Out of Control Policy Blog

What the AIG Contracts Said

Anger is turning to weariness with the AIG mob saga. But the situation is probably far from over. Yesterday, President Obama spoke, Secretary Geithner spoke, and we got a look at one of the contracts, all of which has clarified where we stand, for better or worse:

First, the contract. While contracts were tailored to specific individuals at AIG, with varying terms, we do have a copy of a standard contract AIG wrote up to offer bonuses to their employees. 

  1. These contracts were for 2008, authorized Dec. 1, 2007, well before the bailout given to AIG. If the point of the bailout to AIG was to keep the firm alive because it was "too big to fail" then that means letting the firm honor its contracts to vendors and employees. Libertarian theory stands on rule of law, and the undermining of the stability of legally binding contracts in general has very dangerous ramifications long term. If the firm is in bankruptcy that changes everything, by law, and that would be better, but if not, Treasury has little choice in this matter.
  2. The stated purpose of the contracts was to align employee incentives with AIG incentives and to retain staff in a tumultuous business cycle. 
  3. The contracts offered a 30% profit share in AIG distributable income. While Steven Davidoff at NYT says this "shows the cavalier attitude of A.I.G. management," that critique is an arbitrary idea of what fair pay is. In reality this probably well aligned employee incentives with the firm succeeding, but that doesn't mean that they made the right choices.
  4. Aside from the profit share, these were not only performance based contracts. Part of the "bonus" was guaranteed, not directly linked to personal outputs, and "calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 of 2007 compensation." So essentially this money is not a bonus, its just secondary compensation. Its just a part of their pay. They knew what the base salary was, and what the end of year secondary compensation was (aka "bonus"). Whether or not this is a good arrangement, who are we to demonize the pay schemes after the fact? Its only our arbitrary estimation of value.
  5. These contracts weren't the best written, and the employees got a great deal. That doesn't mean we can tax them 90% because we want to. Should we tax baseball or football payers for making millions? 
Second, Geithner's interview with CNN: 
  1. Geithner admitted that language in the stimulus bill that allows for bonuses to be paid was necessary to legally honor contracts and avoid lawsuits--and that he and Senator Dodd were well aware of this at the time the stimulus bill was being authored.
  2. Geithner said he did all he could to legally stop the bonuses, but at the end of the day he had to allow them to be paid. 
  3. All that said, it looks like Geithner is still gonna try to get the money back. Of course it would be nicer if we got all the bailout money back, or if we spent more responsibly throughout the government.
Third, President Obama spoke on Leno:
  1. In this interview the President said he wants to put more checks and balances on Wall Street to keep firms like AIG from "holding us hostage." Of course if we never bailed them out we wouldn't be in this position in the first place. We gave them the gun and let them stay in the bank. More government regulation won't fix that. He also said that we should "get back to some common sense regulations." There is some truth to this, that we do need smarter system, but the financial sector is already incredibly regulated, so perhaps less is more.
  2. The President said that he was going to do everything he could to "get the money back" from AIG employees.
  3. Even Leno realize that the 90% tax targeted at individuals on a whim is a scary idea. The President seemed to be uneasy with the Congress plan though he didn't directly condemn it or say he'd veto the tax plan. Then the President went on to reiterate his belief that people over his arbitrary wealth threshold should pay more taxes.
So it looks like AIG is still in trouble, though there is understanding from the Executive branch that legal contracts are legal contracts. What is very clear though is the attitude of the Administration, and it was encapsulated in what the President said about working in the country: 

"We need young people, a smart kid coming out of school, instead of them deciding to be an investment banker we need them to decide to be an engineer, they want to be scientist, they want to be a doctor, or a teacher, and if we are rewarding those kinds of things that actually contribute to making things and making people's lives better, that's gonna put our economy on solid footing."

What is so troubling about this is the lack of understanding that our economy's growth has been largely driven by the wealth of the financial sector, providing capital to the rest of the country to do all the great things we have done. It is a critical component of our economy. It should not be looked down upon, and hated as we are doing as a nation. We can't keep attacking Wall Street.

Anthony Randazzo is Director of Economic Research


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