A show trial for AIG?

March 19, 2009

 Diana Furchtgott-Roth– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have been raking AIG over the coals in hearings and speeches for paying employees bonuses totaling $165 million. But today’s Los Angeles Times reports that the Treasury Department specifically agreed to the bonuses in a 586-page agreement signed on November 25. The deal allows AIG to pay out bonuses for the 2009 year that equal bonuses paid for 2007.

It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff. What is puzzling is why the administration pretends not to know.

According to documents from AIG, the bonuses are compensation owed to employees under Connecticut law. Under the Connecticut Wage Act, the company said, if the bonuses are not paid, AIG becomes liable for legal costs of employees who try to collect, as well as penalties that could equal twice the bonuses owed. AIG might also leave itself liable to shareholder suits.

Despite the show trial in Congress and the sense of public outrage, it would be unwise for the government to go back on the contracts and sue to recover the money, especially when they agreed to it in November. This could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.

Members of Congress are also discussing emergency legislation to tax away part or all of the bonus. This would set a precedent—corrupting if not unlawful—of using the IRS and the tax code as weapons of the state to go after individuals whom the administration and Congress want to punish. Such sanctions might amount to ex post facto punishment, legislation that makes unlawful behavior that was lawful when it occurred. The Constitution prohibits such legislation. Even President Nixon, who had an enemies list, never dreamed of this.

The wave of public sentiment against the AIG bonuses presents the government with a choice. It can try to run companies that receive bailout funding in a way calculated to win public approval, micromanaging every detail. This is impossible, because the government cannot even manage its own federal agencies efficiently, with episodes of wasted resources surfacing regularly.

Better, the government should get out of the business of rescuing ailing companies. The bailouts have won little support among Americans. In a CBS poll published on March 16, 53 percent of Americans disapprove of the government giving money to banks and financial institutions even as a way to help the economy and only 37 percent approve.

When TARP began in early October, it was supposed to resolve the problems of the financial sector and avert an economic slump. In late September, President Bush warned that if a bailout bill did not pass: “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. “

Even though TARP passed, 28 more banks have failed, the stock market has dropped by almost one-third, and median home prices have declined by 9 percent. It’s natural that Americans have become disillusioned.

The attack on AIG is being used by the administration and Congress to bolster sinking approval ratings and hide the failures to date of the $700 billion TARP and the $787 billion stimulus package, as well as their lavish future spending plans: the $275 billion housing bailout plan, the $634 billion health fund, and higher individual and carbon tax increases. The outrage would be put to better use abandoning bailouts altogether.

60 comments

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The $165 million in retention paid by AIG to employees has been played up to distract our attention from the roughly $50 billion AIG paid to Goldman Sachs, Deutsche Bank, Merrill Lynch, Société Générale, Calyon, Barclays, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, Lloyds Banking Group, and other.

Posted by P. Rankin | Report as abusive

“It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse.”

* * *

From the website of the Federal Reserve:

Release Date: September 16, 2008

“The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.”

“The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets.”

The NY FED “loaned” AIG $85 Billion to AIG, not the US Treasury.

From the former FED Chairman, Alan (Bubbleboy) Greenspan, during an interview with Jim Lehrer:

Jim Lehrer: “What is the proper relationship…what should be the proper relationship that should exist between a Chairman of the Federal Reserve and a President of the United States?”

Alan Greenspan: “Well… first of all, the Federal Reserve is an independent agency, and that means basically that…uh…there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration, or the congress or anybody else is requesting that we do things other than what we think
is the appropriate thing, then what the relationships are…uh…don’t frankly matter.”

* * *

“…don’t frankly matter.”

Something is rotten in the state of Denmark, and all anyone can talk about is Hamlet’s shoes.

