Greed’s not the real issue at AIG

The outrage over the $165 million in bonuses paid by American International Group Inc. last week misses a key point.

The outrage over the $165 million in bonuses paid by American International Group Inc. last week misses a key point.
It goes without saying that the payments — coming from a company that is 80% owned by the taxpayers and that has received nearly $200 billion in federal bailouts — are outrageous, especially as the recipients helped create the mess.
And, of course, the payments have provoked a public outcry, led by the usual finger-pointers: New York State Attorney General (and likely gubernatorial candidate) Andrew Cuomo and Rep. Barney Frank, D.-Mass., who pushed sub-prime mortgage creation despite warnings of the consequences.
But as everyone gets in front of the cameras to ask “how could they?” and “how dare they?” let’s not lose sight of the fact that we already know how they did it and why they did it: They could.
Simply put, executive corporate compensation is out of control, with dire consequences for everyone, including the real heroes of American business, entrepreneurs, who get tarred along with the phonies at giant corporations.
What’s the solution?
Well, those of you who are convinced that I’m a regulation-loving media pinko (see some of the comments regarding last week’s column on CNBC) may be disappointed to learn that I don’t think more regulation is the answer. Nor do I believe that railing against greed will do the trick, although a little public shaming wouldn’t hurt.
Greed, to borrow a line from “Wall Street’s” Gordon Gekko, can be a force for good. It motivates risk-taking and investment, which can produce wonderful results. But most times, greed is held in check by a countervailing human impulse: Fear. Even in the absence of laws preventing piggish behavior, we all know what happens if we bite off more than we can chew — we get sick or choke.
The reason nature doesn’t rein in corporate greed is that corporations are unnatural. They are creations of government in which ownership (shareholders who are treated like sheep) is divorced from control (management).
Unlike businesses where owners have their wealth and reputation at stake, corporate executives are playing a “heads I win, tails you lose” game. They pretty much set their own pay and typically run things to make sure their interests are protected, and if they screw up they still leave with a huge pot of money. Their greed works for them, but not so much for everyone else, as the way entrepreneurial and labor greed are channeled by the marketplace.
So what’s the answer?
We’ve got to encourage and expand smallness and management ownership, and de-emphasize public corporations.
The current financial crisis affords a wonderful opportunity. Since the government already owns vast stakes in financial companies and stands willing to prop up the system, let some of the bigger institutions fail. Instead of one gigantic unmanageable Citigroup, for instance, there could be dozens of smaller, more nimble and profitable institutions.
Investment banking was always a relatively small business, consisting largely of partnerships in which brains took the place of limited capital. As a result, few investment banks ever made crazily risky bets with their capital and instead formed syndicates to spread out the risk of larger deals.
We should bring back the best of that model in many areas of the financial business.
Certainly AIG could use a dose of smallness. Now that we own most of it, let’s auction off the parts.
Private-equity firms would be likely buyers. With lending stalled, private-equity firms also could use the tons of capital at their disposal to actually run the many businesses they buy, as real owners (treating management like the employees they are) instead of treating the businesses as baseball cards to be traded.
If we think creatively, we can put greed back to work.