How to Stop AIG's Bonuses
By William K. Black, Thomas Ferguson, Robert Johnson, and Walker Todd
AIG's decision to pay out at least a hundred and sixty five million dollars in bonuses takes the bank bailout program's abuse of the public trust to a whole new level.
This act simply cannot be allowed to stand. The only question is how to stop it.
"Sanctity of contracts" has for some time been TARP's equivalent of Harry Potter's magic wand, the thing you waved to make difficulties disappear (for financiers, of course; if you are an ordinary worker with a pension contract, by contrast, the magic doesn't work for you). AIG clearly takes the Treasury, the Federal Reserve, and the Obama administration for fools, who can be counted on to roll over yet again at the first whisper of the magic words. There is no reason for agents of the people of the United States, whose money AIG plays with, to be so sheep-like.
Remember that this is a firm that is 79.9% owned by the United States government. It is therefore quite possible to abort this outrage by decisive exercise of public authority. Within existing law, there is more than one way to do it, but a direct solution is readily at hand: Firstly, the US trustees in charge of the firm must immediately instruct the corporate treasurer to make no payments of any bonuses. They also need to order him to issue stop payment orders on any checks that fly out the door at the last minute, as with Merrill Lynch. Then the trustees need to split off the derivatives unit from the rest of the firm and separately incorporate it. This step leaves AIG's other businesses free to operate as usual. If the recipients of the bonuses refuse to waive them, then the derivatives unit should at once be thrown into bankruptcy, terminating all obligations to pay them. Right now, press reports suggest that the firm's top management waited until the last minute to inform the government of what was happening. AIG CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake of public confidence and to send a clear signal that gaming the system is unacceptable. It is also past time for an investigation of the validity of AIG's past accounting and securities disclosures and its executive compensation program by the Office of Thrift Supervision, the Securities and Exchange Commission, and the FBI.
This leaves open the question of how to deal with all other obligations of the derivatives unit, including the notorious credit default swaps. We, like most independent analysts, are mystified by the determination of the Federal Reserve and Treasury to keep paying these off at 100% of their face value. But that's an issue for tomorrow. Today the task is to stop a grotesque abuse before it is too late. The path we outline here would do it, without throwing markets into turmoil. Nothing less than public confidence in the United States government as a whole is now at stake.
William K. Black is Associate Professor of Economics and Law at the University of Missouri - Kansas City. He was a senior regulator during the savings and loan scandal and blew the whistle on prominent politicians, including House Speaker Wright and the five US Senators who became famous as the "Keating Five." He was the lead staffer on the successful reregulation of the S&L industry and directed the investigations that led to convictions in many of the worst S & L frauds.
Thomas Ferguson is professor of political science at the University of Massachusetts, Boston and the author of Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems (Chicago, 1995).
Robert Johnson was formerly a managing director at Soros Funds Management and chief economist of the Senate Banking Committee.
Walker Todd worked for many years in the Federal Reserve System. He was a legal officer of the Federal Reserve Bank of New York and a legal and research officer at the Cleveland Federal Reserve Bank. He is the author of many studies of bank failure, reform of the Fed's discount window, open market operations, and the Reconstruction Finance Corporation of the 1930s.
Part I of Ferguson and Johnson's "Too Big To Bail: The 'Paulson Put,' Presidential Politics, and the Global Financial Meltdown," appears in the next issue of the International Journal of Political Economy.
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Can we have the four gentleman who wrote this article take Tim Geithner's place for a day to put this plan in motion.
If the government is able to establish a special tax intended for recovering the money, I hope there will be no loopholes left, for example allowing the lucky-holders of these bonuses(at least the big ones) pay mega-donations to all sort of charities and non-profits organizations for discharging their due taxes and profit from receiving recognition and positive PR feedback for their contributions to those charities.
I agree. I also have this question that if the contract was entered into with AIG and its employees before any bailout is the contract now void?
