Summing up the AIG bonus debate

Hard to watch/listen to any news without hearing about AIG's $165 million dollar bonus payout. I guess I was a little surprised how quickly the story spiraled out of control. My blood started to boil when I heard a prominent democrat (I won't mention HER name but will only say that it rhymes with "smelosi") illustrate what could generously be referred to as a complete lack of insight, knowledge or even a general awareness of the circumstances and points of debate regarding the bonuses AIG paid out to their employees. I'm not making a political statement. This is not a political blog. Many members of congress, on both sides of the aisle, misunderstand the situation but I only heard her comments due to her public profile.

What Happened
AIG received $170 billion from TARP and posted a 4th quarter loss of ~$60 billion. A week ago AIG announced it was paying out $165 million in bonuses to various employees. Total payouts by AIG could reach over $1.2 billion. The difference accounts for additional performance and retention bonuses. Can't wait for that to happen. And you think $165 million is bad?

So here's a smattering from around the web. I tried to find arguements on both sides, but gave up after discovering there really isn't a logical contra-arguement against the paying of the bonuses, mostly just populist rage. Here what strikes me as funny, everybody hates these guys are getting paid, but no one knows for what or for when and everybody hates the 90% tax. Tell me again why we're having this arguement? Is it even productive?

As you can expect, comments range all over, from very sophisticated "These bonuses are terrible but must be paid as a matter of contract" to "Hey, Pa, come n' see what those @#$%* from AIG that knocked up Jenny done did!" Alas, the apparent risks of a computer in every home.

First....

Rick Newman U.S. News explains why we are so outraged.
Myriad experiments in behavioral economics have found that people are willing to pay to punish members of a group whom they believe to be shirkers or free-riders. In other words, people are willing to make themselves worse off (they have to pay their own money) in order to insure that others don’t get undeserved rewards. But when it comes to the A.I.G. bonuses, the costs of clawing them back are trivial at best, while the public satisfaction at seeing what feels like justice being served will be great. Getting all worked up about this money may not, strictly speaking, be rational, but I think that paradoxically, if some of this money is clawed back, it’ll increase the chances that we’ll be able to keep dealing with the ongoing crisis in a rational way in the future.

On to the rational minds...
Andrew Ross Sorkin (Editor, NY Times).
The fundamental value here is the sanctity of contracts. Imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right. A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it. Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work — against taxpayers’ interests.

SmartMoney
For the stock market, this is a rally-killer. Or worse. No one seems to want to determine whether the people getting this money deserve it or not. Maybe some of them don't—maybe some of them are even the bad people who got AIG into trouble in the first place. But maybe some of them do deserve it. Maybe there's one guy or gal who has just done some brilliant trade that has made taxpayers billions, at least offsetting some of the billions in losses. Should that trader not get a bonus? No one seems to care that the 90% tax will apply to all banks that have accepted federal money, not just to AIG. That includes banks like Wells Fargo, who told Treasury secretary Henry Paulson that they didn't even want the money when the Troubled Asset Relief Program (TARP) was enacted last October. Reluctantly, Wells took the money at Paulson's urging, as did other healthy banks such as JPMorgan. Now virtually every employee of every one of them faces a 90% tax on their bonuses. No one seems to care that the Internal Revenue Code is designed to collect federal revenue, not to punish particular classes of people. These employees will simply leave. Or they will turn their brains off. Either way, the taxpayers whose money is at stake in these companies will be hurt—because these companies will crash and burn.A successful economy depends more than anything else on the rule of law. There has to be a stable set of rules governing the interactions between economic players, and between players and the government.

From the Wall Street Journal
If the A.I.G. bonuses looked were the quintessential example of Wall Street self-dealing, the House’s bill looks like a quintessential example of blunt and ill-considered political policymaking. On top of that, one logical consequence of this bill would be that companies will simply pay people much higher base salaries, which takes us in the wrong direction.

Henry Blogett at Clustershock
Today’s frantic passage of the Populist Rage Tax was a new low in the US government’s response to this crisis. It shows just how likely we are to doom ourselves to a decade or more of misery — by choking our markets, closing our borders, turning our banks into tools of social policy, and wrecking what’s left of our economy. If the “TARP bonus” bill the House passed today becomes law, any of the hundreds of thousands of people who work for Citigroup, Bank of America, AIG, and nine other major US corporations will have to fork over 90 cents of every dollar they make that puts their household income over $250,000. That’s household income, not individual income. If you’re married and filing singly, you’ll have to surrender anything over $125,000. Indefinitely.

Eric Etheridge, NYTimes
As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy. But now that taxpayer money is on the line the story has changed: innocent taxpayers are now being exploited by horrible Wall Street financiers. The guy who defaulted on mortgages on his six spec houses in the Nevada desert has turned himself into the citizen enraged by the bonuses paid to the AIG employees trying to sort out the mess caused by his defaults.

David Harsanyi at DenverPost

Here's an idea: If you stop nationalizing banks, there will be no need to engage in phony-baloney indignation over bonus payments anymore. Don't we want AIG to succeed and get off the government dole? What sort of employee would work for an entity that doesn't honor its contractual obligations? How many valuable employees will walk away from such a company?


Chris Bowers at OpenLeft describes why the tax needs to be broad

1. Passing Constitutional Muster: Lawrence Tribe has written that, in order for a bonus tax to be constitutional, it must be "sufficiently general to avoid classification as a measure targeting solely a closed class of identified and named individuals." The more narrow the bonus tax legislation, the less likely it will be ruled constitutional. As such, making the bonus tax as broad as possible is necessary to the survival of the legislation.

2. Weeding out thieves from the bailout program: The bonus tax must apply to all participants in the bailout program, so as to guarantee that only those firms and people interested in helping the economy participate. Anyone who considers their personal compensation to be more important than helping the economy needs to be kept as far away from the bailout program as possible.

3. Addressing a broad culture of greed and excessive executive compensation: I agree with President Obama that the bonus scandal is a "a symptom of a larger problem," based on a broader "culture of greed.". As such, if the bonus tax that is aimed only at AIG, then it simply is not good enough legislation. The bonus tax has to make a broad dent in broader problem of excessive financial services industry employee compensation, which is directly connected to our ever widening income inequality. This is one of the best opportunities I can ever remember to pass such a law.