Diary

Mitt Romney on AIG bonuses – right and wrong

Cross posted to The Political Class.

Over at NRO’s The Corner former Massachusetts Governor Mitt Romney weighs in on the AIG bonuses:

The news that employees at AIG are on the verge of being rewarded $165 million in bonuses at a time when the insurance giant is on the verge of collapse is rightly shocking to taxpayers who have pumped billions into the company to keep it afloat. Of course, the Obama administration was wrong to initially defend the bonuses as contractually obligated. In 1990, I was asked to assume the CEO position at the management consulting firm Bain & Co., then in acute financial distress. The need to restructure was paramount or else the company would fail, leaving 1,000 employees without a job. We renegotiated debt with bankers. We rewrote leases with landlords. We designed a whole new governing system. We also had to convince the founding partners to turn back profits they had already taken out of the company. Of course, we had no legal basis for making such a request, but without a shared sacrifice we couldn’t keep the company alive. Generously, the founders returned the money, putting us on a path to stabilizing the firm and turning it over to new leadership. It’s difficult to understand why the same lesson about shared sacrifice is lost on AIG’s executive team and their government overseers.

His insights are instructive, and his business acumen is legendarily impressive, not to mention his executive roles in both public and governmental sectors as well. It is difficult to imagine what a night and day difference it would surely be with someone of his background and caliber in the White House. As it is we have a tin-eared, thin-skinned greenhorn who doesn’t know what a P/E ratio is at the reins during this serious financial crisis – but I digress…

While Romney makes a valid point regarding his experience with the turnaround of Bain & Co., I would take issue with applying the comparison directly to the AIG situation, for the following reasons (in no particular order):

1.) The way Romney describes the situation with Bain & Co., the money put in by the partners was in the form of investment capital (and it is really beside the point whether it related to previous profits or not – money is fungible, and if there also had been some recent losses at Bain they still would have been asked to invest). This is not the same thing at all as compensation. It may seem like a small distinction to some, but be assured it is not. Not only that, but the circumstances were very different. Imagine if the company you worked for asked you if you would be willing to invest some of your time and capital in the company in order to save the company (and incidentally your job). This is a voluntary proposal. Now imagine that Barack Obama walks into your cubicle uninvited and demands a portion (possibly a very significant portion) of your recent paychecks back. He isn’t asking, he is demanding, even as he admits he has no right to do so. What would your response be?

2.) To reinforce #1, above: Let’s all appreciate that the AIG money in question really is in the form of compensation – just because it is in the form of bonuses (and, hence, more easily demagogued – let’s see them go in and start confiscating peoples salary,  even though it is really the same thing) doesn’t make it any less so. Compensation equals salary plus bonuses – how would you like it if the government swooped in and started talking about not only reducing your compensation, but by taking back compensation which you had already been awarded?

3.) Also to #1, above: In the example Romney describes, all of the partners were asked to voluntarily invest their own capital and time in order to rescue and ultimately turnaround Bain, and the monies invested by the partners would have been critical to the financial health of the consulting company. As I best understand it, we the taxpayers are on the hook for something on the order of $173 billion when it comes to the various (and seemingly never ending) bailouts of AIG. This means that the bonuses in question work out to about 0.095% of the current value of the bailout. This amount is not relevant as to the question of whether or not AIG survives.

4.) The bonuses are contractually awarded and are for people that are theoretically educated and/or experienced to the point that the bonuses are a value proposition. The circumstances of the financial crisis certainly may lend credence to arguments denigrating the supposed education and experience, however it is up to the management and ultimately the board of directors as to whether the bonus structure is a winning value proposition to AIG or not  I am certainly not knowledgeable or qualified enough to make that determination, however I could not possibly imagine worse judges than the likes of Barack Obama, Chris Dodd, Barney Frank, et al.

I could go on, but you get the point.

There is nothing inherently wrong with the example Romney provides, and it could serve as a possibly useful model that AIG could have followed. My objection is not to the suggestion, but to the populist outcry this issue has sparked. It might very well be that the bonuses were not the most judicious use of capital (and don’t be too quick to judge – we might need some really capable and well paid heavy hitters in there working their behinds off in order to unwind this mess without everything coming apart at the seams – if that is the case $165 million would seem like a bargain).

Perhaps the bonuses were ill-advised, however the power of the presidential podium, the Capitol Rotunda, and the Senate floor have no place in this debate. In fact, most of today’s feckless politicians could not qualify for the mail room in my small company.

Jim Manzi at The Atlantic has more: Management by Headline.

Still more: A few weeks ago Robert Gibbs expressed confidence that the administration knew what happened to the previous billions given to AIG.

Cross posted to The Political Class.