StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



AIG Bonuses: Why Moms Should Run the Treasury

17 Mar 2009
Posted by Andrew Samwick

This article from The Washington Post (run in our local paper with a slightly more provocative headline) greeted my wife and me over breakfast this morning.  By way of introduction, my wife is as far to the left of center as I am to the right of center, has never taken an economics course in her life, and is as outraged by the behavior of large financial firms as I am.  When I got to the following passage, I noticed a familiar expression on her face:

President Obama yesterday vowed to "pursue every legal avenue to block these bonuses." But that pledge might have come too late. About $165 million in retention payments started to go out Friday to employees at Financial Products, after numerous discussions with the Treasury Department and the Federal Reserve.

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

The expression was the one she gets when one of the children (our son, 7, or our daughter, 3) disagrees with her about their behavior in a way that attempts to usurp her decision-making authority as the parent.  I knew what was coming.  It went something like this (with my responses):

Doesn't the government write the tax code? (Yes) Can't the government just tax away the bonuses after AIG pays them? (Yes) So why not just impose a 100% tax on bonuses paid to anyone at a firm that gets bailout money? (Indeed, why not?)

And there you have it.  Right there on the Form 1040 for the year 2009, just add three lines:

  • Did you receive compensation from any firm(s) on the attached list?
  • If so, enter the amount of all such compensation in excess of $250,000. 
  • Add this amount to your total tax liability. 

For the employees of AIG Financial Products and other similar firms that work overseas, there is less ability to go after the monies, but the companies can be forced to pay an extra tax on the excess compensation on their corporate tax forms.  (None of these companies will have positive tax payments, I suppose, but at least their losses will be smaller.)

Moms just know how to deal with poorly behaving children.  There is no better metaphor for the conduct of these financial firms.  I urge President Obama to fill all the vacancies at Treasury with moms of young children.

UPDATE: I see that a commenter on CG&G last evening had the same idea.  It seems our readership here at the blog is another excellent hiring pool for the Treasury.

UPDATE #2: Some more suggestions about using the tax code, from Aaron Zelinsky at The Huffington Post.

AIG

Good point. Still, at the end of the day, it comes down to the government throwing all of this money hither and yon without any forethought. Continuing on the parent metaphor, if my kid comes to me saying she has an emergency and needs an amount of money way beyond the norm because she's in trouble, I'm going to ask a bunch of adult questions: How did you get in this mess? How bad is it? What are you going to do with this money? What steps are we going to take to make sure you don't wind up in this mess again?

And you darn well know I'm going to put restrictions on how the money is going to be used--BEFORE I give it to her. Not after.


AIG Compensation not "bonuses"

Some other thoughts and considerations.
1. Most bonuses range from $3000.00 and up
there are not many million dollar bonuses.
2. Let us say that most bonuses were really earned
and yearly salaries were below norm and these workers and there families counted on this as a completion of their yearly salary.
3. Let us assume that these workers above are critical to unwinding the mess created by their co-workers. They are going to leave AIG and surely get jobs in the same field and now compete with AIG with some vengence.
4. Let some of the 500+ attorneys that we elected to office who did not read the "stimulus"
package now read the compensation contracts and review each employees performance and try, no matter how hard it is for them to make a decision
to get a fair and equitable solution.
5. Yes, we own the company and we want our money back, we cannot hope for it to happen with new hires and the inexperienced financial academics
in charge.


AIG Bonuses

This is simplistic but:
We the people should be outraged at the bonus that is given out. Why is it that the auto makers to receive any money MUST first obtain concessions from the unions? But Wall Street to receive any money, no strings.


Because....

Why is it that the auto makers to receive any money MUST first obtain concessions from the unions?

Because GM and Chrysler cannot continue to exist as businesses when their operating costs are so much hihger than the competition's.

But Wall Street to receive any money, no strings.

Hello?? From the first tranche of the AIG intervention the condition was that the money given to AIG would be repaid by breaking up the company and selling it off for parts, the proceeds going to the government.

You consider that to be "no strings"? Would GM and the UAW be happy to receive such a "no strings" rescue?? With GM being broken up into parts and the bits being sold off to Toyota, Nissan, Honda, Huyndai, the Bulgarian Motor Works, whoever would make an offer?

If so, sign on and we can get that done right away!

But even so, GM would still have to pay its top execs six-figure and seven-figure compensation to keep them, to work to preserve the value of the parts to be auctioned off.

And if GM had a brain (which admittedly is speculative) it would pay those execs compensation that is back loaded with retention bonuses, so they'd get most of their pay at the end as a "bonus" for staying -- since with a flat salary they'd have every incentive to jump ship to another opportunity ASAP, and leave the remaining parts of GM to go down blub, blub, blub, at taxpayers' expense.


I'll take the job if they leave

MIT trained economist, in business continuously for 30 years, willing to work for half the annual bonus of the top 100 people at AIG...they're no smarter than me, for sure...I can lose a lot less than they did.

What a hoot. Retention payments...where are they going to go? Is there another trillion dollar company to destroy? "They are going to leave AIG and surely get jobs in the same field?" Oh, puh-leeze...

