Thursday, April 30, 2009

Fallout of hostility towards bonuses to AIG employees

I have an article in Financial Express today titled Political problems of governments intervening in financial firms. Also see:

4 comments:

  1. Re your article in the FE today.

    Ajay, I usually find very little to disagree with in your writing, but this is an exception.

    Without going into the rights or wrongs of the bailout/outrage cycle, your statement:

    "The larger community needs to understand that in a financial crisis, what is being bailed out are the households of the country and not the shareholders of the financial firms."

    is disingenuous to say the least. Households don't need a bailout. They have the federal deposit insurance scheme. The bailout is for other creditors. And who are these creditors? And who owns them?

    btw, your link's broken.

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  2. Besides the FDIC bond gaurantees, banks in general have been 'bailed' out via AIG. The govt. effectively gave them a new counterparty instead of AIG for free!

    AIG financial products group were in the business of 'insuring' (via CDS) tranches of ABS CDOs that banks held and needed to reduce regulatory capital requirements. Sure they didn't pump money directly to the rest - and the cost of this 'bailout' will only be known once the CDS portfolio in AIG matures.

    Now if they didn't capitalize, or left AIG insolvent, imagine what happens then when you have major banks looking for capital at the same time - further killing the interbank market - and this just after the Lehman episode.

    To me this is a bail-out of the financial sector, but one which was needed to prevent a general economic meltdown which would then hurt households.

    But naturally I think it is right to be disgruntled when you have people at Goldman Sachs offering to repay TARP funds, saying they didn't need them at the time and acting like everything would have also been cool for them if AIG was not 'bailed' out.

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  3. Never knew you read xkcd? :D haha That was a pleasant surprise!

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  4. It is also worthwhile to note that the AIG bonuses were contractual obligations of AIG, and that most of the folks who received them were working on a $1 salary, cleaning up after the ones responsible for the mess were fired.

    http://www.nytimes.com/2009/03/25/opinion/25desantis.html

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