Companies & Industries

AIG: A Big Early Loss for Obama


The bonus fiasco constitutes a strike, especially because it happened at the beginning of his tenure, says Harvard Business blogger Michael Watkins

Posted on The Leading Edge: March 19, 2009 2:19 PM

The most fundamental guiding principle for making successful transitions is to secure early wins. Early wins are essential because they build the new leader's credibility and create the perception that momentum is building in positive directions. Wins translate into significant deposits in new leaders' political bank accounts; capital on which they can draw to make needed changes happen.

Failure to get early wins is therefore not a good thing. Far worse for newly appointed leaders, however, is incurring significant early losses. Worst of all are errors that make new leaders look simultaneously incompetent (for letting something bad happen in the first place) and powerless (to do much about it once it has happened, beyond expressing outrage).

The AIG bonus fiasco is shaping up to be a significant early loss for President Obama. AIG is not only consuming an unfathomable amount of financial capital, it's sucking desparately needed political capital out of the new administration. And there's no reason to think that the situation can be turned around any time soon.

The reality is that the Obama administration is not to blame for what has happened here. But that doesn't matter, because the optics of the situation are really bad, and the public outrage feedback loop has already been established. At this point no amount of presentation of "the facts" is going to help; in reality, focusing on the facts would hurt, because the public doesn't want to hear them. Also there is little the administration can do to have a real or perceptual impact on what happens next. So it puts them in a terrible bind.

What are "the facts" of the AIG situation?

1. The bonus contracts that are generating such outrage were written in January, when the Obama administration was still in transition, before the new government-approved CEO was installed,and before additional waves of tax-payer dollars were infused into the AIG sink hole. But this doesn't matter because Obama now owns the problem and can't blame the previous administration.

2. The contracts are for retention of "talent" and not a reward for past performance. They were put in place to keep some of the people who presided over AIG's derivative losses from leaving the company. This is important because AIG still has a $1.6 trillion derivatives portfolio with a lot of complexity. If everyone who was involved in creating it leaves, then there is real potential to magnify the losses. The same traders who created the mess in the first place are effectively holding a gun to AIG's head. "We are holding your company and (by the way) the U.S. economy hostage. Pay us $165 Million or we are out of here." So the bitter irony is that the bonuses may actually be good for the country.

3. The only way to really recoup the money is to break the contracts (the proposal to claw back some of the funds given to AIG won't cut it). But the contracts likely are enforceable. Efforts to break them could therefore not only result in key people leaving AIG to seek greener pastures, they could result in court cases in which successfuly plantiffs could we awarded double damages.

4. Finally the hurricane of public outrage is likely to be strengthened by the realization that a big chunk of the money given to AIG is going directly to hedge funds that took the other side of bad bets that AIG made. This is probably necessary to stabilize the financial system, but it's going to be pretty hard for the public to swallow.

So there is no chance that the Obama Administration can both do the right thing and be perceived as doing the right thing. What an awful bind to be caught in.

So how would you recommend the Obama Administration mitigate the potential losses? I will review your responses and offer my own thoughts in the next post.

This post is part of our in-depth look at Obama's first 90 Days in office.

Provided by Harvard Business—Where Leaders Get Their Edge

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