Opinion

The Great Debate

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.

Comments
60 comments so far | RSS Comments RSS

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
 

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