Sunday, March 15, 2009

Why all the Moaning over AIG Bonuses?

In case you missed it, there is quite a bit of consternation over AIG's bonus payments to its executives and employees. With AIG accepting bailout funds, the fact that they are paying $165 million to executives and employees after accepting the money has become a rallying point for the Obama administration and for a segment of the general public.

While creating diversions is a favorite sport of politicians, it appears that they are simply missing jumping on a publicity bandwagon that they themselves created.

Those bonus payments are contractual. The company entered into employment agreements and severance agreements with its executives and employees long before this economic crisis, and the government had no right, and no ability, to interfere in those contractual arrangements. The general public can object to executive compensation all it wants, but (and excuse my bluntness) it is none of the public, or the government's business. These are matters for shareholders and boards of directors, not senators and politicans.

However, that all changes with the bailout money. When the government gives you money to help your business, in my view, it has the right to condition that money in reasonable and necessary ways. One condition could have been to limit bonuses and executive compensation, much as the administration attempted to do with the bailout money for the investment banks.

However, that did not happen here. While moaning and whining about the bonuses, even the Obama administration acknowledges that these are pre-existing contracts. Lawrence Summers, President Obama's chief economic advisor is quoted in the NYT as saying - "[w]e are a country of law... There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”

The first half of the statement is correct. A private contract between a private employer and his employee is not something the government should be meddling with. But what about the last sentence? Is the government really doing everything it can?

What is it with government officials? The Bush administration gave out TARP money without sufficient regulation and monitoring, and much of it was wasted. Now we have the Obama Administration doing the same thing. Are our politicians this stupid? Undoubtedly not. In my view, they did not "overlook" the bonus and compensation issue. The President talks about it often, and does so often enough to be accused of starting class warfare.

So why wasn't the renegotiation of these contracts discussed during the bailout process? Did anyone try to condition bailout funds on the scaling back of those bonuses by agreement with the employees? If not, why not?

If the decision was made not to do so, why do we have all of this posturing by government officials when they did in fact have the ability to negotiate these items before turning over the TARP and bail out funds?
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