Avoiding Consequences

You would think, from the way the latest bailed out company bonus scandal hit the press, that nobody could have seen this coming. Wrong. Quite obviously, AIG CEO Edward Liddy saw it coming. For that matter, everybody within AIG who was "entitled" to a bonus saw this coming. To the extent that Geithner and Summers didn't see this coming, it was because they were deliberately kept in the dark - and perhaps also that they chose not to ask.

Here's an interesting theory (albeit most likely incorrect) on how Liddy may have tried to scare Geithner out of any meaningful confrontation over the bonuses.

I take this to mean that if a bunch of AIGFP managers quit because they didn't receive bonuses promised in their contracts, then France could, if it wanted, to appoint its own designee. And if that happened, then it would equate to a default and those contracts would kick in, at a cost to AIG the US government of at least tens of billions.

I doubt that such an outcome was likely and, if it were, my preference would have been to talk to France about the many reasons they weren't going to do any such thing.

But really, I think the legalistic rationalizations are just meant to give Liddy cover - he wanted to pay the bonuses, and the best way to do what he wanted to do was to keep quiet about them until the secret could no longer be kept, thereby avoiding the chance that Congress will revise the strings it has imposed on bailout money, then dump a convoluted legal rationale on the credulous and compliant Timothy Geithner in order to avoid any serious action before the bonuses can be distributed. [Addendum: Certain key people, probably including Geither and Summers, knew about these bonuses for a considerable time before the news was made public; so part of this assumption was unfair to Liddy.]

Larry Summers is worried about having policy created out of anger? This is increasingly looking like the straw - a word that strangely enough fits, because in the larger scheme of things these bonuses are a tiny part of the bailout - that broke the camel's back.