AIG bonuses are not the problem

And you thought insurance was boring...

And you thought insurance was boring...

It seems the country has gone and gotten itself all wound up about this whole AIG thing. Why do these greedy executives get huge bonuses – paid for by taxpayers – while everyone else is losing jobs, homes and retirement savings? Where’s my fair share, my big fat check? No, not the weekly unemployment check that doesn’t cover my expenses… the $2 million one rewarding me for driving a company into the ground. Give me some of that.

This was my initial reaction, having never worked for a Wall Street-related company or received a bonus with more than three digits. After some research and discussion, I’ve modified my opinion. That’s right, I jumped the fence on this bonus issue and now actually disagree with the populist, reactionist view that’s dominating headlines and inciting threats of violence. (Let’s put away the torches and pitchforks here, people.) The AIG employees should get to keep their bonuses and not be taxed at 90%. Then staff performance should be reviewed, as often occurs when one company takes over another. Those shown to be extraneous employees or poor performers should be let go. The federal government now owns 80% of the company, so AIG employees work for taxpayers now.

This firestorm of jealousy, hate and resentment over AIG bonuses shouldn’t even be happening. The $165 million in payouts ($17 million less than the Redskins signed their 3 free agents for) is small in scale and very much beside the point. Imagine arguing with your wife over a quarter when the bank is coming to foreclose on your house. Congress, the media and citizens everywhere have taken their collective eye off the ball. The president, for his part, would rather be solving problems, but is forced to do damage control. The country has much more important and threatening problems than what is essentially an overblown PR mess.

What are called bonuses at AIG and on Wall Street in general are really deferred compensation. These payouts can be based on company performance, but can also be built into employee contracts (which seems like the case at AIG). It’s part of the understood and agreed upon payment structure for the financial industry. The term “bonus” is a misnomer.

As we all know, 2008 was a bad year for the financial firms and the economy as a whole. Some companies failed and some – like AIG – were bailed out by the government. When an entity takes over a company, it inherits all of that company’s obligations, including compensation agreements with employees. Some have argued that without the government, AIG would have failed and bonus-collecting employees would have been SOL (S**t Out of Luck). This is very true; when companies go away, so too do payouts to employees. I know this scenario well. But because AIG survived – regardless of how – all of its obligations remain in effect. The company (and by extension, the government and the taxpayers) must pay up. That’s the law.

The AIG employees don’t deserve bonuses, but they should get them if that’s how their compensation has been structured. It’s a flawed system, one that needs to be changed. And the government has every right to change it going forward, but not backward. I’d rather endure this bit of unfairness and more than the dictates of an angry, reactionary mob and its elected officials.

A lawyer friend of mine who is closer to this issue weighed in with his opinion. I’ve included it in full below to add some more perspective…

First off, I can’t really speak as to AIG’s system of compensation, but regarding the banks, the term “bonus” is a bit of a misnomer. A “bonus” implies gravy on top of a base salary. But bankers’ base salaries are actually pretty low (relatively speaking), and “bonuses” make up the vast majority of their compensation. It’s not really a bonus, it’s more deferred compensation. Bankers may get a $100K-$150K base salary, and then a fat check for a few hundred grand at the end of the year. So that 90% tax is really killer.

But the main reason why I really hate the 90% tax (other than its dubious constitutionality) is that it’s probably the most reactionary piece of legislation I’ve seen in a long time. It’s based on pure emotion and the need for sh**head Americans to “punish” someone. I was explaining the situation to this guy when I was on vacation, and he asked me who he can blame. I’m serious. He literally asked me if he could blame Barney Frank or Jim Cramer.

I guess if you want to blame somebody, blame the federal government as a whole for their initial bungling when this crisis started. Maybe if the federal government held tighter restrictions on where TARP money went back in the fall, none of this bonus fiasco would have happened. Maybe if they hadn’t let Lehman fail, we wouldn’t be in the s**t that we’re in, because people’s confidence in the credit markets would have been at least partially re-established. Notice that the economy didn’t take a real dip until after last October, and economists have attributed at least a large part of the free fall to Lehman. I haven’t read the bill, but my question is, where does this end? What happens when the TARP funds do what they’re supposed to do, banks are super-profitable again, and everybody is getting nice big bonuses? Is the tax only this year, or is it going to continue in perpetuity? I tell you, if it’s the latter, it really has the potential to f**k New York City — enjoy plummeting real estate values, the erosion of the hospitality industry, etc. I’m dismayed that Charlie Rangel would be so stupid as to sign onto a bill that has the potential to adversely affect his constituents so much.

Are bonuses offensive and unfair and ugly and all that? Yes. Do those guys deserve the money? No. But they’re not the problem. The problem is opening up the credit markets, and the government is d**king around with retribution and blame when they could be fixing the economy.

Anyway, to get back to your original question, the government cannot and should not be in the position to invalidate private contracts. There are theories of contract law (i.e., the principles of equity) that may entitle the government to successfully challenge the employment contract, but it’s a real slippery slope that the government should not start to slide. The government holds an equity stake in the companies it provided funds — when was the last time you saw an individual stockholder successfully overturn a contract that was signed before the stockholder made its equity investment? (My answer: I don’t know, but Corporation Law 101 says that when an entity buys equity in a company, it assumes all of its debts and obligations).

So, this whole thing is an emotional reaction to a failure of oversight, and the need for opportunistic politicians to boast that they “took on Wall Street.”

Be Sociable, Share!
If you enjoyed this post, make sure you subscribe to my RSS feed!

One Comment

  1. Tina wrote:

    Agreed. I hope your post gets lots of attention.

    Tuesday, March 24, 2009 at 8:46 am | Permalink

2 Trackbacks/Pingbacks

  1. […] Jobless and Less created an interesting post today on AIG bonuses are not the problemHere’s a short outlineAnd you thought insurance was boring… It seems the country has gone and gotten itself all wound up about this whole AIG thing . Why do these greedy executives get huge bonuses – paid for by taxpayers – while everyone else is losing jobs, homes and retirement savings? Where’s my fair share, my big fat check? No, not the weekly unemployment check that doesn’t cover my expenses… the $2 million one rewarding me for driving a company into the ground. Give me some of that. This was my initial […]

  2. […] Jobless and Less created an interesting post today on AIG bonuses are not the problemHere’s a short outlineAnd you thought insurance was boring… It seems the country has gone and gotten itself all wound up about this whole AIG thing . Why do these greedy executives get huge bonuses – paid for by taxpayers – while everyone else is losing jobs, homes and retirement savings? Where’s my fair share, my big fat check? No, not the weekly unemployment check that doesn’t cover my expenses… the $2 million one rewarding me for driving a company into the ground. Give me some of that. This was my initial […]