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AIG: Bonuses Well-Earned, Well-Spent

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The real outrage is scapegoating its talented employees.

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The scapegoating of the AIG bonus babies and the "outrage" of Senate is making me crazy. - like Tom Wilkinson in Michael Clayton type of crazy. (And forgive the potty talk, but Wilkinson and Clooney are brilliant in this.)

We have a bunch of ex-Goldman Sachs (GS) bankers making $1 a year, and whatever Rubin and Paulson got paid for their government stints, putting together a package paying countless billions to make Goldman whole (which they claim is a side effect of "prevent a global cascade of Apocalyptic scale"). These are guys who are ex-Goldman partners and they're being grilled brutally for exactly the wrong reasons.

It's like having ex-Gambino guys on the stand and grilling them over paying bonuses to the delivery boys at the pizza joints that fronted heroin businesses that were 8 degrees removed from the Gambino guys. It's insane, and it's obvious where the real money is made - and where the real taxpayer losses went.

Explained without the the vaguely slanderous metaphors: It wasn't the AIG (AIG) traders, over-selling of instruments -- which were flawed in a way the AIG people didn't understand -- who got the bonuses. The AIG guys getting bonuses were paid to unwind those positions.

That was what Liddy was trying to explain. They weren't "retention bonuses." The bonuses were based on the speed and efficiency exercised when unwinding the idiocy being practiced by AIG up until last year. It's not immaterial that the banks on the other end of the trade -- those who weren't going to get paid if AIG died, or if TARP didn't go through with no questions asked -- effectively put AIG out of business by buying the flawed instruments in enormous size.

The outrage is that the AIG bonus people were greedy Wall Street fat cats. That's an argument that's easy to sell to the naïve, or to people who don't work in finance. "Greed" from the AIG guys? Even if the bonus babies put together the flawed CDs, or whatever they called the vehicle, they didn't sell it in enormous size because they were greedy. They sold it in enormity because they had mispriced what they were selling in a way they didn't realize.

The AIG traders thought they were selling a low-margin product and didn't realize the risk. The banks on the other side of the trade, the traders who recognized errors in the structure of the AIG product understood more about what AIG was selling than AIG did. That's why they bought from AIG in size -- because in the event of payout, AIG would be paying out big. Real big, even by Wall Street standards. You can get a list of the payouts made to AIG counterparties disclosed so far at Slate.com, in this outstanding article by Daniel Gross.
No position in stocks mentioned.

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