Blowing Smoke on Bonuses

March 17th, 2009

There’s an interesting article in The New York Times on the AIG bonuses that have generated so much righteous indignation. 

President Obama is outraged, Senator Chris Dodd is threatening to tax the people receiving those bonuses at a 90 percent rate, Representative Barney Frank is mumbling something unintelligible, New York Attorney General Andrew Cuomo wants to subpoena AIG’s records, Senator Chuck Grassley suggested that AIG executives commit suicide, and the company is receiving threats. 

The facts?  The AIG bonuses are meant to keep key executives, and we probably need that to happen.  The bonuses are provided for in contracts that were in place and known to exist before the bailout took place.  The legislation itself provides that existing contracts will be honored.  The amount of money involved is a minuscule percentage of the bailout money AIG received, and it’s small compared to the AIG bailout money that’s going to other businesses, some overseas (money laundering, anyone?).

All of this information is available in the media.  Does the Obama Administration and Congress think we just won’t notice–that we won’t pay attention to anything other than their histrionics?  Looks like some sleight of hand going on here, hoping they can distract us on a relatively trivial issue while their house of cards shudders and shakes and threatens to crumble.

From The New York Times article:

Do we really have to foot the bill for those bonuses at the American International Group?

It sure does sting. A staggering $165 million – for employees of a company that nearly took down the financial system. And heck, we, the taxpayers, own nearly 80 percent of A.I.G.

It doesn’t seem fair.

So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain.

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers’ money. Hard to argue there.

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right. …

…as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Not that any of this takes the bite out of paying these bonuses. For better or worse – in this case, worse – someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear. …

I don’t have much sympathy for the huge compensation packages executives receive, especially those who don’t perform very well.  But I’m not frothing at the mouth over these relatively small bonuses AIG executives are getting, considering the magnitude of the economic crisis we’re in and the growing impression that the Obama Administration and Congress are flubbing it.


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16 Responses to “Blowing Smoke on Bonuses”



  1. Kevin |

    Here’s what I don’t get: WHY do taxpayers need to keep some of these alleged brainiacs in their seats? So what if they turn against the company and take some other gullible company down the financial toilet like they did AIG?

    Seriously!

    What have they done which the staff in the AIG mailroom couldn’t have *** up just as thoroughly and for far less $$$?

    The so-called “credit default swaps” which AIG was so fond of were called “swaps” rather than “insurance” explicitly to avoid regulation. These alleged “brainaics” at AIG work for the largest INSURANCE company in the country. They knew what the *** they were doing.


  2. Brian |

    In a FREE MARKET, no company is so big or important that it should be propped up with money coerced out of taxpayers. Otherwise, let’s dispense with the pretense that we have a free market.

    If the government props up one, it should prop them all. And if it props them all, then by def. they are not operating in a free market. This is not merely semantics. If there gets to be no fear of failure, then there is little or no incentive to achieve and succeed. In a FREE market, businesses are free to soar as high as they can go, and they are also free to shut their doors if they cannot make money.

    Ask any entrepreneur you might know. Most of them have a string of failures under their belt before they finally figured out how to do it. And sometimes, even if they know how to do it, fate seems to conspire against them.

    Believe it or not, a Phoenix really can rise from the ashes.


  3. doris |

    We should’ve never bailed them out, obviously. The problem I have with these bonuses is we are allowing taxpayers money to give rewards for bad, no, terrible business practices. Duh, no brainer, they should’ve had rules before giving out the bailout, better yet, no bailouts, they are certainly not offering me money when I ##$$%% up. I do, however, think since we already bailed them out, so not a free market, so we should and must be allowed to tell them no bonuses, ever, until someone there does something right. Possibly a lot of firings, contract null and void, due to poor performance, a novel idea. If bailout money goes overseas, no bailout, for sure.This money should’ve never been given, but since it has, it needs to be monitored. The bailout police, the whole mess smells of kickback to me.


  4. Tom |

    Doris, you’re sounding like a conservative…. 🙂

    One of the important points made in the NYT article is that these bonuses are based on contracts that were in place and known about before the bailout. If the government starts forcing businesses to default on contracts, the crisis we have now is going to get much worse because no one will trust contractual guarantees of any kind.


