Sunday, March 22, 2009

Our Idiotic Government and AIG's Critics

AIG appears to be a pretty badly run company. They insured mortgages and badly miscalculated the risk of default. When the risk was realized they found themselves on the brink of collapse.

Our government has stepped in with our tax dollars as well as billions borrowed in our children's names and given AIG a few multi-billion dollar blank checks. What is this poorly run company doing with the money? Among other things they are passing out multi-million dollar bonuses, some of which are to people that no longer work for the company.

Everyone is ticked. But where are they directing their anger? AIG. Not so much the government. As Stossel would say, give me a break.

What do you expect wasteful companies to do when you don't allow the market to punish them for their wasteful practices? They'll keep doing what they've been doing. If the government offered the company I work for billions in bail out money and the company offered me a million a month to keep doing what I'm doing, guess what I'd do? I'd take the money.

If you're looking for a place to invest billions of dollars and you find a poorly managed company that has a history of making decisions that lead to bankruptcy and you give them your billions and they continue to make poor decisions, who is to blame? This is like blaming a heroine addict for getting high after you've provided him with all the drugs he wants.

What your so-called conservatives might say at this point is "We need to pay these bonuses because we need to retain the talent required to get us out of this mess. You want crappy executives running the company? That will make things worse."

My response, as a person that sees the value of truly free markets, is that you don't know that. You don't know that you are really getting millions of dollars in value from these executives. That's the whole point of a free market. If these executives bring value, then the market will reward them, and if not the market will punish them.

Now we've decided we will not let the market punish them. So Obama and the rest of the central planners will step in and decide what their wages should be. But he cannot do this successfully. He cannot know if these high salaries really bring this kind of value. A market can. But a market has to be allowed to punish failure. And in America we don't do that. At least we don't do it for companies that are large and have people lobbying Washington on their behalf.


Vinny said...

The problem is that the market does not punish the people responsible for destroying AIG and driving the world financial markets to the brink of collapse. It punishes the shareholders (like me), but the executives responsible still walk away with millions even if we deny them this year's looting. Letting AIG collapse does nothing to deter these executives or others from doing the same thing somewhere else.

Jon said...

I don't really have a problem with executives making millions. Go for it. Make all the money you can. But if you're an investor and you see the executive board is awful and making poor decisions, do you give them all your investment money? If you do and they continue to overpay the executives, who is to blame for your loss of money? You are. You should have invested elsewhere.

Our government invested with these wasteful people and now they complain when they act wastefully. Stop writing checks to them then.

Vinny said...

And how is it that I am supposed to see that the executive board is awful and making poor decisions?

I bought AIG because the things I read suggested that it was a conservative company that did not have exposure to sub-prime mortgages. I didn't read anything that told me that it had a rogue Financial Products unit that was writing CDO's like a drunken sailor.

In theory, I don't have a problem with executives making millions. In practice, however, the interests of the executives diverge from that of the shareholders. The executives are motivated to pursue short-term high-risk strategies that produce the kind of returns that justify their compensation while the shareholders depend on the long-term viability of the company to profit.

Jon said...

You're right that it's tough for you to see if an executive board is good. I'm more speaking with regards to AIG and our government. Our government has invested with them after the errors became obvious. Companies will do awful things that cause investors to lose money and you won't necessarily know until after the fact. But at least they go down the crapper. That's the way it should be anyway.