AIG Defers To The Compensation Czar

AIG has another $2.4 million wave of retention bonuses to pay out. But this time, rather than anger pretty much the entire world, they decided to pass the buck to Kenneth Feinberg, the Obama administration's Special Master for Compensation (yes, that's really his title). This sets up a fascinating situation: will the administration pay out those bonuses or will it refuse?

CNN Money provides some information from an unnamed source, and a bit of detail:

A source close to the matter said Feinberg will be reviewing both the $2.4 million, as well as the much more controversial $235 million that is scheduled to be paid out AIG-FP employees next year.

AIG-FP is the division that wrote insurance contracts on shaky derivatives that were at the root of the company's near-collapse. In September, the government bailed out AIG with funds now worth up to $182 billion.

Fireworks! I can hardly wait to see what the almighty pay czar decides. On one hand, it seems pretty intuitive that some of those bonuses, particularly those for the AIG-FP division, are not particularly deserved, under the circumstances. Yet, the contracts are legally binding. So those employees could sue AIG/Uncle Sam to recover those bonuses if they are denied payment.

Angry taxpayers' first inclination might be to say: let 'em try! Sure, but then we still incur the cost of lawyers defending Feinberg's decision. Would the cost of that legal defense be as much as the $235 million owed in bonuses? Probably not, but it wouldn't be cheap. So Feinberg should seek a better way to recover bonuses.

Here are a few options I think he could consider:

Impose That Excise Tax

Remember back in March when Congress was so angry about the AIG bonuses paid out? The House passed legislation meant to recoup all of that money. That legislation sought to impose an excise tax specifically targeted at those bonuses. Yet, their legislation turned out to be largely symbolic: the Senate never passed it, and President Obama never got the opportunity to sign it.

But what if they resurrected it, and then paid out the bonuses as scheduled? I wrote an article about Congress' scheme at that time, back when I was at Forbes. There was some debate then about whether the legislation was constitutional. That debate would likely resurface, but in writing the article, I spoke to renowned Harvard Law School professor Laurence Tribe. Here's what I learned from Tribe:

The constitution would not preclude an excess tax for a specific group of individuals at a very high rate. Moreover, Tribe argues, the taxes are not meant to be outwardly punitive--the purpose is to recover bonuses paid as part of federal expenditures, not to punish employees.

Its retroactive nature won't matter either. "The Supreme Court has, in numerous cases going back to the 1920s, upheld tax measures that claw back amounts prior to the effective date of the enactment," says Tribe.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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