Wednesday, March 18, 2009

We Own You

The message about AIG and the bonuses is that once a company takes a bail-out, the government owns them and can set or change the rules at will.

Some background:

According to at least some reports, the controversial bonuses were not performance bonuses. They were a bribe to keep the top staff from jumping ship as soon as they found out the state of AIG's finances. Without these bonuses AIG would be in worse trouble than it is now.

It is rarely discussed but AIG's problems all come from the number of mortgages that are being defaulted on. At the government's insistence under the Clinton administration, most of the traditional rules for qualifying for a mortgage, things like down payments and being able to make the payments, were tossed out in order to increase minority home ownership. These mortgages were bundled into financial instruments which were made more desirable by taking out insurance on the underlying mortgages. The default rate was fairly low for decades so AIG insured a lot of these mortgages at a low rate. When the mortgage-holders began to default, the banks put in claims to AIG. This is when we bailed them out. If we hadn't then a lot more banks would have failed.

The bonuses were not always so abhorrent to the Democrats. Chris Dodd slipped an amendment into the stimulus bill requiring that pre-existing contracts be unaffected by government money. Dodd has now reversed that position.

All of this makes people wonder if the Obama administration allowed the bonuses to go through just so that they could throw a fit about them in public? Rush Limbaugh has suggested this. The alternative is that the administration didn't realize what it was pushing for. Normally I assume incompetence over conspiracy but the Obama administration has shown a compulsive need for enemies. Did they set up AIG the same way that they targeted Limbaugh?

The rational response would be to ignore the bonuses. They can't be stopped - the checks are already in the mail. That hasn't stopped Barney Frank from threatening to fire everyone who accepts his bonus. Other Democrats are talking about enacting a retroactive 100% tax on the bonuses.

If you are not troubled by this yet then here are some things to consider:

Congressmen are threatening to fire people for accepting compensation spelled out in their employment contract. What sort of of precedent is that?

Those same congressmen are threatening to confiscate pay that they consider inappropriate, even if it is legal. Again, this is a bad precedent.

That is on top of moves that Obama has already taken to cap pay for companies that have accepted government aid. The excuse is that they want to be sure that the taxpayers' money (or the borrowed Chinese money) is being used wisely. They don't have the same compunctions when approving spending bills. Obama is pretty free with the people's money in his travelling, also. I'd like to see him cut out unneeded travel instead of going on an expensive field trip every Friday.

Now that the precedent that accepting government money gives the government control over how businesses are run, expect this to be expanded. A lot of companies get government money one way or another. The Democrats have been complaining for years about the gap between the rich and the poor. Now they are doing something about it.

Businesses have noticed. Two banks have given notice that they will return their TARP funds this month. A couple of hundred others, out of around five hundred, are having second thoughts about accepting TARP funds. I expect other businesses to start being cautious about accepting TARP or stimulus money.

If I worked for a company that had accepted government money I would be looking for a new job, even if I was not in the pay ranges that the Democrats are looking at now. I expect these businesses to lose all of their top talent which will affect their long-term viability. Also, this incident means that your employment contract might be cancelled at any time at the whims of Barney Frank.

In a separate but related story, President Obama announced his plan for helping small businesses. He ordered banks to give more loans. This covered all banks, not just ones that have received TARP funds. I wonder if he is lowering the loan standards for small businesses, just like the standard for home buyers were lowered?

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