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  • AIG, Bonuses and Bankruptcy


    Bonuses for AIG employees? News this weekend that troubled insurer AIG, after receiving over $170 billion in taxpayer funds to prop itself up, is planning to pay some $1.2 billion in bonuses and retention payments met with general outrage from the average man in the street to the man in the White House. Now comes word that President Obama has called on Treasury Secretary Timothy Geithner to pursue “every legal avenue” to block the payments.

    That may be easier said than done. Like most other issues in the massive Gordian mess of the financial world, this problem is not as simple as it seems. Despite the focus on high-flying executives, most of the recipients seem to have been mid-level employees. And some apparently were folks who were brought in to help clean up the Augean residue within AIG, exactly the sort of folks you’d want to compensate.

    That doesn’t explain all the bonuses however. Seven individuals reportedly received more than $3 million. And while it’s impossible to delve into the merits of each, there’s little sense that AIG engaged in the sort of cutbacks one would expect of a firm losing billions — and supported by billions — in taxpayer funds.

    But there’s another problem: AIG maintains that many – perhaps most – of the bonuses were required by contract, and thus AIG had no choice but to pay them out. That presents a bit of a legal and constitutional barrier to efforts by Geithner to block payments. And unless Geithner finds sound legal grounds for challenge, the precedent created by government efforts to break contracts could be an ugly one.

    This conundrum illustrates the problems inherent in ad hoc taxpayer bailouts such as that provided to AIG. In the normal course of events, failing firms end up in bankruptcy court, where pre-existing contracts and debts can be reduced or eliminated, under the (non-political) supervision of a court. That’s the option recommended by my colleague Andrew Grossman last week for General Motors and Chrysler, which are groaning under the weight of their own labor contracts.

    The AIG situation, of course, is in many ways different. The stated rationale of the bailout has been to ensure that AIG could honor its financial commitments – thus avoiding cascading instability in the financial system. Regardless of whether you agree with the rationale, bankruptcy undercuts that assurance.

    The result is unsatisfactory – with AIG functionally bankrupt, but without the ability or incentive provided by bankruptcy to reduce its costs. And the difference is unhappily covered by the taxpayer.

    The situation underscores the distortions and unexpected consequences which accompany any kind of financial “rescue” plan, especially an ad hoc one such as AIG’s. These costs must be considered before policymakers again press the bailout button.

    Posted in Economics [slideshow_deploy]

    21 Responses to AIG, Bonuses and Bankruptcy

    1. Ozzy6900, CT says:

      If there is truth to the story that the bonuses were given to workers by contract, then there is nothing that can be done. If the company is viable, it must honor the contract that it entered with the employees, no matter where the money came from (providing it was legally obtained). If this is the case, the Government has no right to try to take back the money.

      Also, isn't it strange that the Left seems to be okay with AIG in the long run? Could it have something to do with Campaign Financing? Just ask yourself, "If this Momma Jo's Insurance Co., would the Feds be pushing money at Momma Jo like they are pushing it in the face of AIG?".

    2. Brittancus says:

      The politicians ,the governors, judges, police chiefs and lowly representatives, who ignored the illegal immigration occupation in a impoverished foreign country, would have been assassinated by now. That is not condoned in a civilized nation like ours, but we do have a remedy of throwing the rogues out of office in 2009. That's when majority leader Sen. Harry Reid (D-NV) , his accomplice House Speaker Nancy Pelosi (D-CA) and 48 democratic indentured servants, who have sold their soul to the wealthy business fraternity—and outlawed E-VERIFY— start looking for our votes. The Stimulus/ Omnibus we thought was to return US workers/legal residents back to work? The President of the Heritage Foundation Robert Rector stated in an earlier interview that the E-Verify loophole, would give access to 300.000 construction illegal alien laborers. Rector has suggested that visa over-stays and border jumpers have infiltrated the job market—not just low paid, but high paying, blue collar–white collar and even professional positions.

      E-Verify would have started to remove the stigma of illegal aliens from the workplace, opening hundreds of thousands more jobs for the legal population in this economic subsidence. For more understanding how the American people have been brain washed by the leftist press. Go to NUMBERSUSA, JUDICIALWATCH, CAPSWEB, FAIR AND AMERICANPATROL. Call your representative in the Senate or House: 202-224-3121

      Incidentally don't trust the cloaked Council of Foreign Relations, as they are involved in this portentous NORTH AMERICAN UNION arrangement. They see our nation as a merger of Canada, Mexico and this sovereign land, with open borders and the free movement of foreign nationals. Read about Europe where the different European country have been saturated with labor from foreign lands, where even in Britain the indigenous people are in direct competition— with civil unrest brewing.

    3. Spiritof76, New Hamp says:

      Stop the bailouts. Let AIG go bankrupt. US is bankrupt. Chinese are demanding some guarantees on the nearly $1T bonds they possess.

