New York Attorney General Andrew Cuomo (hat tip: LA Times) asserted that on Friday insurance company AIG, recipient so far of perhaps $170 billion in bailout assistance, distributed over $160 million in “retention payments to members of its Financial Products Subsidiary.” These payments apparently included “retention” payments of over $1 million each to eleven individuals who are no longer working at AIG.
One of the reasons this is so outrageous is that the promise of such bonuses was in fact one of the very factors that caused our current problems, creating incentives for managers of AIG to get out of solid insurance underwriting and into hedge fund gambling. If anyone had supposed that AIG had “learned its lesson”, this report seemed to dash that hope against the wall like a plate of china.
Some may argue that AIG’s hands were tied by contracts the company offered employees in the spring of 2008 promising that 2008 bonuses would be 100% of 2007 bonuses. Or that the inability of the Treasury Secretary to override these bonuses was cemented by the following clause in the American Recovery and Reinvestment Act signed into law on February 17:
The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.
Fox News blamed the above de facto AIG exemption on Senator Christopher Dodd (D-CT), suggesting a possible connection to the fact that Dodd was the largest single recipient of 2008 campaign donations from AIG. But Jane Hamsher documents that the words above were inserted after the bill left the senate and went to conference committee. Hamsher proposes instead that pressure from Treasury Secretary Timothy Geithner and National Economic Council Head Larry Summers played a role in those words’ appearance in the final bill.
I have yet to find a clear account with actual names of the representatives and senators who thought prohibiting restrictions on bonuses promised before February 11 was a good idea. But somebody put that clause in, and the claim that the legislators all are shocked– shocked– to find this is part of what they voted for is, if nothing else, Exhibit 9,247 for the case that legislation needs to be sufficiently short that everyone can be expected to read it.
But more shocking yet, at least if we measure these things in dollars and cents, is the amount of taxpayer funds that have gone to compensate AIG’s counterparties for bets those counterparties never should have been allowed to make.
On Sunday Larry Summers offered this explanation for the bonuses:
We are a country of law. There are contracts…. Binding contracts were entered into long before the government put any money into AIG. We’re not a country where contracts just get abrogated willy-nilly.
But here’s the point. AIG may have entered into contracts with its managers and its counterparties, but the U.S. taxpayers did not. A precondition for infusion of taxpayer funds has to be sufficient restructuring of pre-existing commitments to ensure that any new funds delivered achieve their purpose rather than simply prolong the problem.
If Geithner and Summers feel they lack the legal authority to ensure that kind of constructive receivership status for recipients of bailout dollars, then they should have delivered proposed legislation to Congress providing such authority on day one.
Or, given that we missed that deadline, maybe they’d consider giving us a plan that works tomorrow.
Originally published at Econbrowser and reproduced here with the author’s permission.