Posted by Baron von Lufthoven | Report as abusive

Ok, my point was that both the Democrats and the Republicans contributed through Policy and Law to the collapse. Even more so did the greed of the Corporate Aristocracy. Are you trying to tell me that the industry didn’t see the housing bubble for what it was? This is not the first time this has happened. They couldn’t see that these instruments they were pushing on the public were going to go south very fast once the bubble burst. I think that is naïve. The Corporate Aristocracy was informed. In their arrogance and greed they pushed forward gambling that the fed would bail them out, if the worst happened. There was precedence.

Now, unless Congress steps up to the plate and provides security to those who are losing their jobs, this depression will drag on. And, the worst is yet to come. I give Obama the benefit of the doubt. He was not pleased with the Democrats in Congress or with the stimulus package but, it appears he felt it was better than nothing. I think Obama has stepped up to the plate. But the Executive office does not hold the purse strings and this depression is not going to be turned by policy. It is Congress’ turn to do the right thing and stop playing games. There are a lot of things that need to be done but number one is to get the money into the consumer’s hands and increase their spending.

It is sad that this commentary seems to defend the Corporate Aristocracy. More than any other group in this country they are the most responsible for the current debacle yet they seem to not only retain their jobs but seem to believe they are entitled to bonuses. The arrogance is absolutely jaw dropping.

Posted by B.Free | Report as abusive

Just remember when you are baying for blood via reneging on agreed contracts, if you get what you want in this instance, what is to stop your employees or your Government from doing the same to you?

Posted by nick | Report as abusive

This is a joke, right? What exactly do you mean then by “bonus”? A “bonus” for ruining the company and destroying the lives and assets of all the people who trusted AIG? NO! A bonus is only paid for extraordinary and positive accomplishments, not the opposite.

For all who are arguing that the AIG managers must legally be paid are fooling themselves. If they must be paid, then it is a salary and if not a bonus is just like a tip for good service. The US government allowed bonuses for GOOD work, but the nobody would and could successfully argue a bonus should be paid for mismanagement and stupidity!

Posted by Eric | Report as abusive

I think any rational moral human being is totally fed up with the pathetic media rhetoric and manipulation about these failed financial monoliths … with CEO saying if denied their bonus $$$ they will jump the Titanic and move to the Hindenburg ,,, this mindless ego crap is what created this global disaster … it is becoming sickening to watch the masquerade of madness.

if the governing bodies don’t get tough and clear out these fools and the trash behind them we’ll see the darkest days the world has ever known.

stop the lies and buck passing please … the solution is easy … cause and effect of actions .

you caused the damage .. no fix … end of game .

bury these fools now .. re-structure and organize before they take us all down … new positive energy to fill the vacuum … I’d say there is a 3 month window to make the changes before a total collapse .

do the calculations .. hard decisions and move quickly … a common consensus on viable salvage or corperate scap yard.

the snow job has come to an end … change or crumble to ruin.

Posted by Harry | Report as abusive

Architects of the greatest economic collapse SHOULD NOT be rewarded. Is the world full of fools? You would think so when it concerns the opinions of those who think that breaking the US treasury is o’k. If the US government alongside the FED did not take the stance as the ‘lender of last resort’ all of these firms who have recieved bailout money would be in the same state so Lehmen Brothers, worthless, NO money, NO bonuses. Contracts are NOT enforceable on a bankrupt corporation which has no money. HOW MUCH CLEARER CAN THIS POINT BE MADE? It doesn’t matter which piece of the whole forced the company to be worthless.

It is pathetic to see self labeled ‘white collar free marketeers’…those who place their flag on the ground of private enterprises sovereignty while making claims on public moneys and then ridiculing the acts of government bailouts. Only the baby boomer generation could be so dilusional…perhaps it’s the residual LSD which can concieve and then believe in this crap. With our leaders floundering on articulating why those involved in this fiasco should not only have their rewards stripped away but be thrown in jail as well. Perhaps we should throw the SOB’s in Guantanamo Bay and let our military deal with them. The people responsible for this…who attacked our nations financial sovereignty should be treated as terrorists. Not only should their ill gained rewards be stripped away but an actually PUNISHMENT of these theives should be pursued. When you catch the thief that robs your families grocery store you don’t merely take the money back and say all is forgiven and let them go…this is a lesson that teaches the thief to rob you again.