      How come Congressmen are allowed to have cushy benefits not available to ordinary American citizens? Their dismal performance doesn't seem to matter. AIG is doing what Congress and the government employees do routinely.

    4. Barb -mn says:

      This is government neglect. How incompetent of the government to hand over billions of other people's money, before knowing where every penny is going. How careless, how irresponsible. Seems theatrical. Where is any spokesperson for AIG?

      It's all intentional and deliberate. Where one or two AIG higher ups took the government bribe and know what's going on, the rest are unknowingly apart of the set-up…leading to the collapse of the free market. One of their Diversionary tactics, also. Keep all eyes open.

    5. Roy, shelbyville,Ky says:

      If you believe that the administration did not know anything about the bonus pay out at AIG, then you probably believe that the cow jumped over the moon. People can ACT indigent and say they will have Tim Geithner investigate this situation, but the bottom line is that the bonus will be paid out as scheduled. I believe that all of these people knew of this scam and if you follow the money, you will find the culprits, and that my friends is being as nice as I can be.

    6. Brad S,, Detroit, MI says:

      I was hoping that someone could investigate the rumor that the main reason the Government so flippantly bailed out AIG with no strings attached and no plan (or transparency) of the funds was not that they were "too big to fail", but rather, that all of the Federal Government employee's pension plans were through AIG. If you allowed AIG to go bankrupt, there goes all of their golden parachutes. Even though I have not seen any evidence of this, it does make all of this nonsense suddenly, make perfect sense . . .

    7. Lynn B. DeSpain says:

      Here we have five hundred and thirty six lawyers in Washington DC, that we have elected to do their best to represent us, and they couldn't see this coming? Come on! They couldn't even keep a straight face while telling you that!

      It sounds a lot like they are in the same bed together and a lot of money is exchanging hands, and we have a name for those people don't we?

      Let them fail! China can't repo anything here. They cannot take any thing from any of our States, even if Hillary and Obama think so, because it is unconstutional.

      Let the nature run its course, even the nature of business.


    8. Tom H., Atlanta says:

      What's the fundamental problem with bankruptcy (in September, or more recently, when AIG needed another big infusion of federal funds). In bankruptcy, a Company can selectively void executory contracts. Thus, AIG and its Treasury puppetmasters can choose to perform executory contracts necessary to shore up the U. S. financial system and not to perform bonus agreements with employees of its credit default swap and derivative units. They can also choose to file for the holding company with all of the bad paper and not for the regulated insurance subsidiaries.

      Why didn't Geithner and Obama insist on this a month ago when (1) they knew of these bonus agreements and (2) AIG would have had no choice except to follow their direction relative to bankruptcy? I suspect two causal factors (1) they don't want anyone to be spooked by the b-word relative to someone as big as AIG, particularly banks fully or partially owned or supported by foreign governments, which might fear selective voiding of credit default swaps and derivatives that they hold themselves and (2) use of the bankruptcy path for AIG would make their decision to rule it out for GM and Chrysler even less credible than it already is.

      I believe that the outrage expressed by Obama about the bonuses is a show in light of the evidence that they were preventable absent other external influences. From their perspective, letting the bonusses flow and making a big public fuss about it seems like a conscious decision made in light of recognition of clear options to kill the bonusses.

    9. TedN, St. Petersburg says:

      Reportedly, Chris Dodd (FoxNews this morning)is responsible for previously inserting language guaranteeing the bonuses… Therefore, there are no surprises and all the acts of indignation are just that.

    10. Richard, Phoenix, AZ says:

      Are bailout's politically motivated? Of course they are. Where does this government get off, giving our money to anyone who has proven to be incompetent at company management. AIG and any other financially distraught company should be held accountable for there mistakes, just like every other hard working american. Force them into reorganization, monitor there progress and if necessary, supply them with a loan, to be paid back with interest, just like every other hard working american. Isn't it great that we, the taxpayer, where able to help AIG employees with there house payments, auto payments, grocery bills, and so on. If contractual aggreements require an employer to pay a specific amount of money to a employee, then pay that person, but, don't call it a bonus. A bonus is something paid in addition to and not to be expected.

      I'd like to thank the Heritage foundation for doing the right thing. Trouble is, we never really know what the left will be up to next.

    11. TedN, St. Petersburg says:


      In December 2008, the Thomas More Law Center filed a federal lawsuit against the U.S. Treasury Secretary and the Federal Reserve Board to stop the impermissible use of bailout funds by AIG.

      Now, Department of Justice attorneys out of Washington (supported by our tax dollars) have entered the case to defend the AIG bailout.

