Obama Trying to Block AIG Bonuses
Responding to understandable public outrage, President Obama is vowing to figure out a way to get back the money AIG paid to the people who ran the company into the ground.
President Barack Obama declared Monday that insurance giant American International Group is in financial straits because of “recklessness and greed” and said he intends to stop it from paying out millions in executive bonuses.”It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession. “How do they justify this outrage to the taxpayers who are keeping the company afloat,” the president said.
Obama spoke out in the wake of reports that surfaced over the weekend saying that financially strapped American International Group Inc. was paying substantial bonuses to executives.
Noting that AIG has “received substantial sums” of federal aid from the federal government, Obama said he has asked Treasury Secretary Timothy Geithner “to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole.”
The public is right to be mad at the bonuses and Obama is right to want to recoup the money. It’s indeed hard to fathom how a company that’s taking millions in bailout money from the taxpayer can in turn transfer some of that money to reward the people who caused the problem in the first place.
Glenn Greenwald who, as noted previously, is outraged that the administration didn’t head this off before it happened, argues rather persuasively that AIG’s chief defense — that they were contractually obligated to pay these bonuses and had no choice — is bunk. He points out, for example, that the administration insisted that UAW workers tear up their contracts as a precondition for bailing out Chrysler and GM.
As any lawyer knows, there are few things more common — or easier — than finding legal arguments that call into question the meaning and validity of contracts. Every day, commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions.
I think that’s right. To be sure, the AIG and UAW cases are different, in that the UAW was a second party to the bailout and the terms of the Big 3’s labor agreements were considered by many to be a major contributing factor to the pickle they were in. But, surely, the AIW bailout negotiations could have stipulated that certain contractual obligations be renegotiated as a condition of receiving taxpayer dollars.
Lawrence Cunningham, a GW lawprof and “leading authority on law and accounting, particularly in corporate governance and securities regulation” provides a whole list of plausible legal loopholes off the top of his (expertly trained) head.
Megan McArdle, an MBA rather than an attorney, tackles a different question entirely: Is it good public policy to kill said bonuses?
But the AIG retention bonuses raise a question the government is going to have to ask again and again before all this is over: do we want to make a point, or do we want to make money?
Why not just say “no bonuses for anyone at AIG”? To hell with the bums! Well, we now own the company. If we hasten the flight of quality employees out of the company, that will cost us money. The answer might be some kind of performance bond. But as in other financial firms, traders often take as bonus what should be salary, which means that they need at least part of their bonuses to maintain their lifestyle. If they’re faced with bankruptcy, the traders who are talented will go elsewhere–the financial market is shrinking, but the top traders still have other opportunities. AIG has a lot of positions to unwind. Do we want to leave the job to the dregs of the organization?
A tricky issue, indeed. One could be flip and note that, since the division in question screwed the pooch so impressively, that it must have been entirely comprised of said dregs. But, alas, that’s likely not true. As Megan notes, we have no way to know from the outside who the good people and the bad people are.
That said, it’s hard to imagine that anyone in AIG’s Financial Products subsidiary earned $6 million in bonus money last year.