October 09, 2008
AIG and Public Perception
Posted by Lisa Fairfax

Yesterday the Federal Reserve agreed to provide AIG with an additional loan for up to $37.8 billion to help improve the liquidity of its securities lending business.  This amount is in addition to the $85 billion loan from the Fed, $61 billion of which has apparently already been drawn down by AIG.  On the one hand, the additional loan to AIG is just another in a series of steps aimed at trying to shore up troubled companies.  On the other hand, its timing has sparked renewed concern and outrage on the part of the public.  This is because the new loan came just one day after Congress expressed its own outrage and frustration with AIG executives not only for their seeming refusal to admit any wrongdoing, but also for spending some $440,000 on a retreat just days after the federal bailout—called "pretty despicable" by the White House press secretary.  The Washington Post blog is filled with comments about AIG, and the comments are almost uniform in their stinging criticism.  There were at least two overarching concerns captured by the comments.

First, commentators suggested that the Fed’s decision appears to confirm the public’s suspicion that government will provide money to ailing companies without being willing or able to hold management accountable.  Thus, many comments consisted of complaints that, instead of seeking ways to hold management accountable for what Congress viewed as improper behavior, the act of providing additional funding appeared to be rewarding them or at the very least not sanctioning such behavior. As one post noted, “the AIG Executives are probably saying to themselves, ‘what is Congress going to do to us, nothing.’” In this regard, this issue with AIG adds to the perception not only that corporations are being bailed out for their own mistakes, but also that corporate executives feel free to make those mistakes without any fear of repercussions.  To be sure, AIG offered many reasons for their decision to host the retreat.  Apparently the retreat had been planned before the bailout and was aimed at rewarding independent life insurance agents for their successes.  Then too, an AIG spokesperson pointed out that the retreat was important because it rewarded those aspects of AIG that were self-sustaining, thereby increasing the likelihood that they would remain healthy.  Hence, AIG executives did offer some business justifications for the retreat.  Moreover, there may be no connection between the retreat, the companies need for additional cash, and the government's decision to provide that cash.  Yet when viewed together, the decisions feed into the public’s perception that their tax money will be lent to executives who will not be held accountable.

Second, as one person put it, “this is exactly what the taxpayers were concerned about . . . life as usual for the Wall Street executives while we, on Main Street and other streets, suffer the consequences.”  This comment captures two sentiments.  The first is the concern that these kinds of retreats represent standard business practices, even though many—though not all—of those who commented on such practices found them to be problematic.  The second is the concern that such practices will remain unchanged despite the fact that many in the public will have to make changes in their way of life.  Indeed, it seemed that even those who recognized that it may be appropriate to reward people for their service to the corporation had problems with such a reward coming on the heels of an $85 billion bailout.  Initially an AIG spokesperson indicated that several AIG firms planned to go ahead with other social and business events, and pointed out that these kinds of events happen all the time.   His comments sparked outrage because they seemed to confirm the public’s fear that they would be asked or required to tighten their belts without any corresponding tightening on the part of executives.

To be sure, AIG’s CEO said that he would be “reevaluating” the costs of all operations "in light of the new circumstances" underwhich the company would be operating, and in fact apparently AIG now has canceled another scheduled retreat.  Nevertheless, this back and forth with AIG feeds into the generally negative public perception about the bailout, its implementation, and those in charge of that implementation, making it that much harder to restore confidence.

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