The A.I.G. Bailout

Much has been in the news lately about A.I.G., and the bailout. The current "red flag" being waved by Congress and the Obama administration is outrage over the bonuses that were paid to A.I.G. executives.
I do not believe in rewarding incompetence. However, these bonuses were "retention" bonuses (not based on performance), and were included in the employees' contracts. These were disclosed (to the government, and to the investment community) ... they should not have come as a surprise.
Several points about the bonuses:
First, they amounted to $175 million. That's an immense amount to you and me, but amounts to less than 1% of the amount of OUR money the government has invested in A.I.G.
Second, our Treasury Secretary, Tim "Turbo Tax" Geitner, was the chief architect of the A.I.G. bail-out (which Congress approved.) Either we have to accept that Geitner and Congress were too ignorant to notice the bonuses, or too inept to do anything about them.

Why all the attention on the bonuses? Again, several reasons:
- It is a populist issue that most everyone will support. It's an "easy sell" to the public, and makes it appear our Congressmen are looking out for us.
- More importantly, the bonus issue deflected public notice that $120 billion (yes, with a "B") has been paid by A.I.G. to other companies (including over $20 billion to European companies.) Our government has effectively used our stake in A.I.G. to funnel "bail-out" funds to other companies here and abroad. If we fall for the "Stop the Bonuses!" hysteria, the massive wealth transfer (with minimal disclosure or scrutiny) will slip through unnoticed.

Should A.I.G. have been bailed out at all? My gut reaction is "no." Companies, and their shareholders, should benefit from their wise choices and suffer from their poor ones. However, with A.I.G. as huge as they were, their collapse would have crashed our economy worse than ever. These guys insured banks, municipalities, cars, homes, etc. for an overwhelming percentage of the country, in addition to their backing of mortgage-based securities. If they failed, no other companies could have been compelled to provide coverage for all those companies. Banks, towns, businesses, and individuals who had paid their premiums would have had no insurance, and no premium refund. They would have to pay again, with someone else, and hope nothing happened before they got coverage to bankrupt them. In short, the economic disruption their failure would have precipitated would have been a disaster.

There's also the matter of public policy (in place since Carter, dramatically expanded under Clinton, and not corrected under Bush) that pushed risky mortgages on the markets. Since the government was at least partly responsible for the "housing bubble", it seems wrong to me that the government should escape some of the culpability for it's collapse.

Personally, I would have preferred that the government guarantee the policies for other companies to take them (indemnifying those companies against catastrophic loss for the first year), and let the market take care of A.I.G. That would have resulted in it being broken up into parts (some of which could be profitable), and avoided the "open checkbook" situation we have been thrown into.