  5. Kevin |

    I’m not sure that I can agree with that, Tom. Bankruptcy judges have routinely allowed major airlines, for example, to essentially default on contractual compensation terms with their own unions. I never heard any politicos, least of all union-busting conservatives, complain about it. Heck, they always seem rather happy about it.

    The only thing that’s different here is the government is telling Big Business how much it can pay it’s OWN elites rather than rubberstamping their desire to reduce compensation for the poor schmucks actually putting in an honest days work – while preserving their own fat compensation packages, of course.

    Funny how when left to their own devices Big Business always looks to cut compensation for working class stiffs whenever profitability is in question. They never seem willing to axe their own obese salaries. And even then we see airlines continue to struggle for profitability after having screwed the working stiffs and while the fatcats continue to enjoy all of their luxery perks. For what? Under what objective criteria have they demonstrated any actual value to either corporation or stockholders? None that I can see.


  6. Tom |

    Apples and oranges, Kevin. Bankruptcy courts operate under law to protect debitors, creditors, and others with interests in a person or business that is bankrupt. Sometimes, in that process, contracts cannot be honored fully or at all.

    But that’s a whole lot different from politicians in Congress and the White House running for cover because their failures are catching up with them. People like Dodd and Frank are posturing before the cameras, it’s as simple as that. Congress has too many members with integrity and honesty to permit the passage of legislation that would attempt to invalidate legal contracts. Even if they passed it and the President were foolish enough to sign it, the courts would invalidate it.

    If people like Dodd, Franks, Paulson, and Geithner had done their jobs in the first place, this kerfuffle wouldn’t have happened. And President Obama would be wise to keep his head down. He’s not the chairman of a politburo with the power to invalidate legal contracts and punish selected individuals with confiscatory 90 percent tax rates. As much as some of the leftist ideologues who support him would wish for that, it hasn’t happened. Yet.


  7. Kevin |

    So, rather than the breaking of contracts being a threat as you alluded to before, now it’s whether these particular contracts can legally be broken that is the threat? Clearly, in the example of airline restructuring, the breaking of contractual guarantees didn’t cause a general distrust of contractual guarantees.

    Again, the main difference that I see here is that conservatives don’t mind when contractual guarantees to rank and file workers are broken. Indeed, they largely seem to favor those contracts being broken. It’s only when the fatcats contracts are at risk that conservatives seem to suddenly see cause for concern.


  8. Brian |

    Kevin, the congress and the president do not have the lawful authority to vacate contracts by legislation. They may at some point have the power to do it, but I don’t want to live in a country where that can happen.

    If a corporation files Chap 11 bankruptcy, then the bankruptcy courts settle the contracts as equitably as can be done. And you will know it is an equitable settlement when all, or nearly all, interested parties are upset about it.

    You may not like the way the “fat cats” do business, but you are always free not to patronize their businesses. If you don’t like the way United or Continental did their employees, you can always chose Delta or American, or drive your car. Nobody from United or Continental is going to levy your accounts or lien your properties for not flying with them.

    The same is not true of the government.


  9. Mighty |

    I dont think it is right at all, contracts or not, companies right now in the US are cutting what they already pay their employees (sort of like a contract when they got hired, then breaking it) and tell them that if they dont like it they can quit. Tell the stupid AIG execs that they arent getting their bonuses and if they dont like it, quit. Im sure that there are plenty of young people getting out of college that are smart enough to replace these shysters. No, I dont think they should receive these so called bonuses no matter what! The company is not doing well, so neither should they, period.


  10. doris |

    Funny part is…11 of the employees aren’t even still there. They quit earlier. So, not giving bonuses to keep them? I told you I am confused, part conservative, part liberal??????? I like the best parts of both. Still, I vote no bonuses, no matter how we do it. A lot of them have given them back now, smart move. Public opinion and all.


  11. Kevin |

    Brian,

    Feel free to cite the airline bankruptcy reorganization where the rank and file DIDN’T have their compensation reduced and the executives DIDN’T get to keep their fat bonuses.

    Bankruptcy law is written by… law makers, who recieve generous campaign donations from the kinds of executive who get fat bonuses whether they performed their jobs well or badly. Of course labor unions also give generous campaign donations. Conservatives would end that yesterday if they could… but strangely, conservatives only seem to object to organized labor having any influence, not the executives or their lobbyist pals. Funny how that works…

    Conservatives can’t run from their own very thoroughly established record of siding with the fatcats and against the common worker. I see no reason not to be skeptical of conservative’s proposed solutions to this crisis.


