Copyright by John T. Reed — Sign up here for free email updates

Politicians have been howling in the middle of March, 2009 about AIG paying $165 million in bonuses primarily to the small group of traders in London who created the massive losses at AIG. AIG received $170 billion in U.S. taxpayer bailout money so far.

One tenth of one percent

First, put the amount in perspective. It is one tenth of one percent of the bailout amount received by AIG.

Go over the contracts

Second, lawyers told AIG it is contractually obligated to pay the bonuses. I agree with Senator Mitch McConnell R(-KY) who said the contracts in question need to be looked at to see if AIG can get out of them. It seems dumb to reward the guys who caused these unprecedented losses.

Seems like AIG should be suing them for the massive losses and they should be prosecuted criminally for what they did—not for receiving the bonuses which is a separate act. Any bonuses they received should be subject to a preliminary injunction that irreparable harm would be caused if the bonus proceeds were not frozen now because of the pending litigation’s likelihood of success and the need for the winning party in the litigation to get the bonus money back pursuant to the judgment.

In other words, do not dispute that they are entitled to the bonuses in accord with the contracts, but say separately that they owe more money than the bonuses because of misbehavior that caused huge losses.

Geithner led the bailout

Democrats have blamed this on Bush. However, apparently, Bush let Obama’s Treasury Secretary nominee, Tim Geithner, take the lead in the bailout of AIG. Geithner, who looks more and more like a teenager who has been called on by his teacher on a day when he did not do his homework, apparently did not consider the bonuses when structuring the bailout terms.

Bonuses paid to the perpetrators of the huge losses are different from bonuses paid to executives who turned in above-average performance in other parts of the company in question. The legitimate anger over these particular AIG bonuses should not be extended to every bonus paid by every financial firm that received bailout money.

God bless us every one

Unfortunately, Wall Street long ago got into the Dickensian habit of paying its workers largely in the form of year-end bonuses—like 30% to 50% of annual compensation. So Wall Street bonuses are not always like normal bonuses elsewhere for extraordinary performance. Also, lots of people on Wall Street receive incentive compensation. As this AIG example shows, one must be careful when structuring incentive compensation that the extra money is only paid when the recipient deserves it.

Wind at your back

For example, if you set an Olympic 100-meter dash record when there was a strong wind at your back, the record does not count. Similarly, executives should not get bonuses for a rise in the company’s stock price if all similar companies’ stock price went up about the same amount at the some time. But if an executive prevents his company from losing the amount of money other similar companies are losing during hard times, he deserves a bonus, in spite of the fact that his company lost money that year. Paying deserved bonuses is a contractual matter in many cases and it is always wise to avoid losing good people. Good people can switch to other companies that did not receive bailout money leaving only the weak in the company that the taxpayers are hoping will pay back the bailout money. Good people can also start their own much smaller companies and make far more money and bonuses there than the government would allow them to make is bailed-out companies.

Bonus for staying until a certain date

The AIG bonus recipients were guaranteed the bonuses if they remained in their jobs until a certain date, a standard employment arrangement. They did stay until the date in question. Since AIG is an insurance company, not a bank, it was regulated, supposedly, by its state, which happened to be New York. The office that caused all the problems was in London, which seems like tough thing for Albany bureaucrats to monitor. In they event, they did not monitor or regulate it. The Bush Administration never had any authority to regulate AIG because the federal government has no authority to regulate any insurance company. All insurance companies are regulated by states.

Dumb, but maybe legal

In other words, AIG executives, perhaps above the bonus level, made a mistake to offer credit default swaps at all—if they were not hedging it or otherwise properly managing the risk. They also may have made a mistake about how they structured the incentive compensation clause. New York also made a mistake not to reign this in. Then the Feds made a mistake to approve these bonuses when they drew up the bailout contracts. The recipients of the bonuses are being singled out as the only villains in this. I would like to hear their side of the story before I conclude that. They may be too dumb to be culpable. Salesmen often are. The culpable people may not have violated any law because the legal system has not kept up with the changes in the finance.

Should not have bailed them out to begin with

Arguably, what the government should have done going back to last fall is to say the U.S. government is not a co-signer on AIG’s credit default swaps. If AIG needs help, they need to seek it in the bankruptcy court. Had the feds not done the AIG bailout, AIG would have gone bankrupt and the bonuses would not have been paid because the recipients would have made the stupid mistake of bankrupting the company from whom they were seeking to get the bonuses. The people who would have suffered would have been those who trusted untrustworthy companies.

There should have been a law

When I was a kid, there was a King Features newspaper comic strip by Al Fagaly called “There oughta be a law.” The cartoons depicted various annoyances and frustrations like bad drivers who went too slow. With regard to the AIG bonuses, there should have been a law. The fact that there was not is the fault of the pertinent legislators in New York State and DC. Instead of denouncing AIG and the bonus babies, they should be denouncing themselves for screwing up. But politicians NEVER do that. They find scapegoats for all bad news and take credit for all good news.

We have been told repeatedly that the bailout was necessary because the world would have come to an end if they did not. I am not convinced of that. Plus the world seems to be coming to an end with the bailout, that is, the market keeps declining and unemployment keeps going up.

Government involvement drives away competence

Driving away competent executives is what the government has been doing for centuries. I originally intended a career as an Army officer after graduating from West Point. When I saw what the Army was like, a federal bureaucracy, not a John Wayne war movie, I could not wait to get out. Most of my West Point class did the same. There are dozens of articles about all that at my Web page www.johntreed.com/military.html.

Tax it back?

Democrat Senator Chuck Schumer of New York says if the recipients of the AIG bonuses do not return the money, Congress will tax it back. That sounds unconstitutional. Bills of attainder are forbidden by Article I, section 9, clause 3 of the United States Constitution. A bill of attainder is a law that declares a person or group of persons guilty of some crime and punishes them without benefit of a trial. That same clause prohibits laws, “impairing the obligation of contracts.” The last 12 words of the Fifth Amendment to the Constitution: “nor shall private property be taken for public use, without just compensation.” The Fourteenth Amendment contains the equal-protection clause that says everyone has to be treated the same.

The Constitutional prohibition against ex post facto laws (same article I, section 9) may also be triggered. Here is what Wikipedia says about that:

An ex post facto law (from the Latin for "after the fact") or retroactive law, is a law that retroactively changes the legal consequences of acts committed or the legal status of facts and relationships that existed prior to the enactment of the law. In reference to criminal law, it may criminalize actions that were legal when committed; or it may aggravate a crime by bringing it into a more severe category than it was in at the time it was committed; or it may change or increase the punishment prescribed for a crime, such as by adding new penalties or extending terms;

Judge Anthony Napolitano wrote several books that said the federal government has increasingly been behaving in unconstitutional ways. Constitutional Chaos, The Constitution in Exile, and A Nation of Sheep.

AIG still exists. It is a huge company—the biggest insurer. Except for a 12-man credit-default swap deparment, it appears to be well-run and profitable. The U.S. taxpayers need it to be well-run and profitable. Yet the U.S. government is currently doing everything it can to destroy the company and its reputation.

Welcome to socialism where governments tell private companies how to run their businesses.

I appreciate informed, well-thought-out constructive criticism and suggestions. If there are any errors or omissions in my facts or logic, please tell me about them. If you are correct, I will fix the item in question. If you wish, I will give you credit. Where appropriate, I will apologize for the error. To date, I have been surprised at how few such corrections I have had to make.