Posted by Craig Teuber | Report as abusive

Benny

Only partially right.

If the borrower does not repay, the lender takes the collateral and then sues the borrower for repayment of any shortfall. If the lender cannot recover the shortfall from the borrower (whether by statute/law or if the borrower is insolvent) THEN the lender eats the cost.

My point being that I’m not seeing any members of the public acknowledging that if the borrowers paid the debts as they promised, there would be no crisis.

Posted by rbsjr | Report as abusive

People are sensitive to terms like “retention bonus” when I think most of us really do not want these people retained. Also keeping in mind that the average American is struggling to survive, forcing them to subsidize these executive bonuses – to support people some regard as borderline criminals – is inappropriate. Since nobody has already done the obvious, I will go ahead and draw the parallel here as per the Great Depression when people like Ford blamed certain ethnic groups within the banking industry for conspiring to bring the United States and world governments to economic collapse. I feel a lot of these executives might not be criminals or conspirators but just total halfwits who should nonetheless be held responsible for their actions. What is criminal however is their inability to accommodate public sentiment while they press for their contractual entitlements. Nobody said that they are entitled to be subsidized. So it is correct and proper for the government to claw back the payout. Everybody is working very hard to demonstrate a lot of maturity and decorum this time around. But there are these pockets of resistance that can’t seem to get into the program. There is a Japanese saying that the nail that sticks out will be hammered down. My advise to those in the financial industry including regulators and those in the treasury is to blend with public sentiment and accept the fact they must suffer like everybody else. Even more so. Because they caused all of this.

Posted by Don | Report as abusive

rbsjr

I do see your point. And you are quite correct on this. There is another piece to this however. Not only should borrowers have repaid. But lenders also should have been wiser in their lending decisions. Granted the government used law to force institutions to make riskier loans. This whole fiasco is the result of a glorious blending of foolish ideas.

The merchants thought they could just keep sucking money out of the masses for ever. The masses thought that they could just keep borrowing and spending for ever.

The “regulators” were content with giving only the appearance of security without actually doing any work. And the politicians create rules that stifle entrepreneurship and support the current market structure. The government should not engage in attempting to shape the markets. Their job is only to make sure that sound business practices are being upheld in the markets, and that fraud and other such activity is removed.

In this, their failure has thus far been exquisite. I’m only 37 years old myself. And in my lifetime have yet to a greater degree of cluelessness. Past foreign policy excluded.

I don’t know what everyone is griping about with these bonuses. I for one will derive alot of warmth and comfort as I curl up in my newly acquired cardboard box
(very low mortgage rate!) knowing that, just maybe, some of these executives will be able to hold on to their third or fourth vacation home thanks to taxpayer generosity.

Posted by John | Report as abusive

What’s amazing is that everyone is outraged about the bonuses AIG and other TARP recipients are paying, but not at the donations to politicians that these companies are giving. If it’s not right for TARP recipients to give out bonuses, it’s also not right for them to give out campaign contributions to politicians. But you don’t see members of Congress complaining about the contributions or passing laws to give them back. These companies spend more than $114 million taxpayer dollars on contributions and lobbying, according to The Hill (http://thehill.com/leading-the-news/tar p-firms-spent-more-than-114m-on-2008-lob bying-2009-02-05.html.

Diana

Posted by Diana Furchtgott-Roth | Report as abusive

History speaks of USA- throwing away dollars for perspiration but never begs for it back.The current fiasco with the AIG is a laughing matter.Why is Mr.Obama in depression supporting Mr.Timothy G.? Is Mr.Geithner the sole person available in USA? If the treasure secretary accepts his fault then why Mr.Obama interested in keeping him? Is there any cooking in progress or cocktail parties ongoing at the White House backyards? Truth will reveal to us in few days.The USA public was first mislead of 165 million dollars and now the price tag increases for which AIG is not to be blamed at all.

