AIG Too Big to Fail?

I’m still scratching my head over the idea of a bank, a corporation or an insurance company being too big to fail. Smaller businesses come and go all the time. The recent bankruptcy and closing of Circuit City is a good example. So how does an organization like AIG become so large, so complicated, so critical that it cannot be allowed to fail?

Of course the answer is that if they are allowed to fail, it would mean global economic ruin… the “Domino Effect.” The other reason is that if large corporations are allowed to fail, it would mean thousands of workers thrown into unemployment. So I guess there is something to this “the sky is falling theory” of why we need to bail out these companies that are too big to fail, but it just does not feel right. It is like we are paying the people that just drove the bus off the cliff to stay in the driver’s seat and keep on driving… and hope for a soft landing.

In the case of AIG, we are learning that not only are they too big to fail…they are too big to regulate. Where was congress? Where was the SEC? We are leaning that the Financial Products Group of AIG was able to invest in these mysterious “derivatives” and “credit swap products” without the normal oversight and regulations that the rest of the banking and financial industry must face. Now just why was that allowed? Some say that these risky products, while very lucrative, were just too complex to understand by most regulators, even if they could be regulated.

Being too big to fail (and knowing they were too big to fail) gave AIG a sense of entitlement. Even as their company crashed around them and they were getting that first big infusion of tax-payer bailout money, we learned that AIG was going ahead with a lavish sales meeting and bonuses for its top people. They continued to “fiddle while Rome burned.” Now, we learn, to our national outrage, that AIG plans to pay or has already paid “retention bonuses” to the very executives from their Financial Products Group that brought the company to ruin. We are told by the legal minds in our Treasury Department that there is nothing we can do to stop them. The bonuses are written into their executive contracts to keep them from leaving the company. But wait! Didn’t the government just tell GM and Chrysler to go back and renegotiate THEIR contracts with the UAW as part of their bailout?

I just don’t get it. I have always rankled at people who felt they were above it all, the ones who cut in line because they were too “important” to wait with the rest of the crowd. Neither do I understand “Golden Parachutes” to executives that leave corporations after driving them into the ground. Now, with AIG, we pay executives bonuses to stay after they bring the company to ruin. Is it me, or has the world gone mad? Have we created a privileged class of people that are just too big to fail? Do the mighty no longer fall… or are they are bailed out?

FOOD for THOUGHT...