What do do about AIG?

For all my sympathy with people whose stupid bets got us into this mess, I am not overeager to hand them more of my hard-earned money.  But the AIG retention bonuses raise a question the government is going to have to ask again and again before all this is over:  do we want to make a point, or do we want to make money?

This is a very common problem in business literature, and bankruptcy law.  One of the unnoticed provisions  of the 2005 bankruptcy reform made it much more difficult to use KERPs, or Key Employee Retention Plans.  The problem is that these funds, often large, were frequently used by management as a slush fund to keep themselves from suffering too much in bankruptcy.  The other problem is that without these funds, bankruptcy often doomed hurting companies, because the only employees willing to stay on a sinking ship were the ones who couldn't get a job anywhere else.

Which is it, at AIG?  The problem is, there's no way to tell from the outside.  The employees of AIG know which traders are good, and which ones are idiots who made a bad mess worse.  But they're not going to tell us--or rather, they'll tell us, and the idiot traders will point the finger at someone else.  From what I understand, you can't even just ask which traders lost money--some of the traders will be able to argue, with justice, that they lost money because they were helping the company cut its risk exposure rather than taking bets they might win.  Others made good trades that were Overtaken By Events. 

Why not just say "no bonuses for anyone at AIG"?  To hell with the bums!  Well, we now own the company.  If we hasten the flight of quality employees out of the company, that will cost us money.  The answer might be some kind of performance bond.  But as in other financial firms, traders often take as bonus what should be salary, which means that they need at least part of their bonuses to maintain their lifestyle.  If they're faced with bankruptcy, the traders who are talented will go elsewhere--the financial market is shrinking, but the top traders still have other opportunities.  AIG has a lot of positions to unwind.  Do we want to leave the job to the dregs of the organization?

I don't know the answer to this question.  Perhaps it is true, as my interlocutors accuse, that I am too stupid to understand the obvious.  On the other hand, perhaps excessive confidence in your diagnosis means that you just haven't asked the right questions.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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