04/18/2009 05:12 am ET Updated May 25, 2011

How to Recoup the AIG Bonuses

Let's get real. This may be a nation of laws, but contracts are not sacred, and employment contracts are less sacred than any. When Enron's executives destroyed the company, Enron's secretaries lost their pensions. When General Motors' executives failed to plan for the possibility that oil prices might go up or pollution controls might get serious and ran the company into the ground, everyone agreed that its retirees, who fulfilled their end of the bargain years ago, must accept that they aren't going to get what their contract says. Every company that goes into bankruptcy -- and AIG would have been bankrupt several times over were it not for Federal subsidies -- rewrites employment contracts. Indeed, as airline and steel company employees know all too well, sometimes that is the main reason the company goes to the bankruptcy court in the first place.

A contract is only worth as much as the party on the other side of it. The scandal of AIG is that AIG is using Federal money to pay its side of contracts that it never should have entered -- and that it never could have fulfilled. Absent the Federal subsidies, AIG would be giving no million dollar bonuses. Nor would it be paying out billions to Goldman Sachs and other sophisticated players that knew that the swaps they gambled with could only pay off if AIG had the money to pay them - and would have known, if they had bothered to do the arithmetic, that it didn't.

We, the people, are making good on swap contracts that AIG cannot, because our government thinks that if we don't, the world financial system will collapse. If the government is right, and I have no reason to doubt that it is, this is a reasonable decision. AIG and the banks on the other side of its swaps bet so much and lost so big that we believe we must come to their rescue.

But let's be clear. The companies and traders and executives who are getting our money have no right to it. AIG and its swap "customers" made massive bets, and they all lost. By all rights, they should pay the price. AIG's swaps should be worthless and the companies that foolishly relied on them should be learning that before you make bets of that size, you should consider the possibility that the loser won't be able to pay off. The traders who sold the swaps would discover that they have bonus contracts enforceable only against an empty shell of a company. In a free market, sophisticated, wealthy individuals and businesses, all of whom are in the business of understanding these kinds of transactions, have no claim on our sympathy or our money.

AIG, its employees and its counter-parties pulled a fast one on us. We've been had. A generation of deregulatory true-believers never thought this could happen. Now, we know better. We need to reclaim the bonuses. No need to go to law: just threaten to announce the names and addresses of every bonus recipient who refuses to return it and exactly what he or she did to "earn" it. We ought to ensure that no counter-party on an AIG swap is paid in full. If that means trouble for Goldman Sachs and the other punters that lost their AIG bet because they won too big, let them come to the government for bailouts -- but make them admit their mistakes openly, make the subsidies transparent, and include a complete ban on dividends and limits on pay to government rates until every cent of taxpayer money is returned.