AIG Bashing Is a Political Smokescreen

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WASHNGTON—Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have finally achieved "bipartisanship." They all agree that AIG should not have paid certain employees last week bonuses totaling $165 million.

Testifying before a subcommittee of the House Financial Services yesterday, AIG chairman and CEO Edward Liddy agreed. “Mistakes were made at AIG on a scale few could have ever imagined possible,” he said. Mr. Liddy reported that he has asked AIG employees who received more than $100,000 in bonuses to return half to the company.

What is puzzling is why it has taken the Administration so long to discover that AIG had, in the first quarter of 2008, committed itself contractually to pay bonuses to 400 employees in its financial products unit. That was months before Congress approved the Troubled Assets Relief Plan (TARP) and before the Bush administration funneled $85 billion into AIG to prevent its collapse.

These contracts to pay bonuses should have become known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before the first September 16 injection of funds. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff.

If the bonus agreements weren’t known to the Treasury before September 16, they should have come to light in the months since, during which AIG has received over $170 billion in federal aid. Mr. Obama and Mr. Geithner should be outraged at their staffs for not having discovered the obligations and raised red flags much earlier. Such ignorance may be a cautionary lesson for those in government and academia who would have the government dictate management of, if not manage overtly, distressed firms in any sector, most obviously the auto companies.

According to documents from AIG, the bonuses are compensation owed to employees under Connecticut law. Under the Connecticut Wage Act, the company said, if the bonuses are not paid, AIG becomes liable for legal costs of employees who try to collect, as well as penalties that could equal twice the bonuses owed. AIG might also leave itself liable to shareholder suits.

Despite the sense of public outrage to which the President and Congress are playing, it would be unwise for the federal government—as de facto owner of AIG, as Democratic Representative Barney Frank has commented—to go back on the contracts and sue to recover the money. This could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.

Members of Congress are also discussing emergency legislation to tax away part or all of the bonus. This would set a precedent—corrupting if not unlawful—of using the IRS and the tax code as weapons of the state to go after individuals whom the Administration and Congress want to punish. Such sanctions might amount to ex post facto punishment, legislation that makes unlawful behavior that was lawful when it occurred. The Constitution prohibits such legislation. Even President Nixon, who had an enemies list, never dreamed of this.

The wave of public sentiment against the AIG bonuses presents the government with a choice. It can try to run companies that receive bailout funding in a way calculated to win public approval, micromanaging every detail. To do that successfully in a business sense is impossible. The government cannot even manage its own federal agencies efficiently, with episodes of wasted resources surfacing regularly.

Better, the government should get out of the business of rescuing ailing companies. The bailouts have won little support among Americans. In a CBS poll published on March 16, 53% of Americans disapprove of the government giving money to banks and financial institutions even as a way to help the economy, and only 37% approve.

With good reason. When TARP began in early October, it was supposed to resolve the problems of the financial sector and avert an economic slump. In late September, President Bush warned the country of dire consequences if a bailout bill did not pass: “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. “

All of that has happened, even though TARP passed on October 1. Since then, 28 more banks have failed (although depositors have been protected by FDIC insurance), the stock market has dropped by almost one-third, and median home prices have declined by nine percent. It’s natural that Americans have become disillusioned.

The bipartisan attack on AIG over bonuses is being used by the Administration and Congress to bolster their sinking approval ratings and hide the failures to date of the $700 billion TARP and the $787 billion stimulus package, as well as the uncertain outcomes of the proposed $275 billion housing bailout plan, the $634 billion health fund, and higher individual and carbon tax increases. The outrage would be put to better use abandoning bailouts altogether.

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