The Right Way to Handle AIG

Yesterday the President compared AIG to a suicide bomber. They're threatening to blow up the world, and defusing the bomb they are strapped to is more important than justice right now.

The analogy angered people. It should. But you can't let that anger rule you. As I said yesterday you can't be a lynch mob.

Firedoglake lumps AIG in with everyone else as "banksters" (rhymes with gangsters) and suspects everyone of being in cahoots. Especially the financial press.

I don't see a legislative solution to the immediate problem either. The bonuses are like a shiny bauble. They are pretty to grab, but irrelevant.

Let's start with what happened. AIG went into the Confederate Money business, legally, guaranteeing payouts it lacked the capital to make. By last March it was obvious to AIG management that the market was turning against them, and that's when these "guaranteed bonus" deals were negotiated.

The deal was, you stay at your desk, you unwind these trades, and when you are finished here is your bonus. We'll look at it all again later, and give you a bonus if you have to stay out the year.

The trading desk guys (and that's what our targets are, not management but highly specialized labor) wanted guarantees that AIG would make good, that it wouldn't throw them to the wolves if things got really rough. AIG complied, even after it went belly-up. The trading desk kept up the pressure, and continues to keep up the pressure. They control the book of business, they could (if they wanted to) walk across the street and trade against it. They want their money.

OK. They get their money. But instead of legislation, instead of Congress yelling at them in public, we need each of these guys to have a little chat with a U.S. Attorney. Separately. Privately. The Fed guy accompanied by someone from Interpol. (Oh, and the most important pending appointment of the new Administration is the successor to that attorney, Lev Dassin (left)).

Here's the deal. You unwind these things and you can walk away. You mess around, in any way, and we're going after you. We will go easier on you if you rat out a colleague who tries to bolt or do us dirty, so keep your ears open and your mouth shut. If this conversation leaks, even in the office, we'll go after you and take every cent from your family. Everywhere in the world. No place to hide.

By unwinding I don't mean pay them off. We have pumped about $100 billion into AIG and the size of their Shitpile has dropped $1 trillion in response. If we can prop up the housing market (Helicopter Ben to the rescue) maybe we can limit our exposure on the remaining $1.6 billion.

Contrary to what you may have thought after reading yesterday's piece I'm not assuming the good will of the traders. I'm not assuming the good will of anyone. But the crimes of 1999-2008 were not crimes under the law as it applied then, and while we can investigate it I don't think that we'll come up with anything. It's what happens going forward we can control, and that's where we need to focus, with every legal weapon at our disposal.

When someone is on a building and threatening to jump, you get a negotiation going, but you also have the fire department downstairs with a net. You clear the streets, you contact everyone who might influence the jumper, and when they come in you deal with them at your leisure.

That leisure will include in-depth investigations into all AIG operations. Anyone who was a top executive at any AIG unit over the last decade needs to be concerned. The whole financial industry needs to be investigated and any criminal activity dealt with by jail time.

We also need to make clear to those traders or bankers who are thinking they can go across the street from a bailed-out firm and use what they know against it, or go back to doing what they were doing, that there is no such place.  Not in America, not in Europe, not in Asia, not in the Caribbean. Not anywhere.That's what the coming G-20 meetings need to be about, making that guarantee of no safe haven real.

We also need to do with insurance what the SEC did with securities trading in the 1930s. That too must be a global operation. The present contracts have a limited life span, and future contracts need to be written on a different, more sound, and more transparent basis. That regulation, too, must be worldwide in its reach. Close the loopholes that let people run off to the Caymans, to Switzerland, or to the Turks & Caicos. Use the full force of the military to enforce those orders.

There is plenty for Congress to do. But it should do what Congress does, legislate, and not act as a preening lynch mob. There is also plenty for the Attorney General (right) to do, and he should do that.

But quietly.