Friday, March 20, 2009

In AIG’s case, the US government is now the de facto owner.

TO BE NOTED: From the FT:

Rage at AIG bonus pay-out is no excuse

Published: March 20 2009 20:22 | Last updated: March 20 2009 20:22

Politicians acting in haste rarely act wisely, least of all when guided by rage. In response to outrage over retention bonuses paid to employees of AIG – the failed insurer, now mostly owned by the government, which has received tens of billions in public support – the US House of Representatives rushed to pass a punitive tax aiming to claw the bonuses back. It would apply to all groups receiving help under the government’s financial stability plan, not just AIG. A similar measure is before the Senate.

The outcry over these bonuses is entirely understandable, though less than fully thought through. Understandable or otherwise, the response smacks more of banana republic than good government.

The country is furious at the idea of rewarding the very people, in AIG’s now notorious financial products arm, who helped sink both their company and the wider economy. Yet these bonuses were paid not as a reward for past performance, which would indeed be absurd, but to retain people deemed necessary to the unwinding of its mistakes. That reasoning offends against the principle of fairness, but if one is more interested in stabilising the economy than striking back at supposed culprits, it should not be dismissed out of hand.

In AIG’s case, the US government is now the de facto owner. As such it has rights and responsibilities, and it should attend more conscientiously to both. The Treasury should decide whether the bonuses are necessary to retain people essential to the success of its stabilisation plan. If they are, much as one may recoil at the idea, the bonuses should be paid: the cost pales in comparison to the vastly larger sums at stake. If not, the people who received them – those who have not already left, that is – should be told to return them or be fired. The government is within its rights as a new owner to set new terms for its employees.

The legislative blunderbuss about to be discharged by Congress, on the other hand, is likely to blow up in taxpayers’ faces. It forbids the case-by-case judgments on pay which are necessary to ensure that the stabilisation plan succeeds. And it expresses the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact and with retrospective force. The measure is constitutionally dubious, as Congress well knows. All these considerations have been set aside for the purpose of venting the country’s anger. It is an abdication of responsibility.

Barack Obama, asked whether he approves of this law, has declined to answer. It would have been better if things had not come to this pass, he says. Quite so, and indeed there are lessons here about the conditions that must be attached to future assistance. But things have come to this pass – and the administration must resist this bad new law."

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