Rage on Main Street over AIG bonuses

By Hasen Bao
Written as at 17/04/2009 20:10

During March; I remember hearing the same piece of news on every news station I tuned into; the rage on Main Street over retention payments paid out to AIG employees was ubiquitous, it was all people cared and talked about.

Extravagant bonuses and luxuries seems like the tradition of Wall Street firms; no one seemed to cared about how much bonuses executives at these firms were getting and how many private jets they bought prior to the economic recession. In the heydays when Main Street was seeing healthy returns on their mutual funds; they’d probably thought executives and managers deserved their bonuses. The government probably never thought about securitizing or regulating a firm’s pay system until everything fell apart.

Technically; AIG did not use taxpayer’s money to pay bonuses, what the company did that raised anger was the fact the company paid out lavish bonuses to executives when they knew better than anyone else that their company is in trouble and later solicited for taxpayer money to help bail out the firm.

After the government spent 180 billion taxpayer funds to bail out AIG; Edward Liddy was appointed as the new CEO of AIG on behalf of the government overhaul the management of the firm. Some think that Liddy should have sabotaged the bonus payments; but Liddy defended himself by saying the bonuses were paid upon contractual agreements made before he became CEO.
It is difficult to understand how the bonuses were warranted to executives in the Financial Product department, which is the department that drowned AIG, but I believe these bonuses was paid out of greed and recklessness.

I understand also that it was not within Mr. Liddy’s power to stop the firm from carrying out contractual agreements made with its employees. But there is one thing Liddy said that I cannot agree with, Liddy clearly explained under his House testimony; the reason he did not stop those bonus payments was because he felt AIG is in burning need for skilled people, the bonuses was an incentive, a reason for them to stay.

Why on earth would he call those clowns ‘skilled’ people? I agree that financial derivatives are very sophisticated instruments; but just because they know how to trade derivatives do not make them skilled traders. Some contracts made by the FP unit are ridiculous; such as long duration contracts that will not mature until at least half a century later. When you get a chance to look at the type of contracts FP has made; you will know that the so-called ‘skilled’ derivative traders are simply playing speculation games.

I think what Mr. Liddy should have done was notice government officials about this matter before the bonuses was paid. Altering or re-negotiating the contracts could have helped stop the bonuses or at least ease the public’s reaction to this matter.

Now let me criticize on the way the government dealt with the issue; the bonus rage had dominated President Obama’s 9th week in office, he shared the public’s upheaval by promising to stop the bonuses and fix the problem.

The government is currently the largest shareholder of AIG; holding roughly 80% of the firm, this means the government should demand for certain degree of transparency of the activities and decisions made within the AIG, but somehow the government was unaware of what was going on behind AIG’s closed doors.

As a part of government intervention on the matter; President Obama and his economic team has asked Congress to pass legislations that would allow more regulatory powers over institutions who have received taxpayer money.

I was shocked when I learnt about the legislation passed by Congress that involved a 90% tax on $165 million paid out to FP employees as the way to address the bonus debacle. In my point of view; lawmakers has manipulated and abused the tax system, this is clearly not a pragmatic approach to resolve this matter.

What will the private sector think about this? Will they trust the government enough to depend on their help? Will they trust the government enough to stay in the U.S? These are some of the questions lawmakers prior to making that decision failed to consider. Who would want to establish their business in the U.S.; if they cannot trust the government enough to not suddenly impose a tax rate as high as 90% on salaries or bonuses they receive? This is probably why for the next few days; I often find news reports on financial institutions eager to return funds they have received from the TARP program.

Upon passing this legislation; lawmakers has derogated the integrity of the tax code, the tax code is a set of rules that guides civilians and businesses to rightfully contribute for the betterment of the country they live in, it cannot and should not be used to punish people.