AIG Bonuses: Some Perspective
Yesterday was a good day to get exercised about AIG bonuses. The most interesting revelation was this one:
While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. The provision, now called “the Dodd Amendment” by the Obama Administration provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” -- which exempts the very AIG bonuses Dodd and others are now seeking to tax.
Dodd’s original amendment did not include that exemption, and the Connecticut Senator denied inserting the provision.
“I can't point a finger at someone who was responsible for putting those dates in,” Dodd told FOX. “I can tell you this much, when my language left the senate, it did not include it. When it came back, it did.”
“Because of negotiations with the Treasury Department and the bill Conferees, several modifications were made,” Dodd Spokesperson Kate Szostak in a response to FOX Business.
The provision excluding those bonus payments made it into the final version of the bill, and is law.
Separately, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to opensecrets.org. Also, one of AIG Financial Products’ largest offices is based in Connecticut.
With all due respect to my esteemed co-blogger, maybe Senator Dodd should have taken some time to read the bill before he voted on it.
But this is the last I intend to blog on AIG bonuses. We are talking about payments of $165 million out of a $170 billion bailout (so far). Will we get as exercised about the other 99.9%+ of the taxpayers' money? I hope so, but I doubt it.
I am totally against mortgage
I am totally against mortgage bailout. I believe it penalizes people like me who live in a 900 sq. ft. house and unnecessarily distributes my taxes to folks who live in 3000 sq ft homes. That being said when I heard Summers real time on Sunday my heart sank and I was sad for the rest of the day. Can someone explain? How is it that the administration can't break AIG bonus contracts, but they think they can modify existing mortgage contracts with the housing bailout? I am getting really confused. Do we make new laws up by the day? Perhaps the AIG employees are victims of their bosses just like homeowners are victims of banks? Do we change our story daily to fit our own personal financial benefit regardless of the morality?
Ready to Riot
I don't know about you all, but everyone (and I mean 80-90% of all workers) here has been told they are not getting a raise in 2009 (and many have also taken cuts for 2010 as well). Many have been put on forced furloughs (more pay cuts) while others have had their pension plans frozen. Hourly workers have had their hours cut.
Are the starving peasants with their 201K's and underwater mortgages, who are scraping to pay their COBRA bills, angry to now find out that AIG workers get massive (in some cases obscene) bonuses?
Heck yes.
Any argument about contract law and how much AIG folks contributed is hollow . . . lots of nice, hard working people are taking big hits . . . and most of them didn't work at companies that took $173 billion in taxpayer money to stay in business.
When Lehman went under nobody gave those nice people any bonuses or parting gifts. Some of them were brilliant folks who made fine contributions to their company, people with nice families. They got squat and lost their stock investment in the company. AIG, on the other hand, is being propped up. Those people should be grateful they have a job to go to at ANY salary.
This is what you get when you unevenly implement morally hazardous bailout policies . . . is anyone really surprised?
Please, tell me one good thing about the "AIG tax".
Really, what about this tax is not plainly self-defeating and stupid. Let's see...
The new law would drop the 90% tax on: "any retention payment, incentive payment, or other bonus which is in addition to any amount payable to such individual for service performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate."
Any bonus! Going forward, on anybody!
[] Does this punish the guilty? No.
"The worst malefactors at AIG are gone ... Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective." [Wapo]
[] Does it avoid punishing the innocent? Those who could have gotten jobs elsewhere, but who stayed on or even newly enlisted to clean up the mess? No, it punishes them!
**Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president. "They've chosen to throw us under the bus," said a Financial Products executive, one of several who spoke on condition of anonymity, fearing reprisals. "They have vilified us." ** [Wapo]
[] Does it encourage healthy firms to engage in further voluntary cooperation with the government?
No! it gives them a major reason to refuse! [Bloomberg]
[] Does it at least claw back for taxpayers a good part of the cost of the AIG bailout.
Well, at most, 8 ten-thousandths of it.
[] At the very least, doesn't it slash AIG's greatly, obscenely excessive compensation?
No, and no. The bonuses were about 3% of AIG's total compensation for over 100,000 employees -- and, get this, since the bonuses can easily be rolled back into regular salary going forward, the law need not cut anybody's total compensation AT ALL!
That's effective!
With bonuses rolled back into salary, all the tax will do is force AIG and all other firms that the government invests in to abandon the sound managment practices of providing incentive pay for good performance, and structuring compensation to be backloaded to give valuable employees an incentive to stay on the job rather than leave.
Brilliant! The only effects are to reduce the quality of management practices of the companies that the government invests in, and to undercut further private-public recovery efforts.
And of course to increase the poll numbers of politicians who play up to the ignorant resentments of the populist mob.
Really, does anyone know any other positive benefit of this tax that they can inform me about? Absent that...
Compared to the plain self-defeating, stupid nature of this tax, mere issues of Constitutionality and basic justice (Congress passed a law saying it wouldn't apply compensation limits to these pre-existing contracts just one month ago)...
"Bills of attainder, ex-post-facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation." -- James Madison, Federalist Papers, #44.
... are trivialities barely worth considering.
~~~~
"When Lehman went under nobody gave those nice people any bonuses or parting gifts."
The very obvious difference being that Lehman *went under* -- while the government is trying to keep AIG, Citi, JP Morgan, and all the other institutions it has invested in, up as going, value-maximizing (or at least loss-minimizing) concerns.
Not Bonuses -- Total Compensation
In my original post, I specified the tax on total compensation, not just bonuses or retention bonuses. If the government is going to own the company, it should set reasonable compensation amounts. The highest of these amounts were obscene. The obscenity should be removed. In this post, I acknowledge, as you do, that this is less than 1/10 of one percent of the total money given to AIG. I would rather we direct our energy at solving the other 99.9% of the problem.
Punishing the Solution
Andrew, the people you want to punitively tax are the very people needed to wind down the mess AIG is in. Their bonuses are incentives to get the most value out of what AIG holds, so they can repay the loans extended to them.