We can get Bernie Sanders to put the 100% tax on the table by next week. Attach it to every bill that comes through the Senate until it passes. This represents T. Roosevelt republicanism at its best -- it's time these masters of the universe learned that their actions actually do have consequences, even if it involves personal bankruptcy.


Bill of Attainder

There was a post on the Volkh Conspiracy website about this. Apparently the law required to "tax the bonuses away" might be considered a bill of attainder - specifically prohibited by the Constitution.


I thought that might come up,

I thought that might come up, but I don't see that as being a big issue. You wouldn't actually list the companies - just say that employees of TARP companies are taxed differently, just as employees of certain international organizations are.

No constitutional issues in my view. The main problem is this:

The people at AIG think they're private sector financial executives

The rest of us think they're de facto government employees.


Much more politics and populism than thought in the outrage

Some notions that come to mind:

1) Yes, there is a "bill of attainder issue". That's when Congress enacts punishing legislation against persons presumed to be guilty of something without trial. That is unconstitutional, and the prohibition has been applied by the courts to business law.

2) Pardon, but how does everyone know all these bonuses are so evil and unconsionable?

E.g., how about a case where ...

[] in one of AIG's many profitable units, a guy earns a $1 million bonus by performing for value by market standards?

[] in one of AIG's imploding, wealth-destroying units, a year ago top management went to an exec and said: "We're in deep trouble, and we need you to stay to help bail out water -- you're one of the few who understand what is going on here. We know you have an incentive to bail out now to avoid all the trauma that is comining, and that JP Morgan [or whoever] is offering you big bucks to jump. But we'll pay you $1 million to stay for a year to help contain the damage".

So the fellow does, he passes on the other job, a year goes by -- and now you break the deal and say to him "Screw you! You're evil because you stayed to be associated with us, so you get nothing!" This is the high, moral road?

Do we really want people in the above two situations indiscriminately subjected to a 100% punitive tax rate along with everybody else?

After we all join in a rush to judgment, do we usually feel good about the results later?

3) Fannie and Freddie are about to pay half-million dollar bonuses to large numbers of their top managers who cratered their businesses to the cost of hundreds of billions of taxpayer dollars.

Where's the outrage? Is it coming? Is anyone proposing that they be subject to the AIG tax?

4) Let's do rush to judgment and assume that every dollar of the $150 million or so of AIG bonuses is wrongly distributed due to greed and political influence. That amount is 1/1000th of the AIG bailout and 2/10,000ths of the stimulus package.

While the Treasury's top staff offices are still sitting mostly vacant, (so the British can't find a phone number that will be answered), etc., there's still no banking system reform plan, etc etc -- is the all the attention and time being spent by the President and Congress to the AIG bonuses really intended to produce an economic benefit or a political benefit?

If it turns out that 1% of the stimulus package is similarly distributed to the undeserving due to greed and political influence, at taxpayer expense, will the Congressional outrage be proportional? -- 50 times larger than over the AIG bonuses?


Clawbacks are not illegal

Jim - I like the intellectual quality of your posts, but you're just wrong here. Bankruptcy courts are always doing clawbacks when money goes to preferred vendors instead of evenly to creditors. What we're talking about here is simply a variant of that.

In the case of a well performing side unit, my answer is, "Bummer. Company went under."

In the case of "Please stay cause you're the only person in the world who can get us out of this mess", I say, "Poppycock. Did you put it out for bids? I bet you could get someone for 1/3 of the money you're paying the guy who got you into the mess in the first place."

The people who gave the contracts clearly had material knowledge that the business was failing...and that's all a bankruptcy judge needs for a Clawback. No one there deserves anything as a bonus, period...the company had to be pulled from the water because it was drowning. If they don't like it, they can leave and go ruin another company, if they can find a job.


Clawbacks and bankruptcy and the AIG tax..

Bankruptcy courts are always doing clawbacks when money goes to preferred vendors instead of evenly to creditors.

If you want to go the bankruptcy route and follow its well-proven, judicially applied rules and procedures that's fine by me ... but wait that's exactly what the government is desperately trying to avoid doing!

The proposal is instead a politically driven 100% tax imposed on specific targeted individuals -- imposed by politicians. The Constitution has two relevant prohibitions that you could expect to see invoked in court on the other side: the "takings clause" and the "bill of attainder" prohibition.

Now, I'm not saying the tax wouldn't be upheld. When the mob gets howling unanimously in a period the executive calls a "national emergency" the courts tend to go along with whatever -- all those Japanese-American US citizens went off to the internment camps with the OK of the courts, and the Supreme Court got around to saying "sorry" only a generation later.

But do you really want this? Do you really want to create a situation where in an emergency when the government has to move one way or another into, say, the leading institutions of the financial system, there is always an absolute risk that some self-promoting politician -- a Joe McCarthy type (I could name some contemporary exemplars) -- will exploit popular ingorance to whip up a frenzy of resentment to clobber the compensation of everybody in the industry by populist legislation?

So you create a situation where (1) the compensation of the hardest-working, most honest, effective and valuable exec isn't safe because he is politically tarred by being part of the demonized organization of the day; and (2) the businesses can't use back-loaded compensation packages to assure that their most valuable execs -- the ones who can most easily jump to another job -- don't do so, because "retention bonuses" are *evil*?

