The A.I.G. Debate - A Failed Opportunity to Exercise True Leadership

by Steven M. Cohen  •  Mar 27, 2009 at 8:53 am

http://www.buyselljump.com/2009/03/the-aig-debate-a-failed-opportunity-to-exercise

If the great AIG bonus debate is what today passes for national discourse, then we have even larger problems than a sour economy. Financial crises, with awful consequences like unemployment and loss of savings, unfortunately seem to reappear nearly every decade, but they are eventually resolved. But when the government essentially sponsors an effort to find scapegoats, when the prevailing discussion in the country is based on either misinformation or just plain ignorance, when the shrieking reaches decibel levels usually found on airport runways, then we are truly in trouble.

On Wednesday, March 24, Jake DeSantis, an M.I.T graduate and eleven-year AIG veteran, wrote an extraordinary open letter to AIG CEO Edward Liddy on the New York Times opinion page. (The seriousness of the subject matter, and the measured writing style of the author, was somewhat undercut by the Times's silly headline, "Dear A.I.G., I Quit!") He described his very productive career there, his consistently profitable activities, and the course that finally took him to the now-infamous financial products unit. He makes it clear that most of the folks there now had nothing to do with AIG's involvement in debt swaps and other products that brought the firm down, but were instead working to wind things down in an orderly manner. He also explains the bonus process, the rationale behind them, and the representations—the promises—the company made with respect to those bonuses. In a message of extraordinary grace and tone, he manages to get the message across that Liddy betrayed the people to whom those pledges had been made by not defending them in the course of his congressional testimony. For that reason, DeSantis decided to resign from AIG—but to donate what would be left of his bonus, his only compensation since, like Liddy, he was working for a salary of $1—which could be as little as 10% if the House ex post facto bonus tax bill is ever enacted "to organizations that are helping people who are suffering from the global economic downturn."

(A great follow-up to the DeSantis letter appeared the next day in the Wall Street Journal. In his weekly column, Holman Jenkins dismantles with a vengeance the entire AIG bonus issue, and takes to task the principal culprits. It is an astounding piece and should not be missed.)

DeSantis has been credited by some for "putting a face" on the controversy, but he did much more than that. Through his methodical and careful explanation, he demonstrates why the bonuses were entirely proper under the circumstances. The grace and class that suffuse the letter—even towards Liddy—are the precise opposite of what is heard from our "leaders"—craven politicians, cynical and opportunistic attorneys general, and a mainstream press that has helped fan the debate with a constant supply of distorted and inaccurate information. To think that this sorry endeavor involved our highest-ranking government official—who increasingly acts more like a scold than the statesman he is supposed to be—is depressing indeed.

It also ignores the practical effect of hounding people out of their jobs with threats. Extortionists like AGs Andrew Cuomo and Richard Blumenthal threaten to release the names of those who received bonuses, a pathetic excuse, as Mr. DeSantis pointed out, for the due process both of them pledged to uphold. Under this kind of duress, people have a tendency to bail out and quit their jobs. We might then be left with a situation similar to the resignation of two important managers at AIG's Paris unit. The company is trying desperately to replace them and avoid defaults on $243 billion of derivative transactions that their departure could trigger. I guess the Aspiring Governors think that it would be better to be left with an AIG carcass than a functioning business entity that might one day pay back the taxpayers.

Class warfare like this of course is expected during difficult times. It is occasionally accompanied by demagogues like Huey Long, the "Kingfish," a populist fomenter of divisiveness and anger, but they are the exception rather than the rule. However, it is rare when these episodes are encouraged —perhaps even initiated —by the upper reaches of the federal government, the legislative and executive branches.

This type of rhetoric has all kinds of unintended consequences. In an ironic twist, the president seems to have realized mid-stream that all of this was getting out of hand and made an effort to tamp it down. But it left the impression that his change of heart was not the result of an epiphany about the nation's moral well-being; instead, his Treasury Secretary was about to hatch yet another version of the bank rescue plan, this one requiring vast participation by the private sector. Background noise like the bonus debate just adds to the anti-business climate the White House has helped to create, and these financial-types might be discouraged, scared away, from pitching in.

It would be comforting to think that the White House decided to defuse the controversy because it took note of some ugly developments in Europe. Vandals near London smashed the windows of a failed bank executive, while workers in France held their factory supervisor hostage for several days in a protest against low pay. These are precisely the kinds of incidents that can throw a city, a region, perhaps a country, into a spasm of riots and mayhem. We saw the beginnings of it here with the bus "tours" of AIG executives' homes in Fairfield, Connecticut, sponsored, of course, by the kinds of "community organizers" that should be familiar by now. While there was no violence involved, it can be assumed that the tourists were not there to marvel at the beautiful homes.

This is a dispiriting development in an already depressing environment. The president could have risen above it and condemned it from the start, providing the country with the moral leadership it so lacks. Instead, he elected to spur it on, fan the flames, sink down to a level that appealed to the most ignoble instincts of an already angry public that was ignorant of the complexity and nuances of the issue. It suited his purpose because he had already tapped into the country's envy vein with his "spread the wealth" campaign theme, remarkably similar to Huey Long's confiscatory "Share The Wealth" program during the Thirties, another period of severe economic distress.

If nothing else, simple respect for the office he holds should have motivated the president to elevate the national discourse rather than debase it.

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