Taunter Media

Jake DeSantis, head of AIGFP’s commodities division, resigning in the Times today:

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixedthe pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

That’s a fair point – I wouldn’t give the money back, and I doubt many people in the lynch mob would either.  The folks who bought overpriced houses in the desert are not asking to be evicted, the the people who sold them the houses are certainly not trying to give back the excessive proceeds.  No need to single out these guys.

What it does go to show, however, is why actual bankruptcy is so important.  Whether in the financial industry or the auto industry, the government is stepping into various sectors of the economy and trying to resolve insolvent situations without the tools to address the entire series of liabilities.  UAW workers and public bondholders are told to accept an equity conversion on their $47bn of liabilities, but the other $130bn or so is supposed to carry on at face, because no one dares tell the public the company is “bankrupt.”

Goldman Sachs and Societe Generale received payment on their outrageous contracts at face.  Why should Jake DeSantis or anyone else who holds a contract with AIG expect to be treated any differently?  If Jake were the head of commodities at Goldman, the transfer of government funds – and avoidance of insolvency in September – would have allowed him to collect on his full compensation contract in December, with no outcry.

If AIG had gone bankrupt, there would have been a transparent process for determining which contracts would be honored and which would be discarded.  The bankruptcy judge would likely have tossed AIGFP’s 30% carry, but whatever the decision, at least once approved it would provide some assurance for people continuing to work under it.  The sacrifice from other stakeholders would be equitable.

The government prevented AIG from going bankrupt.  We did this to prevent a breakdown in the payment stream to favored firms.  However disgusting the people at AIG may be, it is a bit rich for us to now use the counterfactual “well, if we hadn’t stepped in, you would be bankrupt” argument for voiding the compensation agreements when we made $170bn worth of effort to keep exactly this situation from taking place.