Clearly, the bailout of AIG was a mistake. Not because they paid out contractual bonuses when the taxpayers owned 80% of the company, but because no company is too big to fail.
AIG should have filed Chapter 11 bankruptcy and then the light of day could have exposed the problems. If that had happened, today we would already be six months down the road to reorganization.
Yesterday, everyone from President Obama to Senator McConnell to the convenience store clerk was outraged about the company bonuses paid out. I understand the sentiment, but it is emotion — or “irrational exuberance” — that got us into this mess. We need solid free market business practices to get out. The new CEO of AIG, Edward Liddy, is working without a salary. When Secretary Geithner asked him about the bonuses, he said there was no way to get around them without violating contractual agreements. In theory that would stand, but I would very much like to know whether Liddy even tried to renegotiate the amounts paid out.
When Liddy, the retired Allstate CEO, was tapped to steer AIG from the edge of insolvency, the markets loved him. He had vast experience, including experience when it comes to successful restructuring of major companies. When Liddy was appointed, the Chicago Tribune reported, “The government’s pick hadn’t been made official as of late Wednesday, but one major AIG customer applauded the expected move, saying Liddy will help foster confidence in a company teetering on the edge of collapse.” There is something fundamentally wrong with that — the idea of “the government pick” to head a large corporation.