$100 Million More In AIG Bonuses Causes Another Stir

In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that's likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called "guaranteed bonuses" that were in place before AIG's collapse still must be honored by law. This is a regrettable situation, and speaks loudly to the messy problem that bailouts pose.

This is not the first time I've written about these bonuses. Indeed, we've been anticipating them since last summer. Back then, the compensation czar was trying to figure out a solution to not having to pay these bonuses out. Clearly, he didn't think of a very good one. Here's what's he came up with, according to the New York Times:

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury's special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

The agreement calls for employees who still work for the financial products unit to accept 10 percent cutbacks, while employees who have left the company must take 20 percent cuts. Those employees are still entitled to their bonuses under the contract, which adheres to the scheduled payments even if people have lost their jobs. The financial products unit has shed almost 200 people as it has wound down A.I.G.'s derivatives business.

A.I.G. has told all the affected people that if they do not accept the reduced amounts, they will get no bonus at all, according to a person with knowledge of the agreement.

Because I'm sure taxpayers won't be at all offended to have to pay only 80-90% of the bonuses. And you read correctly: if someone promised a bonus doesn't even work at AIG anymore, he still gets 80% of the guaranteed bonus. Must be nice. Clearly, the talent retention argument doesn't go very far with those former employees.

Unfortunately, there's little that the government can really do to prevent these bonuses from being paid. As long as AIG stays in business, it legally owes this money to the recipients. And since the government kept AIG afloat, it has to pay the bonuses. In fact, if any employees decide that 10% or 20% cut is worth taking the government to court about, they could very well win and get the full 100%. Luckily, this probably isn't worth the hassle and bad publicity for most of them.

This episode, again, stresses the problem with bailouts. If the government decides to stand behind a company that should have failed, it must honor all of its awful contracts in the process -- whether that means millions of dollars in bonuses to employees or billions of dollars to domestic and foreign banks. If AIG had been able to fail without bringing down the economy with it, then all of those compensation contracts would have been void, and reduced to a general unsecured claim in bankruptcy court. If the company reorganized, then those employees might choose stay, but only after the contracts would have been renegotiated.