After receiving billions in bailout money, AIG plans to provide its executives with $165 million in bonuses. In the face of public outrage, Obama has announced his intention to do something about this.
In defense of the bonuses, the folks at AIG have offered two main arguments. First, it is claimed that the contracts specifying the bonuses were set prior to the bailout. Since the people receiving the bonuses are doing so under legitimate contracts, then they are entitled to the money. Or so it is claimed. The second argument is that if AIG does not pay out such bonuses, their top people will leave for companies that will pay them large bonuses. Without such people, the argument goes, AIG will collapse and this will ruin the economy even more.
I have a reply to each of these defenses.
In regards to the contracts, the folks at AIG do have a point. A contract is a binding agreement and, as such, should normally be honored. However, contracts are not magically unbreakable and changing conditions can justify a change in a contract. After all, insurance and financial companies often change their contracts and agreements with their clients and, as such, they surely must accept that the same can be done to them and for the same sort of reasons.
In the case of the bonus situation, it seems reasonable for the government to have the power to change such contracts. After all, we have literally bought the right to do so. Of course, such a purchase does not convey unlimited rights to break contracts. While the government should respect some limits in revising contracts, it seems reasonable to change them so bonuses are limited.
In terms of justifying this, it can be argued that bonuses are intended to be rewards for success. Given that AIG is failing in a catastrophic manner it seems unresonable for the executives to expect such bonuses. As such, it seems reasonable for the government to insist that the bonus contracts not be honored.
Of course, AIG has the right to refuse to accept such a request/demmand. If so, then AIG should promptly return the money it took, preferably with a suitable amount of interest.
It might be replied that AIG has the right to keep the money and pay out the bonuses. After all, the money was handed over without any specifications about executive compensation. As such, the folks in government would seem to have little right to make demands now-such restrictions should have been put in place before the money was handed over. Of course, the folks in government can put restrictions on the money that AIG will be asking for soon and one of these restrictions can be that they cannot pay out bonuses now.
Obviously, if the folks who handed AIG money thought that AIG would act responsibly, then they were clearly misguided (at best). AIG is in the mess it is in, at least according to some, because of the alleged greed and scheming of the folks in charge. Why would anyone think that these folks would behave responsibly with federal money?
In regards to the second defense, the obvious reply is that if these executives are so good and so worthy of bonuses, then why is AIG a financial ruin? If there are people in AIG who are managing to do a great job and who are working financial miracles, then I am fine with giving them due compensation. All I ask is for adequate evidence of their alleged accomplishments. There seems to be no evidence for that, but I am willing to consider any evidence that is offered.
As far as the executives going somewhere else, the obvious reply is that there choices are rather limited these days. After all, many of the big financial companies are either gone or are struggling. I would be inclined to say that no one would want the executives from AIG, but executives seem to be willing to look out for each other. No doubt the AIG executives could quickly move on to other lucrative positions. However, this might not be a bad thing.
If the top executives were responsible, at least in part, for the AIG disaster, then getting rid of them might be good for the company. If these people could be replaced by those who would do a better job, then this might be part of getting the company back on its feet. In the world outside of privileged executives, when people fail so awfully they are typically fired rather than rewarded. While this is often a form of punishment, it is also the way to open the positions to people who will do the job properly. So, rather than getting bonuses, perhaps these folks should get pink slips.