On AIG and Autos

On AIG and Autos March 18, 2009

Remember what the AIG Financial Products division actually is: it is the unit that brought down the company. It did so with almost Madoff-style hubris, basically writing huge insurance contracts for CDOs with nothing to back them up. It got away with it because it used unregulated credit default swaps. And now as those assets continue to go south, the taxpayer must keep piling in money. In my view, the instigators of this scheme deserve jail, while in fact they are getting enormous bonuses. To be fair, the outrage about this is near unanimous, and seems broadly bipartisan. But still, there is a general fear of interfering with “contracts” and the way the “market” determines salaries.

Now consider auto workers. In response for federal funds, the auto companies were told to slash benefits to workers. The contrast is stark. The Church teaches that workers have the right to “a pension and insurance for old age, sickness, and work-related accidents” and that all have a right to health care. And yet, the fact that the companies were granting these rights to their workers drew the ire of many, especially on the right, when the companies became the recipients of federal funds.

Interesting, isn’t it? There is a lesson here, I think. In one case, it’s the “free market” determining compensation, and so the outcome is accepted. In the other case, it’s the union forcing companies to pay above market compensation, which clearly must be harmful. I think Pope Leo had it right more than a century ago: the correct way to see it is through the lens of justice, and that means the relative power of the different sides.

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