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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Bush and his croonies put us in this mess. Now President Obama has got to find a way out of this mess. My suggestion. Individuals who make less than $ 50,000 a year pay no taxs on anything. People making more than $50,001 pay a gradually taxs of 10% and increments of $50,000 takes you to 10% more until 50% tax rate is reached at those making above $250,000 per year. Instead of giving the banks the money give the people that lost their money through these fraudlent schemes there money back by taking it away from those who have committed the acts. Also lift the rules of investments because individual don’t control what or how they invest. They have to go through some investment firm whether it’s local or internet based. Oh yea get rid of the people who put the company, bank, or etc. In the situation they are in anyway because it they did not manage it correctly the first time what makes you think they will do it the second time around???

Posted by Annette Rusher | Report as abusive

How refreshing to read something truthful and sensible in the printed media!
The “side-show” should start examining their own hypocrisy and get back to the
business of representing THE PEOPLE! Thanks you, Diana!

I see nothing in the panoply of bailout measures taken to date and yesterdays FED’s decision to pump another $Trillion or so into the credit pipeline that will do anything to restructure the economy. These steps are all pallative, designed to get the Americans spending again — i.e; continuing our addiction to cheap credit and cheap imported goods. When was the last time, my fellow pilgrims, when you bought anything serious Made in America or Made by Americans? Our political leadership is bereft of new economic thinking, our business and financial community spoiled, lazy and corrupt. We’re headed for a prolonged world depression because we can’t stop repesting our self destructive behavior.

Posted by ron nicholson | Report as abusive

You blame the administration in this day and age when roughly a year ago, yet the Republican administration also gave them a federal bailout with no strings attached.

It’s funny how your argument consists of this quoted from you:

“Better, the government should get out of the business of rescuing ailing companies. The bailouts have won little support among Americans.”

I would agree to that, but where was the public outcry in this a while ago when the bailouts also happened in the previous administration?

Posted by J. Adamson | Report as abusive

But there is one problem with this argument. Didn’t many auto workers agree to a contract last year, and were later forced to have that contract amended once their corporation accepted emergency federal loans? Why is there a double standard between blue collar workers and white collar traders?

So this ‘it would be unwise for the government to go back on the contracts’ is pure bullshit.

While the Congress is “Fuming” over bonuses it “didn’t know about” from a partly private company, Fannie and Freddie are getting an apparent free pass to provide the same type of bonuses and even telling us about this upfront. There is no truly private portion of either of these 2 companies which, amazingly enough, have been even greater failures than AIG. This just goes to show that the show trial is exactly that. If the public ever gets angry about Fannie and Freddie in mass, then we should see some more outrage by congress over these bonuses that will come as a “complete surprise.” When Congress gets off its spending high, maybe we can see some real economic improvements.

Posted by Thomas L | Report as abusive

The writer is affliated not only with the past neo-conservative government but also with the Hudson Institute. Both are known for their laisse-faire “markets are free” ideology.

Unfortunately the markets are not free, nor they have ever been. Also, Diana has carefully avoided the word “executive” in her writing.

This is not a rational article that presents why the Executives should get the bonuses. It also presents Congress intervention in this lunacy as “micro-management”. A bonus as the rest of us understand is awarded when you are successfull at your job, not when you sink the company to the ground. Since there is no success, and since this money is coming out of taxpayers pocket, there is no “bonus”.

The issue at hand here is disciplining the “Executive Class”. The executives have created for themselves an alternate world, seperate from the rest of the economy. Which would have been fine, but like a parasite they require the rest of the economy to survive.

In no other job would you be utterly incompetent and still get a bonus as stipulated by your contract. While the rest of us are in constant danger of loosing our jobs due to the incompetence of the Executive Class, the Executive Class runs no risk in anything. Who else in our present economic environment can get to make such contracts?.

There has been a regime change, and these guys are going to learn to live the economy as we live it. Wellcome to your new life Diana. Just like the rest of us, you can get fired, jailed or have your income taken away.

No more immunity for the Executive Class, welcome to our world.

Posted by Ron | Report as abusive

It is obvious that the last administration left some landmines for the current administration and AIG bonuses is probably just the first one. When we look at the AIG payouts I think we will see the next one. Contracts can be modified. But, I tend to go along with those that say we should not give out anymore bail out money to corporations. As 80% owner of AIG I think the President has the power to fire and hire and restructure the corporation into many smaller entities. It is in an oligopoly, I mean it is a TBTF. And the government has broken up companies before. AIG, even if we allow the bonuses, is still in serious trouble if this administration wants to deal it out.

