Kings of Finance

Amid the news that AIG will be getting even more money, Matt Yglesias makes an interesting and galling observation:

I’m only over the past few days really coming to understand what’s been going on with AIG. But the long and short of it is that all this money we’re giving “to AIG” isn’t really going to AIG, it goes to AIG’s counterparties. These are mostly banks (many of them abroad) who bought insurance from AIG against the possibility of a global financial meltdown. It turns out that AIG can’t actually pay all the insurance claims. So were AIG to go down, all these firms who thought they were at least partially insured against catastrophe would find out that they’ve got nothing and they, in turn, would go under. Hence, the government is stepping in to, in effect, pay off AIG’s debts.

That seems reasonable enough. But the retrospective look at things is truly outrageous. The whole idea of the insurance industry is that if I buy insurance from you, you pay off the claims. Absent ability to pay claims, there’s no business there at all. It’s just fraud. Whether or not it meets the legal standard for fraud, I couldn’t say. But in ordinary language sense, it’s a fraud—you’re selling a service you have no capacity to deliver.

Matt goes on to suggest that it would be right for the executives who got extraordinarily rich running this business to have the money they made doing so confiscated by the government. I’m not so sure — while it seems pretty cut and dry in this case — as best I know, they weren’t doing anything illegal, and it screams of “slippery slope-ness” where pretty soon it would be hard to distinguish what egregiously bad behavior necessitates punishment.

The problem seems to me not to lie so much with AIG, but rather with a compensation scheme that a) overly incentivized risky behavior, and b) proved ludicrously remunerative even for people who ran their companies into the ground. With respect to the latter, it’s almost as though these executives sat atop Financial Fiefdoms where position guaranteed untold millions of dollars totally irrespective of job performance. But rest assured, I hear the market is self-correcting.

UPDATE: By the way, for a good article explaining what the hell AIG was doing, read this.


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