A very good article in The Nation by Sebastian Jones, “The Media-Lobbying Complex,” (hat tip Tom F) has gone peculiarly unnoticed in the blogosphere, which is a real shame. It does some good, old-fashioned reporting to identify 75 individuals who were regularly presented on TV as experts, and by implication independent, when in fact they were “registered lobbyists, public relations representatives and corporate officials–people paid by companies and trade groups to manage their public image and promote their financial and political interests.”
The article is very much worth reading in its entirety, but a particularly interesting revelation is the degree to which AIG was selling its message during the crisis, and the fact that it ratcheted up its lobbying post crisis, which would strike most taxpayers as an abuse. The relevant section:
Bigger players were on AIG’s payroll, too: shortly after receiving its first bailout, in 2008, AIG hired PR mega-firm Burson-Marsteller to handle “controversial issues.” In April 2009, B-M hired former White House press secretary Dana Perino, already an established TV pundit. A month later she was picked up as a contributor to Fox News, where she has had occasion to discuss the economic meltdown.
This past July, for example, Perino joined a roundtable on Fox Business Network’s Money for Breakfast, which briefly noted her affiliation with B-M but neglected to mention its link to AIG. When a fellow guest commented that AIG had been “highly regulated” before the crash, Perino pounced, suggesting that current financial reform efforts demonstrate how “Washington has a tendency to overreact in a crisis.” When Gary Kalman of USPIRG suggested that regulations had, in fact, been rolled back for decades, Perino scoffed, “I don’t think there are many business people who would actually agree with that.”
Yves here. As most readers are well aware, the “highly regulated” part, as applied to the AIG train wreck, is rubbish. Credit default swaps were an almost entirely unregulated product; the unit that wrote the CDS, AIG Financial Products, had gone jursidiction-shopping. Its main regulator, the Office of Thrift Supervision, was chosen because it was seen, correctly, as unlikely to interfere (a single supervisor who did not know CDS oversaw the unit). Similarly, while AIG’s insurance subsidiaries are regulated, the company operates a broad array of business around the globe. To the extent possible, AIG is certain to have domiciled its businesses in countries that offered the best combination of favorable tax treatment and regulatory simplicity for the product in question.
But the bigger point is simple. This is again another example of the flaw of the corporate governance regime in place at AIG. The original structure of the deal was sound: a loan at a high rate of interest. The only objective should have been to get as much of the loan back as possible while preventing a systemic crisis. When AIG was determined to be unable to pay the interest on a current basis, the only modification should have been to lower the proportion due on a current basis and have the rest accrue (ie, be added to the principal, so it would still be repaid when the AIG business units were sold). As part of that plan, AIG’s subsidiaries were to be sold to repay the loan. The concept was at least a partial, and likely a full dismemberment of the firm. Given the incompetence and likely fraudulent conduct of AIG parent, there is no reason for the enterprise to continue to exist, particularly since the operating units are largely independent of each other and make for good sale candidates.
But the original deal maintained the fiction that AIG was a private company, rather than a ward of the state, and the successive retrades of the original deal only served to reinforce that notion. As a result, the senior management of AIG has exploited the flaws in the governance arrangements to embark on its own, unauthorized mission, to keep AIG intact. Since top level pay in financial services is highly correlated with the size of the enterprise, this goal is tantamount to a program to pull more bonus money out of the enterprise.
At a minimum, AIG needs to be put on a much shorter leash. One place to start is to demand a full audit of AIG’s lobbying expenses and activities, both during and post crisis. Any programs that do not support the objective of paying the loans back (ie, supporting revenue generation in a direct way) should be terminated. A company on state life support has no business using funds to support the personal goals of its executives.