Posted by Peter Vaz | Report as abusive

Benny

Actually, the lenders did not have to be wiser (and for the life of me I don’t remember any public outrage over the mortgages-for-all policies in place at the time, do you?). They sold their loans to investors (including other banks, foreign countries, insurance companies, investment funds, pension plans etc etc) and thus lenders did not hold any risk on any loans. The investors bought the repackaged loans by the boatload and thus they hold all of the risk of non-repayment by borrowers, though some of them insured this risk with credit default swaps written up by insurers (for example, AIG). So now that the borrowers are defaulting, the risk is now a reality and these investors (and the applicable insureres) are becoming insolvent.

What the regulators (and politicians that empower them) would have had to have done was to have made it harder for folks to borrow money for houses – for example, by imposing all of the common-sense rules to house purchasing that applies in nearly all cases and can be read in any simple article on the matter: 20% down, at least 6 months living expenses in safe cash deposit, no more than 30% of income to housing costs, buy a house only for long-term living, etc. Do you think any of the voting public would have gone along with that regime? If not, then who is to blame?

Posted by rbsjr | Report as abusive

Diana

EXCELLENT POINT.

That round-trip of tax dollars is heinous and true.

Posted by rbsr | Report as abusive

The author writes that “This [retroactively taxing bonuses] could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.”

This is disingenuous at best. These companies did not “fall out of favor with the ruling elite.” They have secured absurd and potentially unenforceable contracts because they are well-connected politically. They knew that 2008 would be bleak so they locked in bonuses at the 2007 levels! This was a conscious, deliberate, and selfish act designed to screw their fellow humans.

It is about time that those people feared the public. That fear makes them think twice before doing something foolish. Clearly, some big companies can certainly use such motivation.

Posted by DCX2 | Report as abusive

I was under the mistaken impression that the government already has the ability to shut down companies like AIG. A lot of people think that taking an active role in regulating these companies is something that occurs in Communist countries. In fact in Communist countries there are very strong ties between leading companies and members of the ruling administration. So to me we already have a bunch of Commies trying to siphon out cash from the general public. If Geithner would take control of the situation by force, I think that would be a refreshing change of pace. Because right now I don’t know who is cleaning whose shoes, who is on a doggie chain and who is taking responsibility. The oil is only being warmed up. The question is who will boil in it. Does Geithner really want to be read in some history book decades from now as the person who sucked up and messed up rather than help real people through one of the biggest crises in U.S. history.

Posted by Don | Report as abusive

Letter from an AIG Executive. Stand in the shoes of those who are being attacked…

http://www.iht.com/articles/2009/03/25/o pinion/eddesantis.php

Posted by Russell | Report as abusive

Maybe we should take some lessons from the Russians. I’ll bet there are some parts of Alaska that resemble Siberia. AIG fatcats playing with money should be its first settlers. The list shouldn’t stop there, that is just the tip of the iceberg. Lets start with all the other hedge fund managers of other companies bailed out that are getting bonus money thanks to tax payers floating their corrupt businesses.
The whole for profit system at any cost with the assumption that resources are unlimited and any of its continued proponents could also use a frozen vacation.
In short, AIG is lucky they live in a “civilized” country and people are for the most part uncoordinated and disillusioned enough that the public has yet to take action on it’s own.

Posted by Chris | Report as abusive

First AIG is to big to fail. The economic fallout we were told would be a disaster. Now we are told AIG has to be shut down for the same reason. The Secretary of the Treasury asked Congress to give him that very authority. Congress is likely to comply. It is clear no one in government knows what they’re doing. Or at least they are giving that impression. What is more disturbing is the steady usurpation of Congress’ Power to the Fed and the Executive branch. The parallels to Ancient Rome and her Senate are haunting.

Where is Cicero now?

Posted by Anubis | Report as abusive