Populist outrage over $165 million in bonuses paid out by insurance giant AIG (AIG) has set off a feeding frenzy in Washington reminiscent of the 1789 storming of the Bastille. Everyone from the President to the House of Representatives has suddenly become "outraged"— the politician's favorite new word. With lightning speed the House passed a bill to tax bonuses retroactively at 90% for financial institutions that have received $5 billion or more in government funds.
The object of all this anger is newly appointed AIG CEO Ed Liddy, who earns $1 per year for taking this abuse. But Ed Liddy is no Marie Antoinette. I believe Liddy, with whom I served on the board of Goldman Sachs (GS), is the one person in the country who can get AIG turned around and recoup a significant portion of the $173 billion in bailout funds the government has injected. Liddy is a good man, facing a nearly impossible situation, who has nothing to gain and a lot to lose in terms of his stellar reputation. "Six months ago I came out of retirement to help my country," said the 63-year-old Liddy, who guided Allstate Insurance to great success as its CEO.
The controversial bonus payments were put in place in early 2008, long before Liddy arrived. Liddy's staff informed Federal Reserve and Treasury officials of the pending bonuses several weeks ago. Even the Feb. 11, 2009 stimulus bill included an exemption approved by Senator Chris Dodd for incentive agreements made prior to that date.
Former AIG CEOs MIA
With the public furor unleashed this week, did the politicians and former CEOs involved in this fiasco acknowledge their responsibilities? Not in the slightest. Instead, they stepped aside and let Liddy twist in the wind. Only President Obama, reflecting the outrage ordinary citizens felt about the bonuses, was willing to say, "I'll take responsibility…It is appropriate when you're in charge to make sure stuff doesn't happen like this."
Where were Federal Reserve Chairman Ben Bernanke, Treasury Secretary Tim Geithner, Senator Chris Dodd, and former AIG CEOs Hank Greenberg and Martin Sullivan? All of them were missing-in-action, running for cover, and unwilling to take responsibility for the fiasco.
When the bankruptcy of Lehman precipitated the financial crisis last September, Geithner, Bernanke, and Paulson worked as a triumvirate to keep AIG from a similar fate. Reluctantly, they agreed that the U.S. government would inject $80 billion into AIG, in exchange for 80% government ownership.
Paulson immediately reached out to Liddy to turn AIG around. He was known for his integrity and ability to straighten out complex financial matters. Having retired just months before, he was embarking on a new career in private equity management, while serving on the boards of Boeing (BA), Goldman Sachs, and Kroger.
Ed Libby isn't charismatic or flashy, but he is honest, practical, and solid. While he didn't know the specifics of AIG's problems, Liddy sensed AIG was in deep trouble after decades of its loosely run conglomerate culture and underpricing of risk.
The architect of AIG was Maurice "Hank" Greenberg, CEO of AIG for 37 years, from 1968 to 2005. Greenberg managed AIG's 165 businesses for growth and short-term profitability, instead of financial soundness and solid risk management—the hallmarks of Liddy's Allstate. When a major accounting scandal forced Greenberg's resignation in 2005, he was replaced by longtime colleague Martin Sullivan, who lasted less than three years.
Time to Own Up to Mistakes
Neither Greenberg nor Sullivan has taken any responsibility for the multitude of problems that led to AIG's downfall. Greenberg even suggested that these problems came about after he retired and that he would like to take over the company once again.
The general public is justifiably outraged over compensation payouts for people in companies that American taxpayers have to bail out. Clearly, this bonus problem should have been handled much better in the first place. AIG should have publicly explained its pending bonus payouts when the first tranche of $55 million in payments was made in December.
All of the leaders involved in this fiasco need to own their role in these mistakes, not duck their responsibilities and focus blame on the one person who can turn AIG around. That's what courageous leadership is all about, something that is sorely lacking in the political and business world these days.
Next time around Ed Liddy may think twice about taking a $1 per year job to serve his country.
Bill George, professor of management practice at Harvard Business School, is the author of two best-selling books, True North and Authentic Leadership. The former chairman and chief executive of Medtronic, he serves on the boards of ExxonMobil, Goldman Sachs, and Novartis.