Some thoughts on AIG

The big scandal this week that caught the ire of just about everyone on both sides of the aisle (see comments by Grassley, Dodd, and Obama) as well as the American public is the $165 million in bonuses paid to AIG executives.  Given the fact that we taxpayers have ponied up $170 billion to date for this company, it does seem damning.  Given these staggering amounts, there is clearly prima facie evidence for the outrage.  Adding insult to injury is the fact that many of these executives actually presided over the finnacial collapse of the company and it would seem that we are financially rewarding failure.

But hold on and take a step back.  In fact, take a 16-year step back in time to 1993.  In that year, a “well-intentioned” Congress amended the tax code where they penalized companies for “over paying” executives.  Although no cap was established per se, they could only write off on corporate returns the first $1 million of executive compensation as it applied to any single executive.  If they were paid $3 million per year, the company could only write off $1 million.  At this point, the lawyers enter the scene and create the concept of deferred stock options as compensation to get around this loss of a business write off.  Gone were the days of $2 million annual salaries and a corporate jet.

Like anything Congress does, there were unintended consequences.  First, it laid the seeds of fraud and corruption.  Because compensation was tied to stock performance under this pay plan, the incentive to “cook the books” was created and you got your Enrons, your WorldComs, and your Tycos.  The result was more legislation, this time by the Republican Congress, that did not address the root problem.  It was popular in that the likes of Kenneth Lay and his ilk were prosecuted.  But from the practical standpoint, it solved nothing.

Today, we rail about the fact that AIG is contractually bound to pay bonuses and compensation under a system that Congress in 1993 fostered.  Senators like Christopher Dodd (who would make a great bobblehead doll) want to change the rules in midstream and effectively nullify these contractual payments through the tax code.  We can argue until the cows come home whether AIG should have even been involved in these transactions in the first place.  Again, in 1999 and 2000, when Congress considered at least regulating these practices through commodity exchange law modernization, and at least protect insurance companies in these dealings, we were told by Rick Rubin, Larry Summers and Alan Greenspan that this was not necessary and the proposals died in committee.

Contract law stands as a pillar of free market, capitalist systems.  Given the fact that this administration is closet socialist, it is no surprise that they now are seeking ways to negate basic contract law.  Also consider the fact that AIG has donated over $100,000 to Dodd, over $100,000 to then-Senator Obama, over $50,000 to John McCain, over $25,000 to Hillary Clinton and over $10,000 to Max Baucus, I suspect this bloviating is nothing more than populist rhetoric and, in the end, nothing will happen.  But it serves as a lesson as to how “well intentioned” laws have unintended consequences and can go awry.  Perhaps, instead of railing about these bonuses being paid at AIG, our esteemed elected officials should look in the mirror and see who the real pigs in this debacle really are.