Saturday, March 14, 2009

A.I.G. to Pay $100 Million in Bonuses

Despite being bailed out with more than $170 billion from the
Treasury and Federal Reserve, the American International
Group is preparing to pay about $100 million in bonuses to
executives in the same business unit that brought the company
to the brink of collapse last year, NYT reports.

If you haven't yet read my earlier post on the 1994 paper by economists George Akerlof and Paul Romer, be sure you do. It won't make you happy, but it will explain what is going on.


  1. This is sick. Why in the world are we helping these companies that keep sending millions to people who do not know how to run a company? Furthermore, I fear this is just the tip of the iceberg--there are so many ways these funds are hurting 'average Joes' but benefiting those in high places. Look what Enterprise rent-a-car did to get bailout funds:

  2. Rob,

    You may want to check out "The Audacity Of Dopes" post by Economics Professor William K Black. He also wrote on the

    Black is author of the book "The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry". George Akerlof had high praise for Black's book. Here is what he said about it...

    "This is an extraordinary book... No other account gives a complete picture of the control fraud that occurred in the S&L crisis... There is no one else in the whole world who understands so well exactly how these lootings occurred in all their details and how the changes in government regulations and in statutes in the early 1980s caused this spate of looting... This book will be a classic."

    Black has a few articles at "Cato Unbound" here and here. His work is based heavily on the concept or paradigm of "control fraud".

    This concept has been picked up by many interventionists as reinforcing the need for "more regulation". I think that is a narrow reading of Black. In the article here he has this to say about regulators.

    "Vigorous, well-designed regulation and enforcement is a "win-win" proposition. It helps both citizens and honest companies. To take another auto industry example, used car dealers overwhelmingly engaged in the fraudulent practice of "rolling back" the odometer to make it appear that their cars were lower mileage and warranted a higher price. That practice is now very uncommon because of a combination of regulation, enforcement, and voluntary efforts by the most reputable dealers.

    Lax enforcement breeds fraud. One of the most pernicious effects of weak enforcement is that it degrades the moral message contained in the law. "Window dressing" of financial statements (manipulating quarter-end transactions to make the financial statements unduly rosy) is a form of financial fraud. The Securities and Exchange Commission (SEC) does not bring actions to penalize the practice. It has, therefore, become pervasive in America. The CEOs and CFOs of these companies do not consider the practice to be wrong.

    A constant danger is that the abusive companies will have the greatest incentive to make political contributions and secure the aid of prominent politicians to weaken regulation and prevent enforcement actions. This occurred during the S&L and Enron scandals."

    My guess is that many liberals have embraced the hypothesis for partisan political reasons. Good luck to them. Does it provide a justification for "more regulation" versus "deregulation"? I think not.

    When you take the "control fraud" hypothesis and add it to the the "capture" hypothesis developed by public choice theorists and economists over the decades, the combined analysis more or less predicts that Black's "worst case scenario" of regulation gone bad presumably would become the default modus operandi, the ordinary case.

    Is there a way out? I don't know. But for one possible alternative enforcement approach see the discussion from David Friedman on Gary Becker's theory of enforcement incentives(see here), especially the last part of Section 2.

    Interesting stuff.