The Cost of Those AIG Bonuses

Posted by ninja on Mar 25, 2009 in Blog | 139 comments

The collective wrath of all right-thinking people in and out of Washington D.C. has now intimidated AIG employees into disgorging $50 million in bonuses. Well, good. They weren’t the same ones who got AIG into trouble(http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031804104.html), but so what? They worked at AIG, and they are therefore guilty by association. Besides, we just saved $50 million in taxpayer money, right?

The only problem is that everyone else on Wall Street was watching what happened to AIG. Those are, of course, the same people who are supposed to partner with the federal government in the trillion-dollar plan Secretary Geithner just announced. They sound a little unnerved, according to the Economist:

“Will private investors nibble? The potential returns look juicy, even though they must share profits equally with the taxpayer. Big firms that would be in the running to manage funds in the programme, such as BlackRock and PIMCO, have given it a cautious welcome. But others, such as hedge funds and private-equity groups, are wary of participating in government-backed plans after witnessing the hysteria whipped up over bonus payments at American International Group (AIG), a clapped-out (and now government-controlled) insurer.

“Government officials have tried to quell these concerns by calling potential asset-buyers “good guys” and providing assurances that they will be exempt from pay restrictions aimed at recipients of taxpayer largesse. But fear abounds that they will become the next target of self-righteous politicians, especially if they are seen to be reaping windfalls. ‘The political risks are scary,’ says one hedge-fund manager, who also points out that some of the plan’s details are still missing: for instance, the interest rate and duration on loans for mortgage-backed securities have yet to be determined.”

Anyone who knows Wall Street knows that risk equals money. The more risk you want an investor to take, the more you’ll have to pay them. So, in order to recover $50 million from one company, we’ve raised the investment risk for all the others. How much extra will they need to be paid to participate in Geithner’s plan? Tough to tell, but I bet it’ll be waaaaaaaaaaaaay more than $50 million.