19 Mar 2009

A.I.G. Bonuses: A Rant

Submitted by Paul Brown

It seems that our elected officials in Washington are all up in arms about what they consider extravagant bonuses that A.I.G. decided to give to some of their employees after receiving huge sums of bailout money from the government. The furor seems to be coming from both Democrats and Republicans, yet I think that this whole firestorm is, in short, ridiculous.

If I hire a company to provide some service for me, the transaction is quite simple: I pay them the agreed amount, and they perform the service agreed upon. Sometimes a simple verbal agreement may be sufficient, but for complex transactions, a contract may be required to be sure that all parties are clear on exactly what the terms are. At the company I work at, we use specification and contracts for practically all the work that we hire others to do or that we are hired to do. If we are hired to design a substation, our client will provide us a specification of exactly what they want. If something isn't specified, then we are free to do what we want as long as we meet our due diligence to provide a product that is safe and meets the client's needs.

In the massive bailout of A.I.G. and other companies, the government was apparently handing out money without any clear specification of what those companies were to do with it. Was there no clear service that was to be provided? And if the money was being provided with no expectation of anything in return, is the company not free to do with it whatever they think best, including giving bonuses to their employees?

I see three possibilities:

  1. A.I.G. has not met the terms of their bailout monies. In this case, the government can pursue corrective action so they receive the services expected.
  2. A.I.G. has met the terms of their bailout monies, but the result is not what the government expected. In this case, the fault lies with the government for agreeing to a contract that did not adequately express their intentions and expectations. Everyone knew the bailout was being rushed, and oversights like this are the result of being hurried. There's an engineering adage that says, "Quality, Speed, Cost: Pick any two". (My sense is that in this case all we will actually have gotten is speedy action. It will be exceedingly costly and all screwed up.)
  3. A.I.G. has met the terms of their bailout monies, and the government is getting what they wanted and expected. In this case, everyone needs to simmer down and let A.I.G. do what they think is best for their company. If anyone should be punished for this debacle, it is our elected representatives, not the A.I.G. employees who did nothing wrong with respect to this whole situation.

Frankly I think the bailouts will turn out to have been a bad idea, and from what I've seen in the news, more and more companies are realizing that their objectives and those of the government don't match up—to such a degree that they would rather not receive bailout money than submit to all the conditions that the government is putting on the funds.

The following graphic demonstrates how severe the flood of bailout money into the economy has been:

Moneytary Base: http://research.stlouisfed.org/fred2/series/AMBSL?cid=124

With that much new cash in the system, how can massive inflation not eventually result? (HT: Glenn Beck)

My friends, we certainly live in interesting times!

Comments

From what I understand, the bonuses were part of contractual agreements made long before the bailout, so the two are not especially connected. It's just that the timing for paying the bonuses turned out to be really bad.

The bailout would have needed to have retroactive language in order to impact the payment of the bonuses.

Paul nice summary. I also like to point out that even before this "hull-a-ba-loo" over the AIG bonuses there was already a pretty steep tax on these bonuses. Granted these people probably didn't need 1M dollar bonuses but what would they keep in their pocket under the old tax system.
Fed Tax 35%
State Tax NY 7.7%
NYC Tax 3.6%
Social Security and Medicare Tax 7.65% on about first $100K

So they already were going to have to pay 47% tax rate. By the way the Democrats are going to raise the top Fed rate back to 39.6% like it was under Clinton times. So future big bonuses will now get hit for about 51% if you live in NYC.

Still I'm old enough to remember the 70% Fed rate under Jimmy Carter!

So go back to 1980 under Jimmy Carter and the Democrats--- a $1 million AIG bonus today adjusted for inflation would be about a $400K bonus back then. So in 1980 you would have only been able to keep about 25% of your 400K bonus, the rest went to the Politicians!!! So really when a company hands out big bonuses it's a BIG BONUS FOR THE POLITICIANS TO TAKE.

Good summary, Paul! Thanks for sharing your thoughts. I can't say that I disagree. Right now I'm pretty dissatisfied with several decisions being made in government that impact business.