AIG did not have the money to pay these bonuses without bailout dollars. Assuming no bailout funds, no bonuses..what would have happened then? Would they have sued for the bonuses so whats the big scare about a suit?
Secondly, the government who paid the money did not enter into a contract to pay any bonuses as far as I know, therefore isnt there no longer a contract?
Thirdly, why cant the government claim some kind of public need or analgous to eminent domain provision which means it would be of great government harm to not retrieve these bonus monies.
Fourthly, as been pointed out, there seems to be no problem breaking union contracts or employee contracts for bonuses..why is it chicken little the sky is going to fall if this contract provision is broken, even assuming you cant void the contract as previously stated?
How can a new Depression be avoided now with this level of incompetence and sheer corruption?
How?
In fact these bonuses, as a way of life on Wall Street, have the effect of reducing taxes that corporations would otherwise pay. This is happening at the same time that product development must be expensed over several years when we need innovative new products
If we are to make the Paradigm Shift from Consumption to Investment as the driver of our economy, then one, of many changes, should be to focus on and optimize "after-tax corporate income." This could mean no taxes on reinvested capital gains and 20% if not reinvested as well as no tax on dividends where the government had already gotten a cut. The key to fixing the whole system is to make profits the objective. But, to move so that this Get Rich Slowly The Old-Fashioned Way Paradigm can work its magic, the tax code must be changed so compensation above say $1,000,000 would be progressively not deductible. Use the tax code to shift the rules fairly to all and focus on achieving after tax profits and then the gains from Capitalism for a new economic policy.
Obama's search for Common Sense Regulations and successful Economic Policy must begin with recognizing the Paradigm Shift from Consumption and Borrowing to Saving and Investing -- not Speculating. So don't mess with AIG contracts after the fact, just change the incentives.
There's an even easier way and we already have a precedent:
Nick Leeson, the rogue trader who brought down Barings Bank UK is rotting in a Singaporean jail. No, he wasn't paid a bonus for the great trades he pulled off prior to the fraud.
These guys should be threatened with jail time for having brought down their financial institution, add in a dose of what they've done to the name of the Company, goodwill, and, surely in their contracts there exists language on the order of...."Not representing the Company to the best of their ability"...that's like reasons for firing if you're caught with a hooker (see Spitzer)...
They should be thrown in jail now and asked questions later. Heck - Guantanamo's still open for business ain't it???
Unfortunately the laws in the UK are not the same as here. When Congress deregulated our finance industry in 1996 and 2000 (made credit default swaps unregulatable if that's a word) they made sure that none of what these cretins have been doing is illegal. No law broken, no jail time.
These guys are right, the only way to prevent the payment of bonuses is to break the financial unit (which is only .4% of the entire AIG's holdings) off and force it into bankruptcy. It wouldn't hurt the company, all of the other divisions are running at a profit and are healthy.
For those who didn't see it, Rep. Michael Capuano (D-Mass), an attorney, soundly eviscerated the "sanctity of contracts" argument in the AIG financial services hearing today. He also told Mr. Liddy that the idea of "retention bonuses" were ridiculous--that there would be no shortage of talented and currently unemployed Wall Streeters to take the places of these overpaid AIG FP executives. I was cheering while he did it.
Where there is a will, there is a way. If AIG's top management is clear about what needs to be done strategically--and has the integrity to do it right--then no force on earth can stop it, including "contracts." Mr. Capuano echoed that in his argument by looking at the big picture and made an excellent case for alternatives to what was done.
During the WorldCom debacle we let each and every employee in finance go... We did not retain the people who brought us the hell we found ourselves in... I was in staffing and we were in a recession at the time. Despite our blacken reputation we were able to fully restaff with highly qualified and talented people at the half the price..and because of their talents we emerged and had something left to sell to Verizon. In this economy many talented people who understand the complicated mess our friends made AIG made and can easily probably more brillantly get us out..remember these morons were hired when the labor market was tight and who would go to AIG...an insurance company..not very attractive so I doubt they were the best and the brightest.. the best and the brightest went to Goldman..or Lehman or Morgan.. not AIG.. Let them all go.. keep them in court for years... and lets get AIG straightened out and lets get our money back..
