Shame on AIG, but let’s not let the bonus flap make things worse
After a few days off, I’m still trying to catch up with all the commentary about the AIG bonuses. Andrew Ross Sorkin of the New York Times attracted many negative comments after saying that the government should honor employees’ contracts. Here’s the bottom line, as Sorkin sees it:
If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.
Bloomberg columnist Michael Lewis, who says we should be more outraged about the bailout itself than about the bonuses, makes a similar point:
… if the government can arbitrarily break contracts made by firms in which it has taken a stake no one in his right mind will ever again make a contract with one of those firms. And so all of the banks in which the government has investment will be damaged.
Howard Gleckman at TaxVox, meanwhile, is worried about the specific way the House of Representatives is proposing to reclaim the money:
The AIG bonuses are an outrage. But the bigger scandal is that a grandstanding Congress wants to use the tax law to punish the companies that paid them and the employees that got them.
If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.
What, then, does an angry public have the right to demand? Name them and shame them, says Rob Cox of BreakingViews.com:
Better yet, give them a choice. AIG Financial Products employees who forego bonuses until certain taxpayer-friendly performance hurdles are met will not see their names in lights. Or maybe if they decided to contribute more than 50% of their bonus to qualified charities they might be spared public humiliation. Either way, a bit more openness might help tame taxpayers’ disgust.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
AIG could have decreased the outrage by being more open in the first place. If Edward Liddy had made a public statement a couple of weeks ago that the bonuses were being paid, and that it disgusted him, but AIG was contractually bound to pay them, he would have eliminated the shock factor.
The bonuses were legal. People at AIG who received them did nothing legally wrong. Morally it was probably not the right thing to do. Turn your anger toward those hypocrites in Congress who voted for the bailout and a pay raise for themselves. Those are the people we should get angry with.
There is an old truism that says, “the smeller is the feller” And the whoops and cries on Capitol Hill tell us that the “feller” for all these stinking payouts is the Representatives, Senators, and yes the President who approved them. Now they want to point fingers at the other guy. Shameful doesn’t describe their reaction, because most have no shame. Reprehensible is the word for putting out the names of the people getting the bonus. From Obama one down, there is the formenting of mob action against these people. Let’s all pray that it subsides before someone really gets hurt.
One of the fundamental principles of free markets is the privity of contracts, and I am happy to see that the Obama administration apparently has more respect for that principle than many members of Congress. Passing a tax on money made under a contract that was legal before the tax was implemented comes close to being a “bill of attaineder” that is specifically prohibited by the U.S. Constitution. It should be of some consolation that large bonuses should be subject to the highest federal income tax rate and also a pretty substantial one in New York.
Mr. Obama correctly points out that what is really important is not to focus on cases like this where people arguably succeeded in getting windfalls at public expense in the past, but on making fundamental changes to the system that will prevent such market failures in the future. And as he says, the greatest fundamental change will be to make productive jobs such as engineering, science, medicine, and teaching (at least of the preceding subjects) as lucrative as jobs in finance.
As I have said in previous posts, the financial services industry is essential, but the U.S. has devoted far too many resources to it in general and to the cartel of bigwigs at the top of it in particular.