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Debate: AIG bonuses

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Were AIG's 2009 $165m bonuses justified? Or, should they be reneged or taxed?

Background of debate

The United States government bailed out AIG in September, 2008 with an initial $85 billion in funding. In November, the government restructured its bailout to include $150 billion in funding. During the implementation of this bailout plan in March of 2009, it was revealed that AIG was paying out bonuses of $165 million to its employees and executives. This caused significant controversy, with claims that AIG was enriching its employees and executives on the taxpayers' dime.
Subsequently, Democrats responded particularly aggressively against the bonuses, with calls for employees and executives to return the bonuses or risk heavy taxes on the bonuses, or possibly deductions from forthcoming bailout money. Generally, although not universally, Republicans have been more inclined to support AIG's bonuses on the basis of upholding bonus contracts with employees, retaining talented AIG workers, and avoiding aggravation at AIG and in the markets that would further worsen the US and global economic crisis.

On March 17th, Treasury Secretary Timothy Geitner declared he would take measures against AIG: "'We will impose on AIG a contractual commitment to pay the treasury from the operations of the company the amount of the retention awards just paid. In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments.'"[1]

Also on March 17th, Senate Democrats sent a letter to AIG CEO Edward Liddy: "We insist that you immediately renegotiate these contracts in order to recoup these payments and make the American taxpayer whole. We stand ready to take the difficult, but necessary, step of working to enact legislation that would allow the government to recoup these bonus payments, perhaps by imposing a steep tax -- as high as 91% -- that will have the effect of recovering nearly all of the bonuses that have been paid out since AIG turned to taxpayers for help."

And, on March 19th, the US House of Representatives voted to 328-93 to tax AIG's bonuses. While efforts to tax AIG tapered off later in March in both Congress and the Obama administration, the debate continued on both philosophical and practical grounds.

Contents

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Morality: Were AIG's bonuses morally justified?

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Pro

  • Most AIG employees are blameless and earned bonuses "In defense of AIG bonus". TPM Blog. March 16, 2009 - "other depatments that made money should not fall under the same derision. Maybe a guy doing a good job trading in currency futures made what would have been a 10 billion loss into a 9 billion loss. Shouldnt he be compensated. And what about all the day to day claims and underwriters who have nothing to do with CDS, should they be penalized along with the risk takers in the swap department? This is a big company, and while it is in bad shape due to it's own poor risk management, not every department should suffer for the faults of a few."
  • Congress cannot punish AIG with "laws attainder" Wayne Outten. "Opinion: In Defense Of The AIG Bonuses". CNBC. March 23, 2009 - "As Americans, we must uphold the rule of law even when—and especially when—it’s difficult and challenges our sense of fairness. We are justifiably proud of our Constitution, which protects individuals against abuses of power by the government. Our Constitution prohibits Congress and the states from passing 'bills of attainder' (laws that aim to punish a single person or specific group of people) and from enacting ex post facto laws (laws that criminalize conduct retroactively); the latter prohibition recognizes the fundamental unfairness of punishing someone for doing something that was lawful when they did it."
  • Punishing AIG bonuses only caters to populist anger "Rumbling on. The Row over Bonuses". Economist.com. March 23, 2009 - "In an appearance on the Jay Leno show he sang along with the chorus of disapproval and maintained that America had to get back to 'an attitude where people know enough is enough' and a 'sense of responsibility'. It was left to Mr Leno to say he thought it a 'little scary' that the government could impose a tax on someone it doesn't like. [...] Recessions produce economic insecurity and are ripe for populist politics. The danger is that Mr Obama risks being seen to be pandering to populism."


