What's Wrong With This Picture?

I have been following with amusement the folly surrounding the payout of $165 million in retention bonuses to AIG employees. In case you have been on the former planet Pluto for the past two weeks AIG paid out these bonuses in accordance with provisions of contracts signed by the employees and management. These employees are in the financial products division, those evil doers that are responsible, apparently, for everything just short of the cruxifiction of Christ, and there are rumors they may have played a part in that. The largest of these bonuses, some $6.4 million, as well as some smaller ones are being returned, the recipients being shamed into it by the likes of Barney Frank (The Banking Queen) and the Teleprompter in Chief, Barack Obama. The latest assault on these "bastards" was passed by the House last night tacking a 90% tax on amounts in excess of $250,000. This passed with 318 votes, which in itself is pretty amazing. Whether the coffee grinder that is the Senate will pass it remains to be seen. Of course this move is being cheered by the pitch-fork carrying protesters in the street, sending death threats to the bonus recipients and their families. What a country!

There are so many things wrong I hardly know where to start. Let us begin with contract law. Imagine you are one of these employees at AIG back in September. You are a quickly rising star at the largest insurance company in the world and heretofore everything is rosey. You are making a six figure income but the real money comes in a performance bonus at the end of the year. Oops! Come to find out that crap you have been selling is worth less than the paper it is written on and, instead of making money, the company is losing billions. Bye, bye performance bonus and hello unemployment line. Here comes the government saying the company is too big to fail and throwing billions at the problem to fix it. The only problem is that, while politicians are great and lying and giving speeches(am I being redundant?), They know less about these insurance contracts and how to value them than any second grader. They need these people to help them unravel this mess. So the management of AIG agree to retention bonuses to these employees to assure that they have the necessary talent to get the job done. They signed a contract! The employees, who broke no laws, agreed to stay and help fix this mess, passing on opportunities with other private sector firms, which would allow them to earn similar money to what they were making at AIG. The Treasury Department and Chris Dodd signed off on them. Most of us would be reasonably comfortable that the deal was done. Hah!

Now what is happening is that the jack-booted thugs in the state and federal government are endeavoring to void legal contracts, pass a retroactive tax on specific individuals, and stir up the class envy constituents on the street. According to the constitution they have no right to do the first two and shame on them for doing the third. Sadly the head instigator in this mess is the President. Most members of Congress agree that what they are trying to do is probably unconstitutional. So why do it? For show that is why! Because most of their constituents have never made the kind of money the bonus recipients are receiving nor will they ever. The fact that government money is involved is just a tool to justify these illegal acts.

So you are one of these evil doers, what do you do? One, you give the bonus back and quit, letting them fix the mess themselves. Two, you keep the money, meet the terms of the contract, then quit. Third, you give back the bonus and stay on at what ever compensation Lord Obama deems appropriate. If you decide to keep the money you know that you will probably spend a large portion on lawyers trying to hold on to it. The sad fact is that even if you are right it will cost you dearly to prove it.

After the furor has died down the government, 80% equity holder in AIG, still has a mess to fix. This harkens back to the savings and loan failures of the 1980's. The savings and loans failed, the Resolution Trust Corp. took them over, and found buyers for them. This was before the days of bundling mortgages and selling them off was commonplace. After the dust settled it was determined that many financially savvy companies bought these assets and deep discounts to their value and made a killing through tax incentives and the resale of the assets. I know because I was working for such a company at the time. This was because the people at the RTC were way overmatched by the private sector and essentially had a fire sale just to get rid of the assets. The losers in this endeavor was, as usual, the taxpayers. Hopefully this will not happen again but it looks like it will.

I am not a bit happy about any of the financial upheaval going on right now. There is plenty of blame to go around, a big portion of which should go to the actions of the government for the past 20 years. Through tax policy and attempts at social engineering they created and environment to allow these things to happen. It would be nice to see this change but, sadly, history has a habit of repeating itself.