AIG Execs: Can't Live With 'Em, Can't Live Without 'Em

It’s a strange world when the same people who got you into a $180 billion mess become so indispensible that you can’t afford to kick them out the door with a foot firmly planted on their backsides. Instead they are given multimillion bonuses. It’s like waving the red cape in front of three charging bulls: the media, Congress, and the American taxpayer.

So at some level you have to feel sorry for American International Group Chief Executive Edward Liddy. He’s catching big-time heat for paying out $165 million in year-end bonuses to executives in the insurer’s small Financial Products unit, a decision that, at least in his mind, was no decision at all.

U.S. Treasury Secretary Timothy Geithner, who took his own beating from Congress last week, told Liddy he shouldn’t be paying out these bonuses. Liddy shot back in a letter that he had no choice. The bonuses were negotiated a year ago (was it only a year ago?) before the credit default swaps iceberg nearly sank the ocean liner of AIG, and well before Liddy took over the helm in September at a time when the financial flood was actually washing up at his feet. Not paying bonuses to these execs would have unleashed an army of their lawyers on the already hapless company, he told the Secretary. 

But then why not boot these Financial Products people out the door now, since responsibility for the bad trades could be laid directly at their feet? Liddy and AIG’s answer is that they are the only ones with knowledge of the contracts and how to unwind them. Yes, that’s sort of like telling the murderer to solve his own crime, a warped version of the board game Clue, but in Wall Street’s world, it makes sense. The products are too complex and the transactions too complicated for anyone else to understand. Without their guidance, the whole process becomes worse than the Bernie Madoff puzzle, which may never be solved.

AIG spokesmen point out that the financial products guys have been hard at work, doing the right thing this time. The notional value of the company’s derivatives has dropped to $1.6 trillion from $2.7 trillion since the crisis started and the credit default swap portfolio has fallen to $302 billion from $533 billion.

So the one small consolation is that the AIG people now making the big bonuses may eventually work themselves out of a job, at least at AIG. But meanwhile they are getting very rich. That privilege doesn’t extend to Liddy, however. He took no pay or bonus for either 2008 or 2009. Don’t feel sorry for him, though, because he’s a millionaire many times over from his previous tenure as top honcho at Allstate Corp., the U.S.’s largest publicly-traded home and car insurer.