The least bad option for AIG

Nicole Gelinas argues that bankruptcy would have been catastrophic, but still better than the mess the company – and the American government – are in today:

The government seems never to have considered the prospect of allowing AIG to go through the normal bankruptcy process. True, an AIG bankruptcy would have been a breathtaking event. It could have caused cascading losses for Europe’s banks, necessitating more government bailouts there, and a (bigger) international crisis; it could have caused insurance policyholders to cancel their contracts around the world, straining reserve funds for failed insurance companies; and it could have caused fright in Asia, where AIG insurance has always been a trusted product. Further, in a bankruptcy, AIG’s short-term lenders could have seized their collateral from the firm and sold it instantaneously, further depressing stock and bond markets. So, yes, there’s no question that an AIG bankruptcy would have been terrible—even cataclysmic.
But it’s reasonable to ask: could it have been worse than what we have now? Consider that in a bankruptcy and orderly liquidation of the firm—even one financed by the government, if no customary private bankruptcy financing were available—an impartial judge and an impartial administrator would have taken on all of the tasks that the government and AIG itself have handled so erratically for the past six months. The administrator and the court would have decided which employees from AIG’s exploded “financial products unit,” which created the mortgage derivatives, should be encouraged to stick around to help the company’s new administrators figure out what was going on. With the court’s permission, the administrator would have determined how much to pay such employees. The administrator would have hired outsiders to muddle through AIG’s mess, just as outsiders eventually muddled through Enron’s mess eight years ago. And an impartial, methodological accounting of AIG’s assets and liabilities would have determined how much AIG had left to pay all of those European and American banks that had bet so recklessly that a company like AIG could never fail.
Above all, this impartial accounting of AIG’s assets and liabilities would have defused the bonus controversy that has now exploded into visceral public anger. By determining how much, if anything, AIG could give the employees due those big bonuses—which are part of employee contracts signed early last year—a bankruptcy would have avoided the disturbing question that so many mainstream politicians have raised in the past week: can government bailout money force a company to break a private contract? It’s a truly worrying prospect in an economy built on private contracts. Bankruptcy enables a consistent treatment of the sanctity of contracts, even in an environment of anger. It allows the administrators of failed companies to oversee the renegotiation of such contracts according to the resources available to pay out on them and the competing goals of various creditors, including employees.
Finally, in a bankruptcy, the government’s goal for AIG would have been obvious: to wind down a failed company, getting the firm’s good assets—the insurance business—into more competent hands as soon as possible, even at a fire-sale price. …

Damian P.

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3 thoughts on “The least bad option for AIG

  1. IMHO…the crux of the matter is that creditors specifically, and the Public in general are flabbergasted that “bonuses” are due even when the company is basically bankrupt. What are the ‘bonuses’ for, specifically? In the real world bonuses are paid for making an organization MORE successful, not less.

  2. The bonuses were retention bonuses, to convince people with expertise to stay on in dead end jobs while things were winding down. A bankruptcy court would likely done the same thing. The bonuses were stated in AIG’s previous fiscal filing and were approved by the Treasury Department, and the administrator brought in by the feds to oversee AIG (just like the one a bankruptcy judge would have appointed). More over, Senator Dodd inserted language in to the “stimulus” bill specifically to enable these bonuses (either by himself or at the urging of the Obama Administration). Whether or not the bonuses were a good idea, the hysterical “how could they have done this?” wailing by government officials is fluorescently hypocritical.
    Now, of course, we will end up paying the bonuses, court costs, and still not keep the expertise. The mob outrage will simply get us the worst of both worlds, not to mention significantly dim the prospects of any future retention in such situations. But hey – that kind of lose/lose/lose result is one thing that’s not in recession in the current White House.

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