The Hypocrisy Boiling in the AIG Pot

Well, are you sick and tired of all this ballyhooing and indignant posturing over AIG? Don’t you just long for the good old days of dissecting the metaphysical philosophies of Joe the Plumber, the excesses of Sara Palin’s clothing purchases or the shenanigans of former Illinois governor Michael Blagojevich? After all, nothing else important is happening in the country right now.

All this AIG “bonus” hand-wringing and self-serving commotion whipped up to a frothy frenzy by the media and our political leaders conjures up the image of a barnyard full of hyper-horny roosters chasing after a single wounded hen. Prancing around and ululating at a fever pitch, the cocks all want to show the farmer the value they bring to the farm by demonstrating their prowess at flocking with the hen.

I’m totally with you. I hesitate to even write on the AIG issue, because I am tired of it already. However, there are issues here that are deeper and far more important than the $165 million in “bonuses” paid to a couple of hundred AIG employees. The manner in which the AIG controversy is being approached and exploited is a perfect microcosm for the study of bad management, misleading media hype, bureaucratic ass-covering at its best, along with ineffective, dishonest and demagogic political leadership at its very worst. Even more concerning are the dangerous and dark actions that have been proposed by our political leaders to address the AIG issue.

I am not here to defend the actions of AIG management, although in this case I believe them to actually be defensible. Those who have read my books, previous blogs or listened to my podcasts know that I have been a longtime critic of the management and actions of AIG. There are numerous activities of AIG management – past and present – that can and should be properly skewered. However, in this specific case the critics are either misinformed or consciously dishonest in their criticisms, and this carping  is being driven by a selfish effort to gain personal advantage.

I will not belabor the point, but some perspective is warranted. The waters are so clouded and polluted now that it is difficult to decipher the truth, but here is my understanding of the situation.

It depends on the meaning of the word, “is” . . .

The first problem is with semantics. The reality is that most of the funds paid out were not “bonuses” in the usual sense that we think of a bonus. A bonus is something that is (or should be) paid for performance above and beyond the norm. We have a right to be indignant when bonuses are paid for poor performance, but in the AIG case, much of the funds paid out were not bonuses at all, they were compensation payments distributed to employees for doing a specific job. If these payments had been properly identified as compensation as opposed to a “bonus,” they would have been a non-issue.

In late 2007 and early 2008 as AIG began to collapse in on itself due to complicated stupid actions in risk assumption that had gone bad, virtually all of the AIG top management was replaced. The new management of AIG had no history or experience in dealing with the complicated financial instruments entangling AIG in billions of dollars of losses. The only people who knew where the bleeding was coming from were the ones who caused the injury. Retaining these people to help untangle the mess would be more efficient and less expensive than having new employees who had no idea as to what happened attempt to correct the problems. Rightly, new management (with the knowledge and approval of the Federal Reserve and Treasury Department) offered to pay a specific amount to those who had caused the problem, if they would stay with the company long enough to work through the unwinding. This was not a bonus, but specific compensation for a specific activity. And, these payments were not made until after a period of time and certain activity was completed. To now, retroactively redefine these payments as a “bonus” is both incorrect and dishonest.

I know from personal experience that it is distasteful to continue to pay those who caused a problem to help resolve the problem, but because of the knowledge they have it is usually the most efficient and least expensive way to accomplish the task.

The Counterparty Issue

AIG is also being attacked is for using bailout funds to pay other financial companies. This is probably even more disingenuous than the criticism over the retention payments. AIG found itself in trouble because it issued literally trillions of dollars of SWAPS (pseudo insurance policies) that guaranteed to make up for any losses incurred by those institutions that had purchased subprime mortgages and other financial instruments. When loses did begin to emerge, AIG did not have sufficient capital to collateralize the potential claims as was required in the contracts and was on the verge of bankruptcy. Such a bankruptcy would have had a cataclysmic rippling effect on scores of other financial institutions and the financial system itself.

To prevent this calamity the Federal Reserve stepped in to provide the capital needed to collateralize the potential liabilities and in exchange took an 80 percent ownership interest in AIG. AIG then used these funds to establish collateral for potential liabilities and pay the claims already filed against the SWAPS. In addition, AIG used some of the funds to pay fees to financial institutions in order to “close out” certain of these SWAPS and mitigate future claims. Despite the fact that this is exactly the reason the Fed advanced the funds to AIG, the company is now being criticized for using the bailout funds to pay the claims. Unbelievable! Can you imagine the brouhaha that would have ensued if AIG had accepted these funds and then simply hoarded them?

The Bedrock Issue

Frankly, the real problem here is not whether the “bonuses” paid out were the proper thing to do or not. In the scheme of issues we face today they are the proverbial pimple on an elephant’s ass. (No political pun intended!) The real issue is leadership or lack thereof. What really bothers and scares me is how the media and our political leaders have responded to the issue. They have decided there needs to be a lynching and are now, in effect, fighting over which of them can bring the best rope.

One certainly understands that Americans are frustrated, fearful and angry to see their jobs in jeopardy, the value of homes decline, even the very ownership of homes put at risk, their 401Ks decimated and the dreams of a comfortable retirement ruined. At the same time we see the fat cats of Wall Street – those who are blamed for causing all this economic pain – waltz away scot-free after lining their pockets with millions of dollars. Yes, these are very difficult times and it is no wonder we are angry.

Even though the AIG bonus situation did not cause the problems and is only a cup of water in a stormy sea, it has served as a flash-point for the firestorm of pent-up frustration and anger. But, that does not excuse or give license to the media and our political leaders to approach the problem by throwing more gas on the fire. We can learn a lot about leadership – both business and political – from the way our leaders have responded to the AIG situation.