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Con

  • AIG bonuses represent company's greed "Commentary: AIG bonuses are just part of the problem". The Fort Worth Star-Telegram (Editorial). March 19, 2009 - "The American International Group bonuses symbolize the wretched excess, greed and irresponsibility that have plagued much of the business world in recent years. [...] The obscenely obese bonuses total $220 million to hundreds of employees, with $55 million awarded in December and another $165 million in retention bonuses paid last week, according to news reports. Seventy-three employees got bonuses of $1 million or more and the biggest bonus was nearly $6.5 million, The Associated Press reported. [...] For these undeservedly lucky folks, AIG must stand for 'Ain't It Grand?' But for the average bonus-deprived taxpayer, it stands for 'Ain't It Greed?'"
  • AIG bonuses are an insult to suffering taxpayers Sens. Max Baucus, D-Montana - "'Millions of Americans are losing their jobs -- millions. And to some degree, they're losing their jobs because of actions taken by some of these firms. At the same time, they're giving themselves bonuses. I mean, give me a break. What are these people thinking? That's part of the problem. They're not thinking.'"[2]
Rep. Carolyn Maloney (D-NY), the chairwoman of the Joint Economic Committee: "Like many of you, I was outraged to learn over the weekend that AIG is paying out another $165 million in bonus compensation. For a company that has required $170 billion in U.S. taxpayer assistance and is 80% owned by the United States Government, this is clearly unacceptable."[4]
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Contract: Was AIG obligated by contract to give bonuses?

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Pro

  • AIG employees fulfilled terms of bonus contracts Frank Snyder, professor of law at Texas Wesleyan University and editor in chief of ContractsProf Blog. New York Times Room for Debate. March 17, 2009 - "the party raising the defense [AIG] has received all of what it bargained for (the employees’ services) and the other party (the [AIG] employee[s]) has done everything he or she was supposed to do."[6]
  • AIG did not file for bankruptcy; bonus contracts still valid Thomas Keeley. "In Defense of AIG Bonuses". DC Republican. March 18, 2009 - "it’s important to remember that bankruptcy is one of the legal protections a business has to get themselves out of the potentially crippling contracts without having to go through a sea of red tape and individual legal proceedings. [...] Just as is the case with any company, AIG had the option to file bankruptcy, go into protection and remove these contracts. However, the United States felt that AIG was too big to fail, and decided that instead of letting them go bankrupt, they would give them the money they needed to continue doing what they thought was needed to become solid again."


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Con

  • AIG bonus contracts, like all contracts, are subject to change Tom Baker, professor at the University of Pennsylvania Law School, wrote on the New York Times' Room for Debate on March 17, 2009. - "Contracts get repudiated, renegotiated, modified, delayed, worked out, managed — pick the euphemism — all the time. A.I.G. knows this. Its insurance businesses pioneered the use of commercial leverage to get peopleto accept less than what the contract supposedly required."[8]
  • Congress can invalidate AIG contracts with cause. Congress has the constitutional right to invalidate contracts with proper cause. The fact that the AIG bonus follow a taxpayer bailout of AIG is certainly just cause.
  • AIG bonus contracts are invalidated by taxpayer bailout The AIG bonus contracts were certainly valid when they were signed. But, when taxpayers bailed out AIG, circumstances certainly changed. It was no longer simply a contract between AIG and its employees. Suddenly, a third party - the taxpayers and their money - were introduced. And, taxpayers should not be held liable for these bonus contracts. Obviously, this changed the terms of the contracts, and they must be renegotiated.
  • AIG bonuses would not have been possible without bailout AIG would not have survived without taxpayer bailout, so they would have entered chapter 11 bankruptcy and the AIG contracts would have been voided. For them to argue that these contracts are inviolable after the bailout is ludicrous.
Andrew M. Cuomo, New York attorney general - "You could argue that if taxpayers hadn’t bailed out A.I.G., the contracts wouldn’t be worth the paper they were signed on."[9]
  • AIG signed bonus contracts as golden parachutes (invalid). AIG signed its bonus contracts with its executives with the knowledge that AIG was on very shaky ground in 2008. It is not as if the company was healthy in 2008, when it signed the contracts, and then, all of a sudden, it fell ill in 2009. Therefore, it is plausible and possibly likely that AIG signed these contracts as a means of providing its top executives golden parachutes as the company collapsed around them.
  • AIG signed bonus contracts on assurances of bailout (invalid). AIG signed its bonus contracts because it correctly estimated that, despite the risks of the company imploding, the American taxpayers would bail the company out. The US government should not reward this calculation by allowing the bonuses to go forward.
  • AIG should reveal contracts so public can judge validity Charles Fried, professor of contract and constitutional law at Harvard Law School, wrote on New York Times, Room for Debate, on March 17, 2009 - "As we all own 80 percent of the company, we ought to be able to see the text of these contracts. They should be posted on our company’s — that is, A.I.G.’s — Web site. Then we can discuss whether the recipients of that money really earned it."[10]


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Auto comparison: Are AIG contracts comparable to renegotiated auto contracts?

