Be careful of what you get in partnership

By DAVID MOON, Moon Capital Management, LLC
March 22, 2009

The AIG bonus scandal presents an interesting question. When a business receives a bailout from taxpayers, to what extent should the taxpayers be able to exert managerial control over the business?

It’s bad enough that these year-end bonuses were for performance in a year that the company collapsed, sold itself to the U.S. government and almost brought down much of the world’s financial system with it.

Some of the AIG employees responsible for failed derivative contracts that crippled the trillion dollar company are reportedly among the bonus recipients.

Despite apparently legally binding contracts, there is a call to have the money repaid. I agree. The federal government should be returned every penny of this $165 million.

From members of Congress.

That’s where the ultimate fault lies. Maybe former Treasury Secretary Hank Paulson and George W. Bush should chip in too.

Every time you hear the phrase “federal government bailout of AIG”,” replace the word “bailout” with “purchase.” The federal government purchased 79.9 percent of AIG for cash and commitments totaling $170 billion. Like any business purchase, the new owners also purchased the existing liabilities and contracts of AIG, including the employment contracts that provide for the egregious bonuses.

The core of an insurance business is its willingness and ability to honor contracts.

AIG has hundreds of thousands, or millions, of other contracts, all of which are now 79.9 percent owned by the federal government. These include things like leases, janitorial services agreements and cell phone contracts.

Should AIG be able to walk away from these contracts too? Or should it just be able to walk away from the stupid contracts? Or stupid contracts with people we don’t like?

In this country, there is a process for walking away from financial obligations. It’s called bankruptcy.

That’s what should have happened with AIG, and it should happen with General Motors.

If the Treasury Department, Barney Frank or the New York Times had wanted to make amending certain employment contracts a condition of receiving government funds, it could have easily been negotiated or demanded before the government bailout… I mean, purchase.

If you have a business partner, does he get to unilaterally renegotiate the contracts between each of you as long as he likes?

If your partner is the U.S. government, perhaps so.

No department of the federal government possesses the skill set to act as investment bankers or money managers. A year ago this week, Bear Stearns was the first in a series of recent disastrous examples.

The government’s takeover of AIG is another failure. Its ownership of Fannie Mae and Freddie Mac are economic failures. The newly appointed CEO of Freddie Mac resigned after less than six months on the job, saying it was difficult to run a business when your owner was constantly using your company to try and achieve policy – not financial – goals.

I’m as angry as anyone that my tax dollars are being used to fund these AIG bonuses. It’s immoral. Being immoral, however, isn’t reason enough to ignore the rule of law.

Besides, I’m more than a little offended at the irony of Washington politicians feigning outrage over someone else’s immorality.

As governor of California, Ronald Reagan said that when you get in bed with government, you’re going to get more than a good night’s sleep.

I am afraid we may be headed for more restless nights.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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