I don’t understand why so many people who should know better are demanding that AIG stop paying out $165 million in bonuses. In particular, I am rather disapointed that President Obama chose to speak out more like a grand-standing politician than view the issue with the perspective of the lawyer that he is (or was).
Sure, I can understand that taxpayers are outraged because they would rather have the bailout money go to shoring up AIG’s capital base rather than rewarding employees. They would rather have AIG start a witch-hunt among its employees to find out who got AIG, and the taxpayers, into this mess. I can understand the taxpayer sentiments, even though I know they are misguided.
But sentiments don’t come into the picture here – AIG has already said it is paying these bonuses because it has a contractual obligation.
In response, people want AIG to tear up the contracts. This, they think, would solve everything.
I hope they really don’t mean to say that. Think about it. If AIG has Presidential approval to tear up some contracts, why shouldn’t it tear up other contracts too, while it’s at it? You know, contracts where it might have to settle with other firms, and so on? And why only AIG? Why cannot every other company tear up their contracts too? Why do we need contracts anyway?
You can see where this is going. If no contracts are enforceable, eventually we can all look forward to living in caves and growing our own food. We shouldn’t even be able to barter, for even that’s really a contract.
Okay, then let’s not tear up contracts. But fire those employees, they say. Then we don’t have to pay them those bonuses. Surely, we can get cheaper labor in the market?
Of course we can, but given how complex all those transactions were in the first place, you will need someone who knows about them to untangle them. If you hire new people, you risk a months-long or even a year-long period where they try to understand all the complexities of the various deals and grapple with them. It is not time we can afford to lose if we want these companies up on their feet – wasn’t that the whole point of the bailout?
Let’s face it – no Wall Street firm, or any other firm for that matter, would like to compensate rank and file employees attractively (CEOs are another matter), unless they have actually contributed significantly to the company’s profitability and are so talented the company cannot afford to shortchange them. Otherwise, don’t worry, they will find ways to shortchange you, however hard you work.
The New York Times’ dealbook seems to be the only sane voice in this wilderness, pointing out these obvious facts.
But even the dealbook doesn’t talk about the next question on people’s minds – if we were bailing out AIG only to have them use some of the money to pay bonuses, should we have bailed out AIG at all?
Of course we should have, because if AIG went bankrupt, half of the financial industry (AIG’s counterparts) would have gone under too..and we’d all be in a deep Depression right now.
But when the government was bailing out AIG and others, did it make any specifications on how the bailout money could be used? Given the recent controversy about asking AIG how it spent the money and so on, I am guessing the government never asked any of the bailout recipients to submit (weekly? monthly? quarterly?) reports about how the bailout money was being used.
In fact, the Washington Post reported in end-January that the Government Accountability Office (GAO) found that bailout oversight was restricted to an inadequate monthly survey of bailout recipients to see how they were using the money.
The $165 million dollar question is – why didn’t the government specify how the money should be used?
Well, because it’s not the government’s business to tell corporations how to handle their day to day affairs. Besides, money is fungible and I am not sure how much the government could have prevented AIG from paying out bonuses from existing revenue if it found a way.
Having said that, perhaps if the government had put in a stipulation saying that AIG cannot use the bailout money to, say, pay bonuses exceeding $500,000 (or some such amount) things could have been different. AIG may have had to defer the bonuses, or pay them in instalments over a few years, or whatever – basically, it would have found a way to renegotiate the contracts with the employees. I am sure most of the employees would have agreed to a renegotiated bonus too, especially in this economic environment.
But since AIG had a carte blanche from the government to use the bailout money as it chose, it really had no incentive to renegotiate its contracts.
So really, I don’t see that AIG is to blame for this mess. If the taxpayers/ government had a list of “approved uses” or better still, a list of “prohibited uses” in their mind, they should have specified them. That’s what contracts are for – you can stuff them with as many conditions as you like.