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Significance: Is the AIG bonus issue economically significant?

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Pro

  • AIG bonuses are insignificant relative to larger problems The AIG bonuses were only $165 million. That is very small compared with the hundreds of billions of dollars under consideration in the bialouts and relative to the $12 trillion economy. It is not worth exhausting any more energy on such a relatively small amount of bonuses.


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Con

  • $165 million AIG bonuses is not chump change Greta Van Susteren, Fox News Host: "Some people are saying, Forget about those bonuses. It's a drop in the bucket compared to the $170 billion you leant to AIG. But you know what, $165 million -- that's a lot of money. [...] We did some research and found some interesting numbers of what you can do or what can you get for $165 million at current market prices. So check this out. You could get more than 2,600 200 Cadillac Escalades. And to fill up that car, $165 million would get you more than 85 million gallons of gas. In that Cadillac, if you're hungry, with $165 million, you could buy more than 39 million McDonald's Happy Meals. [...] So to us, that $165 million -- it just doesn't seem like chump change."[11]


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AIG recovery: Are bonuses essential to AIG's recovery?

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Pro

  • Bonuses help AIG keep employees and survive "What has AIG done wrong?". Mises.org. March 19, 2009 - "AIG has to pay salaries and bonuses in order to keep its people employed, and to dissuade those in important positions from moving to a different company. If we can assume that this is true, the government should not be surprised that an influx of money was given out in the form of bonuses. If it truly comes down to it, would the government rather AIG give bonuses to the people who are vital to the success of the company, or would they rather those people leave and AIG completely fail?"
  • Punishing bonuses will distract AIG from restructuring David Weidner, Marketwatch: "I think what we're doing here is we're cutting off our nose to spite our face because you're going to go after these bonuses, you're creating a lot of disruption at AIG. And right now, AIG as a company is not -- it's not business as usual. This company is struggling. Its insurance business is struggling. They're trying to unwind, you know, billions in derivative contracts. [...] They need people, all hands on deck. They need to be focused. I don't care how terrible they are. They are the people in these jobs. And I think that we're risking billions and billions more by clogging up AIG and its management with fighting these bonuses and answering subpoenas. We know the bonuses are bad, but let's stop them from having bonuses next year."[12]


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Con


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Recovery: Is allowing AIG bonuses important to larger economic recovery?

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Pro

  • AIG bonuses furor distracts from solving larger crisis. The AIG controversy is merely a distraction from the much larger crisis at hand in the United States and globally. The dollar amount is much less significant than the amount of time being spent on the issue, and the cost that that time has for on addressing the larger crisis.
  • AIG got itself into crisis; only it knows how to get out. AIG created the bomb. Only it knows how to diffuse it. Bonuses may be part of that approach, particularly because they are necessary in retaining AIG employees and surviving.


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Con

  • Taxpayer bailout of AIG justifies government control The Internal Revenue Service statement - "The IRS recognizes that those entities that receive taxpayer support have a special obligation to pay their taxes, and these taxpayer accounts will remain closely monitored by the IRS to ensure that the full amount of taxes due are paid."[13]


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Government programs: Does maintaining AIG bonuses help government programs?

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Pro

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Con

  • Allowing AIG bonuses would undermine government-citizen trust. There is such public outrage over the AIG bailouts, government action in reneging or taxing the bonuses is necessary to maintain a healthy relationship and trust between government and citizens in this trying time. If the government takes no action, a sense will develop that government is ineffectual, which will undermine government programs, precisely when confidence in these programs is needed most.
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Taxes: Is taxing AIG bonuses a bad idea?

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Pro

  • Taxes should not be used to punish AIG The Texas Republican Jeb Hensarling - "'You know, this is the wrong instrument to go around and say [about] people that do things that are reprehensible, ‘I’m just going to tax them,’ Hensarling said. 'Who’s up tomorrow? You know, a lot of my colleagues vote on reprehensible legislation — when I’m in power, should I vote to increase their taxes 100 percent?'"[15]
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Pro/con sources

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