More Millions, More Mishaps: Washington Struggles with AIG’s Executive Compensation Bonuses

A remnant from the previous administration’s carelessness is now an enormous problem for the current one.

When American International Group, Inc, AIG, accepted taxpayers’ bailout funds last year, no member of the Bush administration bothered to address how AIG planned to reward their employees in the coming year. Then, according to an AP article, “Analysis: White House, Dems Backpedaling on AIG,” no one in the Treasury Department under the Obama administration double-checked the AIG bonus structure or compensation plans when they gave AIG an additional $30 billion just a few weeks ago.

Now, after AIG followed through on its contractual obligation to give out $165 million in executive bonuses to its high level employees, is it ethical to reverse AIG’s actions and get that money back to the taxpayers?

Public Fed Up With Excessive Executive Compensation

Washington and the American public are sending a loud and clear message to bailout fund recipient, AIG, about the fairness of handing out executive retention bonuses, particularly to the people who got them in trouble. The message is, “No way!” According to an AP article, “House Passes Bill Taxing Fat Bonus Payouts to AIG,” the House passed legislation within a week of learning about the AIG’s bonuses to ensure that they will be taxed at 90 and up to 100 percent.

Did AIG just have bad timing? Many months ago, no one may have noticed AIG’s choice until well after the deed was done. But this time, after a long string of executive compensation bonus scandals, the federal government and the taxpayers are extra sensitive to wasteful spending where bailout funds are involved. According to the AP article, “AIG Head Shares US Anger of Bonuses But Backs Them,” Treasury Secretary Timothy Geithner found out about the AIG bonuses Tuesday, March 10 then made President Obama aware of them on Thursday, March 12. Nonetheless, AIG gave out $165 million in bailout-funded bonuses over the following weekend and, mostly, to the group that caused its demise.

Questions still hover around this messy situation, does getting involved in AIG’s agreement with its employees send all sense of order and trust between the government and companies to the four winds?

Where All This Trouble Came From

The Yahoo! Finance piece, “What's Good, What's Bad About the AIG Bailout,” points out that $165 million in executive compensation bonuses that is causing this upheaval pales in comparison to the $170 billion AIG has received in total bailout funds. Very true. But, it’s the principle of their actions that smarts once you know what led up to it.

Just after Lehman Brothers failed and Merrill Lynch found a buyer, back in September of 2008, AIG ended up on the verge of bankruptcy and was given $85 billion in emergency funds to prevent its failure. This money changed hands fairly quickly and without a great deal of oversight. Why did AIG get so much bailout money, and why was AIG’s security considered a national emergency?

AIG Is Big Business

Apparently, even though the portion of the company that was involved in mortgage-backed securities was small in comparison with the insurance side of AIG, the smaller, failing portion of the company would have brought down every other part with it. And, government officials feared that AIG’s demise would have caused ramifications from which our economy could not recover.

AIG is so big that even its current CEO Edward Liddy, brought in to manage the use of bailout money, recently was quoted by The Associated Press as saying that his new management team found AIG’s overall structure, “too complex, too unwieldy and too opaque for its component businesses to be well managed as one company.”

Basically, even the best of the financial best are struggling to manage this beast of a company. So, is it any wonder that they decided to keep it simple and stick with paying out the employee bonuses they were contracted to pay?

AIG’s Best Choices

Let’s take one moment to compliment some choices that AIG’s current management has made regarding the AIG bonus structure, according to another AP article, “AIG CEO Says Employees Starting to Return Bonuses.”

1. Their post-TARP CEO Edward Liddy is not getting a compensation bonus and only earning $1 this year.

2. Liddy eventually asked employees receiving the AIG bonuses to voluntarily give back at least half of anything received over $100,000, if they were willing to.

3. AIG is trying to protect the sanctity of their contracts with their employees to preserve some sense of trustworthiness as an employer.

The interesting thing about the second point is that many employees, before the new tax was passed by Congress, responded to Liddy’s request and agreed to give back their AIG bonuses – some in full. Their motivation to do so may have been complicated.

Most people want to hold onto their money, no matter what. But, since, according to that Yahoo! Finance piece, N.Y. Attorney General Andrew Cuomo is calling for the names of all those AIG employees receiving bonuses, it would likely be smart to be the good guy or gal on that list who handed the money back. It’s questionable whether or not Cuomo has the right to demand this information, but he will likely get it. Second, some members of the public are sending death threats out that target all of the AIG bonus recipients in general. So, when you’re already making the big bucks, is that extra $1 million worth losing your life?

Are We At Compensation War?

It seems that our country has reached a tipping point. The gloves have come off. After years of excessive executive compensation the government, cheered on by many taxpayers, is trying harder than ever to put an end to it. In a statement made Wednesday, according to the AP story, “Obama Seeks Great Rein on Financial Institutions,” President Obama summed up his opinion of excessive executive compensation by saying, “the buck stops with me.”

In the hustle to change things, rules are being bent, some nearly to the point of breaking, as we watch this mess get sorted out. Some examples, according to articles already mentioned, as well as the AP story, “AIG bonus checks may be taxed at up to 100%, says Sen. Chuck Schumer,” are:

1. The government’s initial demands that AIG bonuses simply not occur, even though the company is contractually obligated to pay them.

2. Quick legislation from Congress that taxes all AIG bonuses.

3. Plans for the creation of another regulatory entity to manage the dissolution of large financial institutions, like AIG. It would have powers similar to the FDIC.

This is certainly not a time when the government is sitting back and letting business do its thing. The fact is that the U.S. government now owns 80 percent of AIG so the lines are fuzzy as to how much involvement is appropriate.

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