When that happens, what will occur when the government tries to force itself into the financial industry, by say taking a prefferred equity stake in each of its firms? It's easy to predict:

1) Instead of the firms all coopperating with the government, they will fight like hell to stay out.

2) When the govt gets into them anyhow, all their best people will bolt ship immediately -- what person who had a chance to wouldn't? You'll be left with GS-16s trying to salvage value from GM and AIG as they drive formerly sound JP Morgan onto the rocks.

Is this really the way we want the goverment to handle an emergency?

Now personally, I believe the financial sector absolutely HAS acted to loot the taxpayers -- but this 100% tax proposal does not even begin to address the real problem and would only make everything far worse.

The only justification for it is the populust "**everybody** who gets paid a big bonus is a bad-doer who deserves to be punished and have it stripped away!" So *everybody* who gets paid over $X loses it all, because the politicians are mad at them. But how do you know about *everybody*?

How do you separate between the ...
a) Really bad corporate looter.
b) The capable exec who was paid a fair amount, by fair binding contract, and whom the company and govt need to keep, and
c) The self-sacrificing hero who signed on and passed up other opportunities to try to turn around the mess for the greater good -- whom the company and govt need to keep
...???

The 100% tax *doesn't*, it is brainless and unfair and destructive.

If you want to follow the bankruptcy court rules, again, it's fine with me. I've been a business lawyer for 30 years, and I've never seen a bankrupty judge make a prime objective of wiping out all the good people in a business's management who were striving to turn it around, push them out the door, as a matter of populist vengence, with the purported financial objective of saving 1/1000th of the turnaround cost.

And again, I'm waiting for the them to include Fannie and Freddie in this proposal, and to see the consequences of that.


Good job, Jim...as usual

I'll only add that there's a third reason this is unconstitutional; it's an ex post facto law too.

Talk about cutting off your nose to spite your face...though it's more like you realize your house is on fire so you rummage under the cushions of the sofa trying to save a few nickles and dimes.

The people working at AIG were unwinding over a trillion dollar book. It's easy to justify bonuses of $165 million to save that kind of money.


I am still unimpressed

1. We passed the bailout law quickly, with flaws. The congress simply did not consider that the thieves would continue stealing. Once they had definitive proof, they modify the rules. So, the problem was the fast bill the first time around, not the response.

2. Patrick, with all due respect, I'm sure you accepted the retroactive tax breaks from the former administration with no mention of "ex post facto"...these laws have been upheld repeatedly, in both directions.

3. There's an Op ed in the Times today from a pair of professors about the issue of needing the thieves to unwind the transactions. I can paraphrase their study of other countries' experience as "throw the bums out as soon as possible." Any reasonably smart manager could take the junior members of the staff, and unwind those transactions for a lot less money. Maybe you think a few million is reasonable compensation for a thief to bring back your goods...I don't.


Not your day, Tom C

Sorry, as this story makes clear

http://dealbook.blogs.nytimes.com/2009/03/20/many-in-government-knew-wee...

Congress knew last fall about the bonuses, and Geithner is flat out lying about when and what he learned.

-----------quote--------------
In early February, Mr. Geithner opposed a provision in the economic stimulus bill that would have slapped a steep tax on the kind of bonuses that A.I.G. was about to pay.

If A.I.G.’s plan to pay out an additional $165 million in bonuses came as a surprise to Mr. Geithner, it did not come as a surprise to staff at the Treasury, the Federal Reserve in Washington or the New York Fed.

Staff at all three agencies had been in daily communication with each other about A.I.G. ever since the Fed agreed to lend the company $85 billion in September in exchange for almost 80 percent of the company.

In late November, after A.I.G.’s plight became worse and the Treasury jumped in with a $40 billion capital infusion, the three agencies negotiated cuts in bonuses and salaries for many of the company’s top executives.

Officials at the New York Fed carried out the most direct oversight of A.I.G., and they were well aware of the coming bonus payments, The Times said, citing a person familiar with the matter.
-------------endquote-------------

And here's a video of Geithner being questioned in detail about the bonuses by a congressman on March 3rd:

http://hotair.com/archives/2009/03/20/video-congress-geithner-knew-about...


Patrick, I'm not sure what you mean

The thread has been about whether the bonuses were needed to "retain" employees and whether taxing them away is unconstitutional. The fact that Geithner knew about them, or should have, is immaterial to my argument. But maybe I'm missing something you see?


I responded to what you wrote:

Which was, 'We passed the bailout law quickly, with flaws. The congress simply did not consider that the thieves would continue stealing.'

The article to which I linked demonstrates that that isn't true.

BTW, if you think you could do as good a job unwinding the AIG FP book as the people most familiar with it, you are dreaming. I know traders without any degree who would use their specific knowledge to undress a novice.

These people are in business to make money (remember the California electricity market). Imagine if AIG had fired ALL of its people. Wouldn't they start their own firm, or move to AIG competitor firms, and begin to trade with the novices AIG brought in.




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