AIG Suing the Government... Have Pity On the Orphan

Even if willing to excuse the incompetents, those who didn't want the criminals who helped take down the economy to avoid any consequence have been reminding us for years that the statute of limitations was running:

In the meantime, the statute of limitations, generally five years for securities fraud and most other federal offenses, is running out, precluding the possibility of bringing many new suits dating from the bubble years.

The result is a public perception that the big banks and their leaders will never have to answer fully for the crisis. The shameless pursuit of Wall Street campaign donations by both political parties strengthens this perception, and further undermines confidence in the rule of law. There may be more civil fraud suits related to the financial crisis, producing settlements and fines. But to date, those cases have rarely named top executives and the banks have rarely admitted wrongdoing. And the fines, even those in the hundreds of millions of dollars, have been small compared with bank profits and banker bonuses.

After all these years, what is still needed are cases with convictions and settlements severe enough to deter future bad behavior. If institutions operating at the heart of the economy really cannot be held to account, the solution should be to break them up, not give them and their leaders a pass.

In an editorial that reminds me of the joke about the lawyer defending his client, accused of murdering his parents, "How can you say such awful things about this poor orphan," David Boies makes the case for AIG's suing the federal government for having the audacity to bail it out:

Objections to AIG shareholders having their day in court to contest the terms of the government's takeover of their company are based on ignorance of the law and the facts.

Opening your argument by pounding the table? Not a good sign.

David Boies is the lead attorney representing Starr International in a shareholder lawsuit against the government. Starr's chairman is Maurice "Hank" Greenberg, AIG's former chief executive.

One statement I do not expect to be hearing from Boies,

This suit was not commenced at an earlier date because it was complex, not because my client has done anything wrong or has anything to hide, and my client happily waives the statute of limitations for any criminal charges or civil claims arising from his own conduct. Pure as the driven snow, he is.

Most of Boies' arguments, no offense to the man, strike me as the leavings of a ruminant. I am to believe that private investors were lining up to bail out AIG with sweetheart deals, but that the U.S. government scared them off? Care to name one, or should we refer to them for now as "Hank Greenberg's invisible friends"?

Remember all that nonsense about "the sanctity of contracts" from back in the day, when insurance executives were insisting that gargantuan bonuses be paid to the idiots who took down the economy, and that payouts be made in full with taxpayer cash, because insurance companies cannot survive unless their word is gold? (Ever make an accident claim only to be lowballed by the insurance company, or fight to get a medical procedure covered? Then odds are you weren't fooled.) Remember how we were instructed that it could even be illegal for AIG to try to negotiate reduced payouts to counterparties? Now Boies complains that AIG actually had to live up to its word, the so-called "back door bailout", because the government used taxpayer money to fully fund AIG's liabilities.

If Darrell Issa has a spine hidden somewhere beneath his suit coat, perhaps he'll stop peering unsuccessfully under the skirts of Obama Administration officials, in search of fake scandals, and turn his attention full bore on AIG. And perhaps he can rally his fellow Republicans to authorize a blank check for the defense of the lawsuit - enough of the excuse for failing to prosecute of, "It's just too complicated". You didn't want to take the war to AIG, fine, but now AIG has brought the war to you. If Hank Greenberg has a case to make, let him make it - but turn the heat way up.

Questions That Will Continue to Go Unanswered

CJR quotes Bloomberg, establishing that some of the excuses used by the Fed for refusing to negotiate for reduced payments to AIG's counterparties is a fiction.

French law didn’t stop Societe Generale and BNP Paribas SA from taking $1 billion to settle $3.5 billion of trades the same month with New York-based bond insurer Ambac Financial Group Inc., according to three people familiar with the matter. Ambac’s ability to negotiate a discount while the central bank of the world’s biggest economy didn’t adds another question for lawmakers as they examine the most contentious transaction of the government’s bailout of the U.S. banking system.

28.5%? I may be missing something, but to my eye that's quite a bit less than 100%.

Question number one for Geithner, whom Bloomberg helpfully points out is testifying before Congress next week, ought to be to explain that and to justify his statement to the SIGTARP.

If he's asked, and unfortunately that's a big "if", expect a blizzard of words that attempt to run out the clock on whomever is asking the question. Why is it that I doubt that he'll admit that it was a back-door bailout that provided massive benefits to banking institutions like Goldman Sachs.

AIG tried to persuade its counterparties to accept payments of 60 cents on the dollar before the New York Fed took over negotiations, according to people familiar with the matter.

OPM.

Update: More from CJR on a significant effort to cover up the backdoor bailout.

So Is It "Really" Salary?

With due respect to the defense of oversized financial industry bonuses, unrelated to profit or performance, can industry insiders please make up their minds? Addressing Edward Liddy, disgruntled employee Jake DeSantis, states,

As of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.

But that was apparently contingent upon these special retention bonuses,

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.

The bonuses are thus characterized as "earnings".

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

Now, I have no reason to doubt that Mr. DeSantis is a good guy who works really hard, made lots of money for his company, had no direct hand in the collapse of his division, and... well, I can't go so far as assuming that he didn't know "what the right hand was doing", down in the corner office, but let's leave that alone for now.

The editorial suggests that Mr. DeSantis agreed to work for $1/year in salary because he knew he was going to be paid about $3-4 million in bonuses for the year. (I'm guessing, based upon his description of the accelerated bonus schedule and the amount he received in this "balance of the payments".) If the bonus truly is a form of salary, Mr. DeSantis should have no complaint - he agreed to a $1 salary. If the bonus is not a form of salary, and was payable without regard to performance, let's stop pretending it was "earnings". Please - pick one door or the other, but not both. (Yes, it's okay to say something like, "The bonuses were really part of my salary, so I actually agreed to cut my salary by about 10-20% when I accepted the $1 deal." Granted, it doesn't sound as good.)

