AIG Saga: Importance of Contracts and Government Inefficiency

The newly announced TARP 2 plan from Secretary Geithner today has wiped the AIG story off the front page. However, the Senate is still considering taking up the House’s “Bonus Tax” bill. Last week, in the heat of the battle a lot was being said about AIG, Geithner, Obama, and executive pay. With the weekend past, and anger somewhat calmed, a few key summary points have emerged:

  1. The importance of the stability of contracts in America should not be understated. Levying a tax in spite after the fact makes future contracts all the less binding and will complicate the compensation process for firms throughout the economy.
  2. Geithner had no choice but to let the bonus money be paid. The contracts probably should have been renegotiated in exchange for the bailout money back in September. Such a deal would have been perfectly equitable. But they weren’t, and the 2008 pay year has passed.
  3. The “bonuses” were really just secondary compensation, structured that way for tax purposes. We shouldn’t seize on a term because of its varied meaning.
  4. While the AIG pay levels were probably too high (given that the employees brought down the firm), we can not arbitrarily determine what “too high” means as a society. Why has $250,000 become the “rich” standard? That number has a lot of unintended consequences.

The 90% tax bill passed in rage by the House violates many founding principles of America, ex post facto and otherwise, as this column in the Wall Street Journal points out. Even Jay Leno understood this point in his interview with President Obama. As the WSJ piece points out, in Federalist 44, James Madison warned that “Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation.”

The most important thing we should learn from this whole saga is that the AIG mess goes to prove that when you mix government and business you get terrible results, a point that we at Reason have been arguing all along. Geithner has enough on his plate without an economic crisis or an insurance giant to run. You can’t run a company by public committee. Sometimes hard choices will have to be made (such as following a contract that seems inequitable).

Other posts in this series:

What the AIG Contracts Said

AIG Saga: A Horrible Tax Idea

The AIG Mob Mentality