This whole AIG bonus thing makes so little sense to me.
First of all, who coined the phrase “guaranteed bonus”? That’s sort of like the IRS saying that paying your taxes is an “optional mandate.”
AIG is an insurance company. They sold me my life insurance policy. But then a few years ago, somebody got the bright idea to sell gobs of insurance to banks, guaranteeing that subprime mortgages wouldn’t blow up. Extraordinarily bad call. The folks who dreamed that up got fired, and rightly so.
Of course, the bad news is that they sold so much of this stuff to banks, the federal government decided they couldn’t afford to let banks not collect on the insurance policies, so they came in and bought 80% of AIG. When they did that, the people who used to hold 100% of AIG’s stock now held 20% in one fell swoop, making their stock practically worthless (not that it was worth much before that).
So at that point, the company got new management. That new management looked around at employees ready to jump ship, identified the ones key to turning the company around for its new owners (you and me), and offered them a future bonus payment to stay.
Sidebar: Employment law does not allow you to pay somebody today and bind them to do something in the future. Way back when, that was called indentured servitude (I pay for your ticket to America, you work for me for six years). So that’s why the bonus payment was scheduled in the future. The deal was “keep working for us now, and we’ll pay you $x on St. Patrick’s Day.”
Guess who approved this plan? The owners of AIG — the federal government. Geithner in particular, who fashioned the AIG bailout. In other words, the very people who now are feigning outrage. They are “shocked, SHOCKED” that the company would pay out these bonuses they themselves approved months ago.
Here’s another piece of employment law for you, and I don’t think I’m out on a limb here. When you promise an employee something in exchange for their labor, and they do that labor, you then have to pay them what you promised them.
Now the Washington politicians are all up in arms about this. “We want our money back!” says Nancy Pelosi. I think Jon Stewart refers to these shows of outrage as “American Grandstand.” 
And as my friend Rich Galen points out, the House just passed a 90% tax on these bonuses because AIG employees got a pretty good deal. Are they going to go tax 90% of the extra money UAW workers earn in excess of their Toyota or Honda counterparts in the US? After all, we gave the big auto companies a bailout too.
So beyond the fact that this is so contrived, it also strikes me that this is a natural and very negative consequence of government owning a company.
Let’s just say it was the right call for AIG to retain these people and use the bonus to get them to stay. Yet because the company’s largest shareholder is 300 million people, none of whom like the idea of owning an insurance company that otherwise would have gone bankrupt due to stupidity, the company can’t make the right decision for the company.
All of the anger about this also underscores two things for me:
- This entire crisis was a failure of government regulation to do the actual job it is supposed to do: create fair and free markets. You cannot have a fair and free market when mortgage brokers lie to underwriters about their customers, and when mortgage companies lie to investors about the mortgages they are selling them.These acts of fraud created this crisis of confidence in our economy that has between $2 and $4 trillion dollars in capital sitting on the sidelines, not invested in our businesses and real estate. It boggles my mind that government can create a 9,000 page education code to micromanage our schools to horrible results, but can’t manage to do the basic, fundamental work of ensuring fair and free markets.
- The lavish compensation practices of Wall Street are coming home to roost. While I do think companies have to follow the law and pay employees what they were promised, in many cases, these promises never should have been made. I’m all in favor of people making as much money as they have the talent and capacity to make, but businesses are poorly run when they do not connect incentive pay to results. That’s what we do in the “real world.”
Illustration Credit: thepage.time.com