Recognizing True Leadership

True leadership is identified by how people react to crisis. Anyone can look good in good times, but only real leaders look good in bad times. In crisis the weak leaders panic and pander to the frustrations and fears of their followers. The strong leader is calm, reassuring, open, direct and clear as to the issues being faced. In crisis the weak leader falls back into the pack, unable to offer real solutions they lash out and blame others by fanning the call for retribution; as if punishing the past will make it all go away. The strong leader rises above the crowd and seeks to elevate, educate and communicate the way forward. Above all the strong leader is honest in discussing the issues and problems, while always focused on the future and ways to make it better. In short,

During crisis the weak leader appeals to the worst in all of us
while the strong leader seeks to bring out the best in all of us.

Unfortunately, the AIG bonus issue has exposed most, if not all, of our political leaders as weak. Have you seen one leader stand up and put the AIG issue in perspective to the entire financial crisis? Have you seen one leader stand up and candidly acknowledge that both the Treasury Department and the Fed were fully aware of and approved the AIG retention payment plan? Have you seen one leader stand up and attempt to direct the discussion away from these minor emotional issues and toward a real solution? I am sorry to say that I haven’t. Unable to offer positive solutions, our leaders fallen in with the crowd to foster and even encourage a lynch mob mentality. Think I overstate the case?

What about Sen. Charles E. Grassley (R-Iowa) who publicly called for the executives of AIG to consider committing suicide. How is that for leadership? What about Congressman Barney Frank (D-Massachusetts)? This guy’s fingerprints are all over the actions that caused the sub-prime financial crisis, yet his comments regarding AIG are among the most bombastic and demagogic of any. Barney Frank is clearly the poster child for the ethically challenged and disingenuous among our political leaders. The House speaker Nancy Pelosi asked three committee chairmen, including the aforementioned Mr. Frank, to come up with legislation to recoup the AIG “bonus” money. Like the Congress has nothing better to do than to take the time to pass legislation aimed at nothing more than angry retribution. (Not even to mention that such legislation is clearly unconstitutional!) Then there is the ever-ambitious Andrew Cuomo, the attorney general of New York, who seeks a list of all those AIG employees who received payments, most likely as a way to publicly tar and feather them to satisfy the lust of the mob. These are just a few lowlights of how some of our leaders have reacted in time of crisis. There are many more, but the point is made.

I am disappointed at the response of President Obama as well. I thought he was better than this, but he has also been sucked into the maelstrom emotional response to the AIG discussion. It seems as though our leaders have been competing among themselves to see just who can best appeal to mob mentality of the masses.

To be honest, I am disenchanted with the way our political leaders have responded in general to the current financial crisis, but even more so, I am saddened by the way our political leaders have sold out and debased themselves by appealing only to the blood lust of the mob over the AIG issue. Thinking only of future votes, our leaders have taken positions, not to resolve the problem, but only to ingratiate themselves with the worst of our feelings. Frankly, we need and deserve better from our leaders.

And the Moral of the Story …

We can all learn from the AIG episode. We can learn to observe both our business and political leaders and determine if they are exercising true leadership in a crisis by staying calm, being open, direct and stable. Determine if they are offering solutions or seeking to blame others to mask their own weakness. Most of all we can observe their reaction to crisis and decide if they even deserve to be called our leaders. Fact is we only have ourselves to blame if we allow leaders to play to our frustrations and fears and not to our future.

I am reminded of two great American leaders and how each skillfully responded to crisis.

In the last major American economic crisis – The Great Depression – Franklin Roosevelt emerged to lead the way out. He could have followed the crowd and blamed Hoover, Wall Street or the banks for the crisis, but he did not stoop to that. If he had, it would only have prolonged and deepened the problems. At the onset of the depression lesser leaders of the time played only to the fears of the people. Instead, Roosevelt’s message, “the only thing we have to fear is fear,” subtly but effectively encouraged people to focus on the real enemy – fear. Roosevelt did not take the easy road by fanning the fears, but challenged people to confront their fears and conquer them, the sign of real leadership.

Another example of great leadership was Lincoln at the end of the Civil War. With the North on the edge of victory many of the political leaders at the time were fanning the flames of mob mentality by calling for recriminations and retribution for those who participated in the war for the South. There were cries for all Southern leaders to be tried and hung. Bills were introduced in Congress for the confiscation of Southern property. Rising above the emotion of the time and looking only to the future, Abraham Lincoln – in his second inaugural address – called instead for reconciliation with the South, not retribution. When General Lee surrendered the Army of the South to General Grant, Lincoln ordered the Northern Army to salute the Southerners and allowed them to return safely home and free of any retribution.

For these actions Lincoln was vilified by the media and most of the political leaders. Some even accused him of being a traitor. Seeking personal advantage, the weak leaders appealed to the worst feelings of people, while Lincoln held firm by asking people to look forward to the benefits of a unified country.

Now, maybe even more than in the past, America needs business and political leaders who exhibit the attributes of Lincoln and Roosevelt. We might wonder where they are today, but the fact is they will not emerge unless we reject the pandering of weak leaders and demand honest, ethical leadership. The reality is that each of us has the power to determine the type of leader we get. Strong, effective leaders will emerge, but only if we will not settle for less than the best from our business and political leaders.

From the way the hypocrisy of this AIG fiasco has played out, it seems as though we have a lot of work to do.

One response to “The Hypocrisy Boiling in the AIG Pot

  1. Bruce Bengtson

    Thank you for your insight Mac. It is about time some light has been directed to this contrived grandstanding by our elected/appointed leaders. Maybe there will be more letters like Jake’s that get published by well-read papers.

Leave a Reply

Your email address will not be published. Required fields are marked *