Saturday, July 16, 2011

The Lesson of AIG

The man-made recession, which continues, did not, apparently, cause the collapse of civilization as we know it, but if we do not take this opportunity to learn how better to manage big institutions, the next time may be worse. Or, perhaps civilization as we know it, based on a capitalist rampage, should undergo planned obsolescence.

The lesson of AIGs collapse and purchase by the Government, using taxpayer funds definitely not intended for that risky purpose, at a minimum is this: some of our societys institutions have in fact become too big to fail, without unacceptable collateral damage, and should thus be managed under intense public scrutiny to minimize such potential collateral damage. Whether or not the AIGs fail is a private concern; how they fail is the business of the Government and the People.

It seems fairly obvious that AIG decision-makers were running their company in a manner irresponsible to their shareholders, their customers, and society [Sorkin, 376-411]. This statement is based not just on their business decisions but, more, on their lack of understanding of their own business: despite the billions they maneuvered, they evidently did not know their own numbers, like a private individual who borrows from all his friends and spends every penny he gets without ever figuring out how much income he has, how much he is spending, or how much he owes. Such an individual will end up in jail; the penalty for executives in organizations too big to fail should be much more severe. A number of specific questions about the degree to which AIG decision-makers were held responsible for this failure of duty follow:

  1. To what degree were AIGs CEO and, perhaps more importantly, its previous CEO (for the one at the time of its collapseWillumstad--had not been in the position long enough to have cleaned house) a) made to explain AIGs failure and b) made to pay personally via fines that, after the fact, amounted to a removal of incentive for others to behave with such irresponsibility?
  2. Were the decision-makers just below the CEO criticized by AIGs own controller (David Herzog) [Sorkin, 410] fired, fined, and debriefed for the public record?
  3. Where is the official evaluation of how the business practices of AIG went so wrong and what we as a Government and a Society should do to ensure transparency for such institutions in the future?
For their clients who held AIG paper (e.g., insurance policies), for their investors who hoped for a profit, and for the millions of innocent victims who would suffer from AIG failure, AIG had a minimal responsibility at least to understand its own balance sheet. The Government had a more profound duty since its primary (and grossly failed) responsibility in the years from the gutting of Glass-Steagall under Clinton until the Bush Recession was to society, not to the rich. The Government, specifically the regulatory agencies and Congress (which sent the financial institutions the message that anything goes and sent regulators the message that befriending the fat cats they were supposed to be regulating was OK), betrayed the interests of the U.S. public in favor of rich and generous institutions.

American society needs to think deeply about how to minimize such corruption. The first step surely is for Americans to wake up and educate themselves so they can differentiate between corrupt politicians who support the elite rather than the public interest, for it is unclear how to punish the politicians responsible for creating the anti-regulatory environment in which the recession was cultivated except by voting them into the ash heap of history. A second step would be to pass an amendment to the Constitution clearly defining person as referring only to people, not groups, institutions, or companies. A third step would be to prohibit three things that present clear conflicts of interest:
1.      electoral contributions by financial institutions;
2.      the revolving door through which the billionaire financial elite flows from Wall Street to Washington (where it passes legislation favorable to Wall Street) and then back to Wall Street, where they earn further billions with yet further safety from being held responsible;
3.      lobbying by financial institutions (which should be allowed only public statements of what they favor, not private lobbying of politicians).

Further Reading:
·        Brief review of the post-bailout continuation of Government favoritism for AIG, despite years of scandalous and criminal (for which a huge fine had been assessed even before the recession) behavior, at the expense of the public
·        Outspoken review of AIG

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