You know, it would have been easier to swallow if the Corporate Aristocracy would have come out and publicly apologized and admitted they screwed up. But these arrogant corporate executives honestly believe they still deserve compensation for their continued roll in this debacle.

Granted I disagreed with the TARP proposal and I didn’t like the stimulus package which gave to little to the people and created way to few new jobs. I am of the idea that it will take consumer spending to turn us around and that using tax money to temporarily build up the safety nets, create a WPA style of jobs for the unemployed, and make sure people have a place to live other than tents on the outskirts of cities, would have put more money into consumer hands than TARP ever could. Let’s face it business comes and goes. As big business fails, secure wealth buys up the assets and continues on. People, in the meantime starve. Let’s hope this administration stops the show and starts focusing on the People.

Posted by B.Free | Report as abusive

We are giving treasury officials too much credit – hah – on their knowledge relating to many issues. AIG demonstrated tremendous audacity approving these bonuses. I want to know which government officials will receive kick backs so these bonuses will go through. I want to know where the pipeline of cash is between the treasury and all of these committees. There is a big pool of cash. The likelihood of abuse is almost 100 percent. So which guy in a suit should be sentenced first. Haul away their friends and family, put them on an island, and let them eat their own offspring. If that is too extreme, fine just take away their bonuses.

Posted by Don | Report as abusive

Thoughts:

1. The gov’t needs to keep its word to the AIG folks (including, quash the politico grandstanding just to get the spotlight – and calling for folks to commit suicide – since when is that appropriate??). This practice of going back to punish/reneg on agreements without any regard to legal contracts will only create instabilty in the markets since no one will have any ability to measure the risk of where they put their efforts and assets. The result being everything halts.

2. I have no idea why the popular thought is everyone who is rich caused this and needs to pay. Basically, if the millions of folks who signed documents promising to repay loans for the houses they bought, we would not be in this mess. Both the lenders and the borrowers were off the reservation thinking that housing would go up 10% a year (which it never had) indefinitely (which it never has) – and the unfair result is that everyone who DID NOT partake in the housing market is now being punished for no reason. Agreed however, that the tax system is highly skewed to favor the rich and super-rich and needs to be reformed so its clear (as it was when income tax was first insituted) that the taxes are coming from what can reasonably be deemed amounts folks dont otherwise need to ensure for themselves and their families but can allow for investments which are a benefit for the country as a whole (public free quality schooling for all perhaps???).

3. Pretty sure the auto workers had to change their contracts in order to get the rescue funds in the first place – not that they had to change them after the funds were already given and utilized by auto companies.

Posted by rbsjr | Report as abusive

A retroactive breach of a contract is a terrible practice for Congress to endorse. The retention contracts have been public knowledge via SEC filings and the Fed’s status on the AIG Board on compensation committees for almost a year. It is hard to agree with the payments, but much worse to let Congress run grandstand to deflect its lack of oversight. Who believes anyone in Congress actually reads the legislation it votes on?

Posted by rb | Report as abusive

You say that we should not appear to be like Russia. Well the hell with that. What has been happening lately across the board is what eventually leads to a government’s demise. It has been said that we are a country of laws. Well I’m sorry, but the hell with that too. It is all of you complacent rule followers that helped to get us into this mess in the first place, by being constantly “nice” and “politically appropriate” with people. It allows “criminals in their coats and ties”(to quote an old Bob Dylan song) to do whatever they want. What this country may end up eventually needing is a dictator. Some of you people need to read your history books.

Posted by Juan R | Report as abusive

“But there is one problem with this argument. Didn’t many auto workers agree to a contract last year, and were later forced to have that contract amended once their corporation accepted emergency federal loans? Why is there a double standard between blue collar workers and white collar traders?

So this ‘it would be unwise for the government to go back on the contracts’ is pure bull$#1t.”

Posted by Dhalgren
_____________________________

It’s not double standard, it’s different circumstances.
The UAW contract modification was one of preconditions of the bailout. The alternative was Chapter 11 and, inevitably, the whole contract being completely thrown out by the bankruptcy court. And the bailout was provided in form of a loan as opposed to the government taking an equity stake.
AIG is not in bankruptcy, and evidently no one in the government wants it to go that way, not when the government already owns 80% of its equity and an unsecured loan on top of that. So there’s no legal way for AIG to renege on contractual responsibility to pay the bonuses (please read Diana Furchtgott-Roth’s post again, and carefully, if you didn’t get it), no matter how preposterous these payments look from ethical point of view. Or there wasn’t until the Congress enacted this legislation, to be applied retroactively, and targeting these particular payments. I thought that only the Soviet Communists were capable of such a feat (not even Putin! – he still has to make sure his actions at least on the surface look legit). Doesn’t Congress have anything else to do? And if they legislated this retroactive tax, why don’t they legislate that all bonus recipients must commit Hara-Kiri, as one Senator suggested?

