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AIG Gets Points For Chutzpah

AP

You have to admit, AIG gets points for chutzpah. You could learn a lot from the people calling the shots at this company.

Seriously.

AIG is essentially a ward of the state.

Management (with the exception of Liddy who came in later) took a healthy, profitable business, poured gasoline all over it and lit a match. The only way to describe it is self-immolation. They've taken over $170 billion in aid from the government. Their company is the poster-child for everything Americans hate about bailing out financial institutions.

Less audacious executives might have been cowed by those facts. Men and women with less nerve might have looked at their situation and seen nothing but hopelessness. The people running AIG saw an opportunity! Get angry at them, fine, but also recognize that there's a lot we can learn here.

From the outside, it's clearly outrageous and totally illegitimate for a company on federal life-support to pay out $165 million in bonuses, with much of that money going to the very people responsible for wrecking the place. And I'm sure that the decision-makers at AIG knew it was wrong, at least somewhere in the back of their heads. They just didn't let that knowledge get in their way.

Think about these bonuses from AIG's perspective. What possible reason did they have to NOT hand out the cash? Worst case scenario? They give the money back. Sure, it's a public relations nightmare, so what? There has to be a point where your reputation is so tarnished that you stop caring about appearances, and AIG got there months ago.

Remember, this is the company that spent hundreds of thousands of dollars on expensive junkets and retreats for its executives after it had been bailed out by the government. They don't care about propriety, they've got their hand in the cookie jar and they don't want to miss a crumb.

You can look at these bonuses simply as examples of unethical, perhaps verging on criminal, self-dealing. Or you can take a more holistic view. I mean talk about perseverance in the face of adversity!

At the end of the day, this whole episode is just "give them an inch and they'll take a mile" writ large. There's a valuable lesson here, and it's better to learn it from AIG than from experience.

If you're in your mid-twenties and you have a job, you're probably reaching the age where your friends start asking you to lend them money. Given how terrible the job market is, I'll bet there's no shortage of people who need to borrow. Don't do it.

You are the government and your friend in need is AIG in this story. Like the government, you don't have much control over what your friend does with their money. You don't have any enforcement mechanism to ensure that you get it back. What AIG teaches us is that once you hand over the cash, your friend has every incentive to abuse your trust, unless s/he wants to borrow even more. A comrade who owes you money is just like AIG.

How on earth are these two things connected? When a friend hits you up for money, that person has to swallow his/her pride and shoulder a whole bunch of shame. In their eyes they've surrendered a boatload of dignity. Often that means they stop caring about their reputation, just like AIG, because it seems irredeemably tainted. And that changes all the incentives.

You'd think AIG's executives would be on their best behavior, but the opposite is true. There's no way for the company to look good, so it has no reason to be good. A friend who asks you for money usually thinks that the very act of asking makes him/her look bad. Doesn't matter whether or not it's true, that's what the borrower thinks. Once you give that person the money, s/he stops worrying about his/her reputation because s/he thinks it's already trashed.

That's a major problem.

When your friends stop caring about what you think of them, they start doing whatever you let them get away with. You expect your buddy to pay you back because failing to do so would damage that reputation. Once your friend stops caring, you get AIG-like opportunistic behavior, because they don't see any downside to it. You think you're giving your pal a reason to treat you better, but more often than not you're actually taking away the strongest incentive the person has to not treat you badly, their desire for your good opinion. In the case of AIG, the company and its employees are truly held in low-esteem by virtually everyone. Your friend who borrows money just believes you think less of him/her, whether or not it's true, but the result is the same.

When the government saved AIG it gave the company an invitation to misbehave. When you lend your friends money you are encouraging them to take advantage of you.

Read what others are saying about AIG on CNBC.com:

Questions? Comments? Send them to millennialmoney@cnbc.com