Why AIG Bonuses Make The Case For Nationalization

ap0812110963.jpgDespite receiving $170 billion in taxpayer funds — and being confronted by Treasury Secretary Timothy Geithner — insurance giant American International Group (AIG) still plans to pay out $165 million in employee bonuses and retention pay. AIG’s chief executive Edward Liddy expressed “grave concerns” about the company’s ability to retain staff if the bonuses — allegedly promised before AIG accepted taxpayer money — were renegotiated.

The bonuses have sparked considerable outrage in the administration and on Capitol Hill, and the White House is seeking “mechanisms” to recover the money. But this episode represents more than just AIG’s apparent blindness to public and lawmaker opinion. As Robert Reich pointed out, this “sordid story…illustrates better than anything to date why the government should take over any institution that’s ‘too big to fail’ and which has cost taxpayers dearly”:

As long as taxpayers effectively own a large portion of them, they should be accountable to the government. But if our very own Secretary of the Treasury doesn’t even learn of the bonuses until months after AIG has decided to pay them, and cannot make stick his decision that they should not be paid, AIG is not even accountable to the government. That means AIG’s executives — using $170 billion of our money, so far — are accountable to no one.

Indeed, we’ve noted before that Treasury’s strategy of pumping money into financial institutions without taking outright control would result in “sinking a lot of money…without gaining authority and accountability over the use of taxpayer funds.” And even with 80 percent of the company owned by the government, Geithner is powerless to do anything other than pressure AIG to rescind the bonuses.

Nationalization, meanwhile, would mean outright control over the hiring and firing of executives and the payment of bonuses and dividends. Treasury wouldn’t have to try to coax or embarrass institutions into voluntarily cutting back.

Of course, the ultimate decision regarding whether or not to nationalize financial institutions should be made on the basis of the stress test that Treasury is making them undergo. If the banks are rendered insolvent by the test (as many likely will be), the government will have every rationale for swooping in and taking over.

But in the meantime, AIG’s decision is symbolic of the current financial rescue: toxic assets are still clogging the system, while the financial institutions are unaccountable to anyone but themselves.