Monday, March 16, 2009

I Want to Be an AIG Counterparty or Financial Products Employee

Over the weekend, embattled American International Group (AIG) published a list of its counterparties in the wild credit default swaps (CDS) market, and more importantly, the amount of collateral paid to them on various CDS bets.

Among the lucky parties were banking giants Goldman Sachs (GS) and Bank of America (BAC) received $12.9 and $12 billion respectively. Foreign banks were also in on the party, with Societe Generale and Deutsche Bank (DB) each taking down nearly $12 billion.

Some folks out there are complaining that AIG, which is using TARP money to settle up on these complex bets, is simply handing out public money to fix its mistakes. It especially looks bad that the company is handing out a boatload of contractually-promised bonuses to its financial-products staff in the face of this use of taxpayer money.

These bonuses range in amount from $1,000 to $6.5 million, so at the top end, folks are getting paid pretty nicely for a total failure in performance. They could voluntarily take pay cuts, but don’t count on that happening. Wall Street, and AIG in particular, has a pretty bad reputation right now.Cutting the big boys’ bonuses from $6.5 million to $3 million isn’t going to calm an angry public watching their tax dollars passed around like candy.

News like this is toxic for the public's faith in business and government. The average person sees a "heads we win, tails you lose" series of outcomes for banks, engendered by an endless stream of cash flowing from Main Street to Wall Street. All while the average American has seen his 401K evaporate, purchasing power decline, and job disappear.