  12. Brian |

    Mighty, most people are hired “at will.” There is no contract, legal or implied, for most employment. The only contractual employment I’ve ever had was when I was a police officer. Most people in this country have never been employed under contract. There is no reasonable expectation of employment by at-will employees. End of story.

    Kevin, the obvious solution is…do away with the patronage system that is in place. It would mean repealing the 16th amendment, but without the ability to reward friends and punish enemies via tax law, congress couldn’t side with anyone and there would be little need of the influence of lobbyists, liberal or conservative. When government becomes powerful enough to “help” one side, there will necessarily arise a movement to “help” the other side. It’s as certain as gravity.

    You picked correctly at door #1 in your article a couple days ago regarding the federal reserve. The inevitable consequence of a monetary system like what we have is the legislation and legislators that we have.

    When legislation decides what can be bought and sold then the first thing to be bought and sold will be the legislators. — P.J. O’Rourke.

    Your ire with the fat cats is misplaced. Direct it at this spoils system. Kill this system, and most of the legislative back room deals will die on the vine.


  13. Kevin |

    Brian, the 3/5th compromise predating the 16th amendment disproves your thesis. Indeed, the fact that the Framers crafted a system whereby only while male land owners could vote also disproves your thesis.

    Those with the gold make the rules.

    Interestingly, the 16th amendment was ratified by 42 of the then total of 48 state legislatures. Only 36 of which were necessary to meet the 2/3rds Constitutional requirement.

    Back to the issue at hand – union contracts are rarily “at will” and thus that is a red herring issue.


  14. Tom |

    Kevin, you lost me. I don’t understand the relevance of the 3/5 compromise. What does that have to do with taxation and the 16th Amendment, which specifically rules out enumeration by state? And there was no requirement for land ownership to vote after the 1820s.

    The fact that union contracts aren’t “at will” is not the point. According to the Bureau of Labor Statistics, “union members accounted for 12.4 percent of employed wage and salary workers” in 2008. The vast majority of the workforce isn’t covered by union contracts, and most aren’t covered by any kind of employment contract. However, that doesn’t mean they aren’t protected by a variety of federal and state laws.

    I disagree with Brian about the 16th Amendment. I think we need a progressive federal income tax. But, it should be less amenable to misuse for social engineering and rewarding favored interests. And, it should be reasonably progressive. The way things are now, the top 1% of taxpayers pay 40% of total federal income tax; 5% pay 60%; 10% pay 70%; 25% pay 85%; and 50% pay 97%. About 40% pay no income tax at all. When that 40% get a tax “cut” they’re actually getting a check payable with someone else’s tax money. This kind of income redistribution scheme is a socialist’s dream come true, but it’s unfair by any reasonable standard.


  15. Brian |

    Kevin, the Virginia Compromise was included so that the constitution could be ratified at all. If it had not been included, then none of the southern states would have voted for ratification and we would have continued under the Articles of Confederation or else completely gone our separate ways. It was not a back-room deal in any way.

    The exclusion of non-property owners as voters was done to ensure that those that voted on the issues had a stake in the pot. You couldn’t sit down to a game of Texas Hold’em with no money, then win the pot after having risked nothing to win it. Property ownership was deemed to indicate a certain level of responsibility. If you weren’t responsible enough to be able to accumulate enough money to purchase property, you certainly weren’t responsible enough to partake of the electoral process.

    Contrast that with today’s electorate, many of whom are barely even literate and can give no consideration to the philosophical ideals used to form this republic. You probably couldn’t find 1 person in 1000 today that have ever heard of Locke or Bastiat, or even of Rousseau. Many, maybe even most, have heard of Marx, and most deride Marx, yet espouse the things for which Marx was an apologist.

    Tom, please do not make the mistake of confusing the words reasonable and agreeable. Taxation of income, while it may be agreeable to many, is unreasonable by any set of consistent ethics. And by consistent I mean a set of ethics which does not contradict itself at some point. Inconsistent ethics are of no utility for they fail to offer reliable guidance on things that should and should not be done.

    If one’s ethics can find that “A” and “not A” are simultaneously true, you have a real problem.


  16. Kevin |

    Tom, the relevance is what Brian referred to as “the patronage system” (viz Congress) which he ties to the 16th Amendment.


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