AIG

There's a lot of outrage in the press about the bonuses being paid out to AIG employees. I think this focus on the bonuses is to miss the larger picture.

At this point, AIG is 80% owned by the federal government, the common equity is long since destroyed, and whatever one thinks about the process, this is by no means a liquidation or ordinary bankruptcy proceeding.

AIG has received billions from the feds, which then go right back out to pay creditors. Had AIG defaulted on its obligations in an ordinary bankruptcy proceeding, it's entirely likely that their creditors would have had to apply for bailout money of their own.

From this perspective, it's probably smart to think of AIG as a pipeline for the feds to distribute money without taking official ownership stakes in the subject institutions. This point becomes particularly important when one considers the tens of billions of dollars paid out by AIG to non-US banks.

So given that AIG is essentially a shell through which the US government is moving funds around the world to preserve order in the financial system, the tempest over the bonuses is a search for a scapegoat.

We have a choice with the AIG people, many of whom are absolutely crucial to winding down their trades. We can refuse to pay them what they are legally entitled to by act of Congress. Or we can treat them badly. Do both, and they will quit. And their insider knowledge of these trades will be gone. Who replaces them then and unwinds the trades? The SEC? The government?

In short, when you buy a white elephant like AIG, there's a lot of manure that comes with it.