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Like many of you, I almost choked on my pancakes when I read the lead story of The New York Times this morning: “At A.I.G., Huge Bonuses After $170 Billion Bailout.” (Why does the Times put periods in all its abbreviations? It seems a waste of I.N.K.) Turns out that AIG is paying $165,000,000 in bonuses to 400 executives in its financial-products unit. (The Times also forgot that hyphen. Maybe it couldn’t afford it after the superfluous periods.) Where have we heard about that unit before? Oh, yeah: they’re the folks who drove the world’s largest insurer off a cliff by writing trillions of dollars of credit-default swaps, leading to a massive federal-government bailout paid for by you and me. The United States now owns 80% of the company.
Naturally, AIG felt the need to defend the bonuses. First they lawyered up and claimed that the bonuses couldn’t be legally cancelled. As if. (Trust me: good lawyers could get them out of it if they wanted.) Then, in a letter to Treasury Secretary Timothy Geithner, AIG Chairman Edward Liddy sings a different chorus to explain why they needed to pay the bonuses:
We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.
(I particularly like the line about how we're doing this for you, America.) It seems too obvious to mention that the folks running the show at AIG’s financial-products unit probably weren’t the best or the brightest, given how disastrously they screwed things up. But what struck me the most about Liddy’s wheedling was that I have heard this reasoning before in an industry I know a bit more about.
That’s right: law firms. Time and time again, when the clients of large law firms complain about the $160,000 starting salaries of first-year associates, the law firms sing the same tune as AIG: they need to pay fantastic money to zygote lawyers to attract “the best and the brightest.” And when a firm’s competitors see that, they all march in lockstep. Which is fine, until the economy collapses and the model fails. (See “Expensive associates threatening big-firm model.”)
The bottom line is that companies should pay for value, rather than throwing demented amounts of money at people who aren’t worth it, figuring that the money will never run out. Sooner or later, when you have a broken business model, the money will run out.