Just as the GM restructuring "plan" was a clarifying illustration of why industrial policy rarely works very well, the current outrage over the AIG $165 million bonus payout illustrates why having the federal government run companies usually doesn't work very well either.

I've argued previously that the idea that people on the government payroll shouldn't be making $10 million per year seems pretty sound to me.  But what we're seeing right now is superficial reaction to inflammatory words and headlines.  Somebody needs to explain to our president that total cash comp = salary + bonus.  It's pretty hard to find a good number for AIG's total annual cash payroll expense, but their total headcount of 116,000 as of 12/31/08 is in the current 10K.  If we assume (conservatively) total average loaded comp per person of $50K, this is about $5.8 billion per year of aggregate headcount cost for rough figuring.

$165 million is less than 3% of this number.  Why isn't everyone outraged every 10 days at this amount of money going out the door to employees -- because it is labeled "salary"?  Suppose AIG eliminated this bonus entirely, but raised salaries 3%, would everybody feel better?  After all, salary is what you "deserve" for your labor, while bonuses are just extra cherries on top -- right?

There are all kinds of counts tossed around about what total bonuses are.  The highest number I've seen credibly reported is $1.2 billion.  Let's assume this is correct.  This would imply that AIG's weight-average comp structure is about 80% base / 20% variable.  I don't know if this is optimal, but this doesn't seem inherently crazy to me.  Do you really want zero comp at risk for people operating this company in its current state?

Or is it that many people hate the fact that senior employees of AIG Financial Products (i.e., "the same people who almost destroyed the world financial system") are being paid $100 million in retention bonuses to make sure they stay to unwind these positions?  I don't like this any more than anybody else.  But as a taxpayer, which is to say, partial owner of AIG, I'm not looking for cosmic justice, I want my equity to retain some value.  The aggregate size of AIGFP positions appears to be on the order of $100 billion dollars.  $100 million is 0.1% of $100 billion.  I don't know if the incremental value that having these guys around to do the unwinding is worth more or less than that, but it's not an inherently crazy idea either.  I am confident that Barney Frank is no better a judge of this than I am, even if his incentives were aligned with mine, which they are not.

In the end, what I think this highlights is the need to get the government out of the business of managing risk capital as rapidly as is feasible.