Posted by Anonymous | Report as abusive

I wonder how many people in that 53% who do not approve of bailouts took out ‘liar-loan’ mortgages where the house they bought could not possibly be supported by the real income.

I noticed that AIG is still shilling (advertising) it’s insurance products. Perhaps some of the big brains at AIG could have figured out that giving bonuses to people who bankrupted the company is not a good way to inspire confidence among its customers. A contract can be voided if the assumptions underlying it prove to be false, or a material change in the business (i.e. bankrupt status but propped up by government money).

The bonuses were a contract between AIG and its employees. Even the historically myopic UAW is seeing the light and displays a willingness to save something by offering post-contract concessions to the automakers. The bonuses at AIG should be seen in the same light.

I love the 90% tax on bonuses given by companies that receive bailout funds is really going to hurt those guys at Goldman.

Posted by Robert | Report as abusive

I think it’s time to systematically go through the list of AIG executives, start freezing their assets and sentencing them for negligence. They can discuss their bonuses after they get out of jail for wonton lack of fiduciary responsibility, improper disclosure of material evidence and conspiracy to commit an organized crime.

Posted by Don | Report as abusive

Dhalgren-

Your point is uninformed. The auto worker unions were not forced to renegotiate there loans. The basic premise was the auto companies were told they have to have a viable business plan in order to get $. The companies then went to the unions and said “you gotta help us out, and renegotiate the contract”. They did – but they didn’t have to, the unions just didn’t like the alternative, which is the company goes bankrupt and then the contract is subject to change under bankruptcy laws – a much more painful situation for a union.

I don’t know if there is a double standard, but congress could have put any limitations on “future” bonuses they wanted to, but specifically didn’t – and now is running around like a chicken with it’s head cut off. Congress can pass any law they want, and it seems likely they will with this one – but it doesn’t make it constitutional, and in the end even a liberal court will overturn there purely emotional but pointless legislation on this one… at the cost of our taxpayer dollars…

And, B. Free – this is no leftover from Bush days in any way, as much as that refrain keeps coming up (and won’t wear out any time soon I’m sure)- it’s a home grown, completely self created Obama administration and congress event of there own creation, with much more fun to come I’m sure.

Posted by chan | Report as abusive

rbsjr, ever buy a home? Ever hear of a ARM loan? The mortgage companies were on a feeding fenzy with these. Let me tell you why. Rules were changed that allowed motgages to be sold eliminating the risk to the originator. ARM mortgages were sweet since for the first few years all you paid was a low interest and next to nothing in principle. Very attractive to short term investors. Lots of return and the selling point was that it could be converted in a couple of years to a flat 30 year loan. They sold millions. They pushed them on people who really just wanted a flat 30 year to begin with. Couple this with the rating companies giving these mortgages a low risk rating, the Mark to Market accounting change which hit the books hard and the Oil companies stealing over a trillion out of the US economy in just over a year and the housing industry reaching its saturation limit and don’t forget the White House screaming the sky is falling and you have a big PoP! Now it is being fueled by millions losing their job.

Not everyone that signed that document went into default causing the crash. It was the otherway around. Industry greed caused the crash which caused the people to default.

Posted by B.Free | Report as abusive

Union of Auto Workers is the reason that auto-makers are in trouble. BLUE COLLAR? $55/hr is not a “blue collar” salary, which is what they agreed to drop the pay minimum to. I am an IT proffesional with a good job and I don’t make near that much. Over-priced button-pushers make for over-priced cars. Simple economics that no one who is pro-Union will ever admit.

Posted by Patrick | Report as abusive

I love the way she makes it sound like the Obama administration signed off on the bonuses.

Personally I wouldent expect Bush and Co to have a moral problem with giveing out bonues to a bunch of failures, I mean after all wouldent it all “trickle down” and such?

In short this op piece is a failure….

Posted by eron | Report as abusive

After reading another artical on reuters I was struck by how well the following applies to this thread
“…..the United Auto Workers, had to be renegotiated to cut costs. The union agreed, and the question arises: are contracts with blue-collar workers less binding than those with highly-paid derivatives traders?”
Bernd Debusmann

Posted by eron | Report as abusive