by Jeremy Rutherfurd

Created on: March 25, 2009   Last Updated: March 31, 2009

Early in the morning of March 25 the home of a former head of the Royal Bank of Scotland was vandalized by a previously unknown group calling itself "Bank Bosses are Criminals".

According to the Associated Press story, three windows of ex-CEO Fred Goodwin's sandstone Victorian home were smashed, as was the rear window of his black Mercedes S600, which was parked in the driveway.

Goodwin is viewed by many in Great Britain as a symbol of the excesses of the financial sector, and all that is wrong with the government response to the crisis. He resigned in disgrace after presiding over the virtual ruination of his bank, brought on by a failed attempt to acquire the Dutch financial institution ABN Amro, and bad loans.

In much the same way the U.S. goverment has bailed out AIG, British leaders have propped up RBS - to the tune of 20 billion pounds (US$29 billion). And American outrage at AIG's executive bonuses are not unlike Britons' outrage over the compensation of Fred Goodwin, who was granted a 703,000 pound (US$1 million) annual pension (according to Bloomberg News.

This incident highlights a point that has been missed in recent coverage of the public brouhaha over AIG bonuses. At the end of last year, much was made of the moral hazard inherent in bailing out failing financial institutions.

"If we save these banks after they took such ridiculous risks, we'll just be encouraging more of this irresponsible behavior," commentators howled.

And they were right, of course. (But, as well all know, we've had to bail many of them out anyway.)

What's interesting is that no one seems to have mentioned the problem of moral hazard when it comes to the current controversy over AIG compensation. Taxpayers are furious that their hard-earned money is being used to enrich executives that almost bankrupted their employers and have imperiled the national, even global, financial system.

But it's more than just a question of fairness. One must ask what kind of signal we're sending to future financial-instittion decision-makers.

AIG employees were told upon being hired that they would receive an agreed-upon minimum in bonuses regardless of how they performed. They then proceeded to make excessively risky bets with regard to derivatives and credit default swaps, risky bets that destroyed the bottom line of the company they worked for.

By any measure of performance, they failed on the job. Completely. And yet many of them have been richly compensated.

It's bad enough that laid-off autoworkers who are now temping and others who are struggling in this economy are paying taxes to reward these incompetents - allowing them to live in their pricey homes and fancy cars - but it's worse that nothing is being done to prevent the behavior that caused this crisis from being repeated in the future.

Here's a novel idea: How about telling such employees that if you fail to do your job you get ... nothing?

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