The Trouble with Bailouts

March 16, 2009

MARKETS-JAPAN-STOCKSSo AIG is honoring its contracts using bailout money. Pundits, sputtering with rage that the corporate world engaged in contractual bonuses, are basically rehashing the argument about whether AIG should have been allowed to go bankrupt. After all, the government decided that allowing AIG to pay its bills was better for the world than letting it break or renegotiate its contracts.

French bank Societe Generale has gone public defending the fact that it got $11.9 billion in bailout funds from AIG. France’s third-biggest bank by market value said it had acted within its rights to call on AIG for cash. This speaks directly to the rationale for the bailout — if AIG had been allowed to fail, a global systemic collapse in payments would have followed.

Keep in mind, too, that if it had resisted paying the contractual bonuses, AIG likely would have been dragged into court, spent millions on legal fees, and then been forced to pay up anyway. However ludicrous the concept of a contractually guaranteed bonus may be, they were legally binding contracts.

So what to do with all this political outrage? The Obama administration has made no bones about building up government task forces and bureaucracy to deal with corporate malfeasance. Would it be too much to expect a new office of contract approvals, where companies can have some of their more bizarre practices exposed to common sense stress tests? Maybe we could require boards to be licensed to enter into commercial and employment agreements, and put the new office next door to the DMV.

Deals of the Day:

* Australia extended its review of Chinese aluminium maker Chinalco’s $19.5 billion investment in global miner Rio Tinto.

* BG Plc moved closer to buying Australian coal seam gas producer Pure Energy Resources for A$1.03 billion ($673 million) after rival bidder Arrow Energy decided to let its offer lapse.

* Astellas Pharma, Japan’s second-largest drugmaker, said on Monday it has decided to withdraw a hostile bid for U.S. biotechnology firm CV Therapeutics.

* Italy’s Banco Popolare will launch a buyout offer for affiliated Banca Italease at 1.50 euros a share and delist it as part of a reorganisation, Popolare and other shareholders said.

* Swiss drugmaker Roche Holding said it is buying Innovatis AG, a privately held cell analysis company based in Bielefeld, Germany, for 15 million euros ($19.31 million).

* HSBC, Europe’s biggest bank, wants to increase its stake in Vietnam’s Bao Viet Insurance to 18 percent despite tough global economic times, a senior company official said.

* German graphite specialist maker SGL Group said on Monday that BMW shareholder Susanne Klatten, Germany’s wealthiest woman, owns options to lift her stake in SGL to almost a quarter of shares.

* Norilsk Nickel is in talks to sell its Cawse nickel operation in Western Australia to exploration firm Poseidon Nickel <POS.AX> after suspending all of its Australian operations due to the global financial crisis.

(PHOTO: A man walks past a signboard of AIG in Tokyo March 3, 2009. REUTERS/Issei Kato)

11 comments so far | RSS Comments RSS

The problem with paying bonuses have NOTHING to do with legality. These companies would have all gone bankrupt and then all employment contracts would have gone where? So, you bailout a company and now the same contracts are being held up as a demand for payment? This doesnt make sense and where nonsense reigns, rage will prevail.
Forget the legality – - these are truly defunct organizations that dont deserve anything – - much less a bonus. Take away all the money given and let them collapse.

Posted by Bala | Report as abusive

So what to do with all this political outrage? What can we do? Blog? Americans are ignored by the federal government.

Posted by jason | Report as abusive

The question is whether, having allowed AIG to escape bankruptcy, has the U.S. government sanctioned such business-as-usual practices as handing out guaranteed bonuses and honoring radioactive collateral contracts? That is what AIG is arguing. CNBC suggested this morning that AIG calculated the legal exposure of breaking these contracts would have cost it twice as much as paying them.

Meanwhile, NY AG Andrew Cuomo is subpoenaing the AIG payout info. That should be good for more outrage, and certainly more blogs.


Plan on AIG Bonuses:

GOAL: Get back the bonuses; Get AIG personnel to return bonuses.

OBJECTIVE: Get the names of the AIG people and amounts of each bonus. Then try moral persuasion that each individual should voluntarily return the bonus.

METHOD: Use the following means:

a. Post names, addresses, email addresses, and telephone numbers (FACEBOOK may already have these for many of them. Use REUNION.COM, MYSPACE, etc.)

b. Contact moral leaders where these AIG employees live. This would include list of ministers, priests, rabbi’s, etc. Ask them to contact the AIG employees and urge them to return their bonuses.

c. Organize unemployed people to protest at the homes, business addresses, and shopping places where these AIG employees live, work, and market.

d. Use power of internet worldwide to urge internet users to contact these AIG employees. They can also use their cell phones and other communication devices to contact these AIG people.

CONCLUSION: Based on world wide moral persuasion and public highlighting of what is taking place, I predict many AIG employees will give back these bonuses.

FINALLY, before this plan is implemented, inform everyone what is about to take place, give them 10 days “to do the right thing,” and then drop these individuals from being involved in any of the above.

Here is a golden opportunity to use the Internet and all the communication devices we now have in order to exert moral persuasion. If this works, maybe we can even use such an approach in resolving wars, terrorism, and other threats to our world.


Posted by Joseph Meissner | Report as abusive

Joseph – start with your congressmen and senators. They knew about these bonuses long before this week. Even the President did. This is just an attempt to take everyone’s eyes off of something else. You are being manipulated. You always have been.

ALSo, perhaps all the folks at AIG and their subs should go get jobs with better comapanies so that they can earn their bonuses in peace and quiet and take a large portion of their business with them, making it even more unlikely that you, the taxpayer, will ever be paid back.


How about bringing back Dick Cheney, to have the AIG bonus recipients classified as enemy combatants of the taxpayer, but sell them to North Korea as laboratory specimens rather than pollute Cuba.

Posted by Rageo | Report as abusive

Dear Joseph, All the internet duress that you have suggested will not work with these shameless AIG fatcats. I am sure they were aware of the moral ground before accepting or demanding their bonuses from taxpayers money for the pathetic performance, which brought a great organisation to its knees. These guys should just be fired and the public should create an outrage on any company that rehires them. Let them stay unemployed and eat out of the taxpayers bonus for the rest of their miserable lives.

Posted by Nithya | Report as abusive

Mr. Kaufman,

You conflate two disparate isues, and expect us to take your argument sirously. The assertion that Soc Gen and others have made are only sustainable based upon the systemic risk argument, of AIG’s not honouring those contracts, therefore leading to contagion. That is debatable, but there is an semblence of an argument, for a lender of last resort, in this case us the taxpayer stepping in.

But, for you to then conflate that “forced choice”, otherwise known as blackmail, with these run of the mill employment contracts, as inviolable, is a pure straw-man diversion from the key issue that these contracts are easily deconstructed by aggresive legal practioners. Look around the net, and you will find plenty of legal experts on employment law, stating they could break these contracts. The question for the public is why not try?


Posted by nyongesa | Report as abusive

Whether the few millions get returned is immaterial in a multi-billion dollar problem. The issue is paying people who caused the crisis.

Legally, is the current, tax-payer-owned AIG actually liable for these bonuses? These contracts were signed before the present, post force-majeure, post quasi-bankruptcy, post “act of god”.

Posted by ricardoRI | Report as abusive

A well-thought-out plan of attack, Mr. Meissner. Perhaps this is what Mr. Cuomo is hoping for by getting the names – that public outrage will get organized.

But beware the unnatural laws of irony, if the bonus recipients seek to defend themselves in the law, claiming harassment and seeking restraining orders.


Can we really liken the problems at AIG to an act of god? We call it a financial tsunami, but is this not the most man-made of financial disasters?


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