      According to Thomas More Law center lawsuit, the U.S. government, through its ownership of AIG, which promotes Shariah-compliant financing, is not only violating the Establishment Clause of the Constitution, but it is also financing the destruction of America using American tax dollars.

      Apparently, there is alot more here than honoring contracts.

    12. Ken, California says:

      Tom in Atlanta likely has it right. Another thought is that bk is usually public and all creditors would have to be identified. At least that's my general understanding. It would be interesting to see that list of AIG "creditors."

      I'm almost finished with The Forgotten Man, a book by Amity Shales about the first two terms of FDR- Franklin Delano Roosevelt. It is shockingly parallel to what we are witnessing today: "brain-trusters" chasing strawmen — bankers and Jewish butchers. And the obvious: the ramping up of executive powers. There's an anecdote about FDR picking the gold price from a list of his favorite numbers. What incredible arrogance. And certainly a picture of this great savior not printed in Holt-Reinhart's high school texts.

      Based on our society's general lack of civics history and practically any economic understanding, I'm rather gloomy about an effort to apply Reason to today's events and get a plurality on our side. But the contract is an important piece and despite AIG paying off with borrowed money, the sacredness of contracts is something that if lost will doom us faster than anything else.

      If the government moves against a legal contract, we should push all of this into the courts — all of it. It was the courts that pushed back on FDR's alphabet agency idiocy. By midterm elections in 1934, FDR was hiding his Socialist enablers and using the radio to project "sweetness and light."

      So that's the clue to watch for. Because all of us have a contract of some sort with someone or something. Once there is shown they can become worthless, you have no law. And that's a "crisis" Obama would surely like to see.

    13. Extirpates, San Dieg says:

      Problems with AIG bonuses…

      The biggest flap comes from Congress and the White House;

      how can we pay bonuses to private companies without bonuses for our hard work;

      Congress has to calculate what basis they can use to pay them millions of tax free dollars without having to work for them.

    14. JMP, St Augustine, F says:

      AIG has demonstrated repeatedly that they are more concerned with “rewarding” the “talent” that led them to the brink then taking care of customers and investors, or paying back the taxpayer. This is what happens when our elected officials react in a shoot from the hip, hair on fire mode. Our bankruptcy court system is designed to deal with these situations and has the experience to do so. Bankruptcy, not bail out was, and remains, the correct option for AIG.

    15. Jerome Zacny says:

      Geithner wrote the bailout provisions for AIG. Dodd wrote the terms of bonus restrictions for companies receiving bailout cash, exempting the bonus payments to AIG employees. The time for righteous indignation was when Geithner and Dodd drafted these provisions. But then again,despite Mr. Obama's promise of 'transparency', the American public was not made aware of these provisions prior to their being signed into law.

      We are now learning what Mr. Obama means by 'transparency'. After all is said and done, and signed into law, we taxpayers will be shown what what was in the legislation.

      The "stimulous/porkulous" bill had over a thousand pages in it and was signed into law by Mr. Obama within 24 hours of receipt. What happened to Mr. Obama's promise of posting such proposed legislation on the Internet for five days public viewing before acting on legislation? It is rather doubtful that we taxpayers could have read the thousand plus pages in a five day period. But the really troubling aspect with the passage of this legislation is that neither Congress, nor Mr. Obama, had no time to read it before voting on it and signing it into law.

      Perhaps if Mr. Dodd considered the impact of the exemptions he had inserted into bonus restrictions for companies receiving bailout cash and perhaps if Mr. Obama had read what he has just signed into law, these two gentlemen might be less shocked and dismayed to learn of the consequences of these actions. The situation is reminiscent of the scene in Casablance where Captain Reinot reproaches Rick saying "I'm shocked, shocked to find there is gambling going on in this place" only to be immediately approached by the croupier with his winnings from the roulette table.

      To see Messrs. Obama and Todd now expressing shock and dismay to learn of AIG bonuses being paid is a bit puzzeling. But I am confident will will shortly be appraised of how these bonuses were snuck into the bailout and obfuscated by

      non other than George W. Bush.

    16. Rick, Lynnwood, WA says:

      According to this article, the total spent in bonuses is still less than 1 percent of the bailout money. Is that really worth the possible consequences of the government deciding which contracts a business will honor or not. Where they given mandates on how to run their business when they got the bailout money? I say quit crying.

    17. Grace, Florida says:

      If Dodd and the boys knew about these bonuses (which I believe they did) they just need to shut up and pay them – and stop trying to hookwink the public. These guys are so crooked it's not even funny. It's just another grandstand play by the Libs. This is what government intervention looks like folks – get used to it.

    18. Barb -mn says:


    19. Stew Morris says:

      If we let them go bankrupt there would be no bonus.

    20. Joe Blow says:

      AIG needs to fail!

    21. Pingback: The Spirit Of Al Capone Lives « Justbkuz

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