Before we take down AIG, we should take down every member of Congress that cut the deal and then forced a vote on the TARP money...
Why does everyone get led around the nose so easily? Even this story about Rush is nothing more than a distraction. Here's why...
a. 165 million went to pay legally binding bonuses.
b. 58 Billion (that's with a "B") went to foreign banks.
Congress and the president are upset about the bonuses and getting the people, "you and me", all worked-up over them.
Here comes the clincher... The 58 Billion was paid out to these foreign banks by funneling the money through AIG! Congress forced AIG to be the middleman for this transaction, and to top it all off, this money also came out of the TARP money. That's my money, and that's your money, and your childrens money, etc...
I agree! Break up the company and isolate the part that brought the entire country down! That way, the profitable parts of the company can continue to make money....and we just might have a chance of recouping the hundreds of billions that we have already put into them! They ARE going to pay us back, aren't they???
The answer is so simple. Just follow two simple procedures:
(1) If any company is "too big to fail" it should be totally nationalized as part of the bailout.
(2) "Nobody is irreplacable". Fire all the top executives of any bailed out company.
OK I come from Europe where the idea of nationalization is not the big glaring hodoo word it is over here. But USA citizens should ignore the bleeting of the sheep (of all political persuations) who are responsible for this mess, and look at this pragmatically. Nobody is talking about long term public ownership. It has been proven many times in many different countries that private ownership works better than public. Just take complete control of companies "too big to fail" and return them to private ownership once they are viable once more. This has to be better than the current pay up with zero control and influence the tax payers are suffering right now.
Simple solution.
Make the congressmen take an oath that they read the stimulus bill that gave the money to these companies. If they did, they cannot cry now as they signed it. If they did not read, then they are hypocrites, else they lied under oath.
Nobody else is to blame except these congressmen.
All this hue and cry is to hide their responsibilities.
After demanding that we the American people "bend over" again, now they are kicking US in the ASK!
If Congress allows this to stand then America as we know it is finished; we will a big third rate Country ruled by the very rich who have Congress & the Court in their pocket!
Being Greedy is no longer acceptable for Wall $treet or Congress!
Hell, give them their bonuses...and the take a page out of the Republican playbook.
That's right, investigate them for -everything.- IRS audits, dig up any and all old complaints and proceedings, reopen any investigations, all the way back to their college days. Ram the government investigative colonoscopy probe right up there, just like they did back in the Whitewater days, when a probe into bad real estate deals came up with a freakin' oral sex scandal.
I remember as a little kid, learning, "Hey, you always turn up something, even if it's not what you expected when you investigate people at the top."
Or as Balzac says, "Behind every great fortune, there is a crime."
Oh, and make sure that the only way to call off the dogs is to return the bonuses. How many of these guys have skeletons in their closets? I guarantee you they'd find at least one or two are child molestors.
Even more of them no doubt owe back taxes. I'd even venture to say most of them cheat somewhere.
The threat of finding everything else they've done and turning it into a public circus ought to be more than enough to put off their ardor for their not-earned bonus money.
This might be the only way forward.
As I understand it, the bonus money has already been paid. That is why the congress passed a tax law to recver it.
if you thought AIG stood for "All is Good", your reality has definitely been checked. And by the way, just think, we might have elected a guy who thought that everything was peachy. There ain't nothing peachy about this hellish situation. If you want the bonus checks to stop being cashed, then why don't we just let the bank fail. If it's 2 big 2 fail, it is 2 big to be a private company that controls so many small world economies. This is ridiculous. I hope Barack see's us through, however, we will be scratched, so we should just take off our protective gear now and get 2 work.
-13 year old impatient liberal
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