Wall Street's Dangerous Refusal to Learn

Edward Liddy, the government-appointed CEO of AIG, has been slow to recognize that old ways won't fly anymore.
Edward Liddy, the government-appointed CEO of AIG, has been slow to recognize that old ways won't fly anymore. (By Kin Cheung -- Associated Press)
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By Steven Pearlstein
Wednesday, March 18, 2009

You have to wonder what else has to go wrong, how much more wealth will need to be destroyed, before the people on Wall Street get the message that it's no longer business as usual.

The latest outrage, of course, is over the $400 million in retention bonuses promised to those financial geniuses at AIG's Financial Products unit last year, months before the insurance giant was essentially taken over by the government in a bailout that already has required an injection of $170 billion in taxpayer money.

The legal argument for honoring these ill-considered contracts is that a deal is a deal and that trying to abrogate them will only wind up costing the government even more in legal fees and punitive damages. But that doesn't mean the government and its handpicked new management team at AIG were powerless to renegotiate those contracts long before last weekend's deadline.

After all, if the government hadn't stepped in, AIG would have gone bankrupt and those whiz-bang traders could have lined up with all the other unsecured creditors at the bankruptcy court to see how much money they might receive three or four years down the road. And the government could still put the company into bankruptcy anytime it chooses.

Moreover, the Justice Department would surely have been within its rights to launch an extensive civil and criminal investigation into whether those bonuses were granted as part of an ongoing conspiracy to defraud shareholders -- a conspiracy in which the traders were knowing participants. As part of that investigation, prosecutors could have also prepared a public report to the Treasury, the Federal Reserve and Congress listing the names and home addresses of all the traders who were slated to receive the bonuses, along with a detailed description of their role in creating the mess that brought down the company. There could even be a chart listing their salaries, bonuses and other perks over the past decade.

Call me a cockeyed optimist, but I suspect that when confronted with the prospect of a bankruptcy and a prolonged and public investigation, the sharpies in London and Connecticut might have been receptive to the idea of renegotiating those bonuses in favor of new contracts -- contracts that increased their base pay but tied their bonuses to success in reducing future taxpayer liabilities at AIG.

Unfortunately, none of this seems to have occurred to Eddie "Good Hands" Liddy, the former Allstate executive who was supposedly brought in to dismantle AIG and sell it off in pieces for the benefit of the taxpayers and creditors. So far, all Eddie seems to have served up is a litany of complaints about what a bad hand he was dealt.

A tougher and more creative executive, I suspect, could have found a way to quickly sell off the healthy insurance businesses and the valuable AIG franchise, even if it meant persuading the government to finance the deals or offer some risk-sharing arrangements.

A more hard-knuckled executive would have gone to the counterparties of those derivatives contracts and suggested that it would be a real shame if AIG were forced to file for bankruptcy, and offered some sort of workout.

If nothing else, he certainly could have been more upfront with his new owners -- the taxpayers -- about not only the bonuses but also the identity of the counterparties to those derivative contracts, who were the indirect beneficiaries of the government's bailout.

Instead, Eddie has not only left us wondering whose side he's really on, but also, because of the bonus backlash, he has managed to put the entire financial rescue effort in political jeopardy. That's harsh criticism, I realize, especially for a respected business executive who volunteered to leave a comfortable retirement to take a $1-a-year job at the request of his government. But at some point you have to ask whether we've hired Gary Cooper for a role better suited to Clint Eastwood.

Liddy is hardly the only one on Wall Street who can't quite grasp the idea that extraordinary times require a different way of doing things.

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