The Sunday morning talk shows are buzzing about the $165M in bonuses going out to executives in the financial services division of AIG, which has received some $170B in taxpayer bailout money. The AIG problem was caused by writing a large number of credit default swaps, which served to protect bondholders from defaults on riskier (e.g., subprime) mortgages.
There are a couple of salient facts: First, not all executives were responsible for the problems resulting in the need for federal bailout funds, but in fact led profitable operations. Second, these bonuses reflect contractual compensation obligations, preexisting before federal bailout operations, and a provision to bailout terms championed by Senator Chris Dodd specifically grandfathered existing contracts. The New York Times reports that the contracts in question had been reviewed by U.S. Treasury lawyers, whom concluded they could not be broken.
What I don't like in particular is the fact that these issue, mostly symbolic in nature, is being demagogued both by the left and right. The fact is that what we are talking about is less than 1% of the total amount of bailout money. Moreover, AIG does more than credit debt swaps. If the purpose is for AIG to emerge as a viable financial services company, they have to stand by their commitments to their successful executives. To scapegoat talented professionals for the sins of a few is unconscionable.
But don't we allow unsuccessful businesses to go bankrupt, and bankruptcy judges can dissolve contracts? After all, I have been arguing precisely the same point with respect to the automakers and their unrealistic labor union contracts. AIG serves a fairly distinct corporate role in terms of the nature and extent of operations in different sectors, both domestically and internationally. I believe that the reasoning behind the federal bailout was that if AIG itself defaulted on its own liabilities in terms of the credit default swaps, the clients who purchased those swaps would be forced to realize those additional losses on their own books, which could have exacerbated issues with client bank solvency: Dealing with AIG made the crisis easier to manage, and I personally believe that professional managers are better able to handle operations than government bureaucrats.
The idea that the government would chase away the very managers it needs to turn around the company over popular dismay about its legal obligations to its workers is unseemly. Why stop with executive employees? Why not cut salaries or hourly pay across the board? The fact is, most of these bonuses are going to be highly taxed.
I have to admit that I have mixed feelings about defending a payout of $157M to managers whom already make an income multiple of the average household pay (more than I've ever made), and during my own professional career, I've rarely gotten a bonus beyond a holiday turkey. (Technically, certain IT companies offered bonuses, but with lower base salaries.)
But I've never bought into Obama/Democratic Party politics of envy and class warfare, where success is viewed as a zero-sum game: if a person achieves success, it happens only through the alleged exploitation of less fortunate people . I, like millions of Americans, believe in the land of opportunity where we have the freedom to chase our dreams. If we aspire to a career as a well-paid financial services executive, we have a chance to make it happen with talent and hard work. If we were to have spent a lifetime chasing our dream and finally achieve it, how would we feel about jealous people wanting to deprive us of fair market-based compensation commensurate with our abilities and experience? For me, it's not just about these executives: "There but for the grace of God go I." It really is an assault on the American Dream, on all of us.
