payments for other creditors and bond holders. No one knows who all will have to take less than what is owed them by AIG or the banks in a so-called “haircut”. That uncertainty has led some to call these institutions,” too big to fail.” Those who say too big to fail fear a Great Depression style collapse in which it will take years to recover.
It is time to get over it.
Our financial system has ground to a halt and it has to be fixed. There will be both undeserved winners and losers. If we insist on punishing the guilty, there will be plenty of punishment to go around. We can sit around and wait on all the culprits of this mess get it. We can wait on a fix which gives us an iron-clad guarantee that no one who was the least bit careless gets a dime of bailout. We can wring our hands as we contemplate the deficits and debt it will take to fix this mess.
We can wait to fix this mess as our economic crisis relegates the United States into a third world country. If my calculations are right, we are losing two million dollars in gross domestic product and 361 jobs every minute we wait. People talk about the next generation owing China. We already owe China and once we wait for dust to settle from the failure of megabanks like Citi, Chase, Bank of America and all those they owe it might take a generation to dig out of the hole. By the time our economy recovers, we may have lost our place as the world’s largest economy. The vengeance motive and the duplicity we employ deciding which industries we save might make us feel better. It may give us the chance to settle old scores like a dislike for unions or investment bankers. That satisfaction may still be costing our grandkids in growth and jobs.