Don't Blame Joe the Plumber

Blame Joe the Electrician!

None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Seriously, though, if the plumber watches the electrician use speaker wire for a 220 volt outlet, and doesn't tell the foreman....

A brief AIGFP playlist:

• Blame it on the Rain - Milli Vanilli. Because it was their producers' fault, right?

• A Little Respect - Erasure.

• She Works Hard For The Money - Donna Summer.

• Fire Water Burn - The Boodhound Gang.

• If I Had a Million Dollars - The Barenaked Ladies. No, wait, that's not supposed to be here.

• Take This Job and Shove It - the Johnny Paycheck version, of course.

Being a Mouthpiece is One Thing....

But abandoning any shred of dignity in the process? Michael Gerson recites from the latest party memo:

The most famous piece of legislation passed by the 111th Congress may have nothing to do with health care or energy. It could be the Dodd amendment, also known as the Geithner amendment, or perhaps the low-level-anonymous-staffer-everyone-can-safely-blame amendment, reading in part:

"The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . . " AIG executives were foolish to use this loophole to "retain" employees, some of whom nearly destroyed the American financial system. But the company did not act with deception or secrecy.

Yes, that's the part that's widely circulated. And, as party hackery goes, Gerson's use is "correct" - he's using it to suggest that the goal was to "protect" excessive compensation going backwards, as opposed to limiting new compensation agreements going forwards. But it's exceptionally misleading to suggest that the provision was meant to reach the masses of employees at a company such as AIG, as opposed to the executive suite:

(b) Executive Compensation and Corporate Governance-

(1) ESTABLISHMENT OF STANDARDS- During the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, each TARP recipient shall be subject to--

(A) the standards established by the Secretary under this section; and

(B) the provisions of section 162(m)(5) of the Internal Revenue Code of 1986, as applicable.

(2) STANDARDS REQUIRED- The Secretary shall require each TARP recipient to meet appropriate standards for executive compensation and corporate governance.

(3) SPECIFIC REQUIREMENTS- The standards established under paragraph (2) shall include the following:

(A) Limits on compensation that exclude incentives for senior executive officers of the TARP recipient to take unnecessary and excessive risks that threaten the value of such recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(B) A provision for the recovery by such TARP recipient of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees of the TARP recipient based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate.

(C) A prohibition on such TARP recipient making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding.

(D)

(i) A prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition developed under this paragraph shall not apply to the payment of long-term restricted stock by such TARP recipient, provided that such long-term restricted stock--

(I) does not fully vest during the period in which any obligation arising from financial assistance provided to that TARP recipient remains outstanding;

(II) has a value in an amount that is not greater than 1/3 of the total amount of annual compensation of the employee receiving the stock; and

(III) is subject to such other terms and conditions as the Secretary may determine is in the public interest.

(ii) The prohibition required under clause (i) shall apply as follows:

(I) For any financial institution that received financial assistance provided under the TARP equal to less than $25,000,000, the prohibition shall apply only to the most highly compensated employee of the financial institution.

(II) For any financial institution that received financial assistance provided under the TARP equal to at least $25,000,000, but less than $250,000,000, the prohibition shall apply to at least the 5 most highly-compensated employees of the financial institution, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(III) For any financial institution that received financial assistance provided under the TARP equal to at least $250,000,000, but less than $500,000,000, the prohibition shall apply to the senior executive officers and at least the 10 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(IV) For any financial institution that received financial assistance provided under the TARP equal to $500,000,000 or more, the prohibition shall apply to the senior executive officers and at least the 20 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient.

(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

(E) A prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees.

(F) A requirement for the establishment of a Board Compensation Committee that meets the requirements of subsection (c).

(4) CERTIFICATION OF COMPLIANCE- The chief executive officer and chief financial officer (or the equivalents thereof) of each TARP recipient shall provide a written certification of compliance by the TARP recipient with the requirements of this section--

(A) in the case of a TARP recipient, the securities of which are publicly traded, to the Securities and Exchange Commission, together with annual filings required under the securities laws; and

(B) in the case of a TARP recipient that is not a publicly traded company, to the Secretary.

Is it conceivable that the Secretary would have been asked to review the bonuses under this legislation, to determine if it should be applied to employees outside the 25 highest paid individuals as contemplated by the legislation? Sure. Is it likely that the Secretary would have found it consistent with prevailing wages in the industry, the intent of the legislation, or the treatment of employees in other bailed-out organizations who had already received similar bonuses, so as to merit extending the prohibition to everybody at AIG? Not at all.

Gerson carries on,

Concerns on the broader compensation issue were serious enough to ensure unanimous Senate passage of an amendment to the stimulus bill sponsored by Sens. Olympia Snowe and Ron Wyden that penalized bailout bonuses in excess of $100,000.

But the Snowe-Wyden amendment disappeared into the misty bog of a House-Senate conference committee, only to be trumped by language that grandfathered in AIG's retention bonuses.

I've quoted enough legislation for the moment, and the Snowe-Wyden language is somewhat opaque - let's let Wyden put it into simple terms:

In an interview with the Huffington Post, the Oregon Democrat noted that during the crafting of the stimulus package, he and his Republican colleague from Maine introduced a provision that would have forced bailout recipients to cap their bonuses at $100,000. Any amount paid above that would have been taxed at 35 percent. The language made it through the Senate, but during conference committee with the House, it was inexplicably removed.

Note, the 35% tax would be payable by the company, not by the employee. And nothing in the Snowe-Wyden language would have prohibited or voided the bonus. Yes, under this proposal, a bonus contract negotiated after January 1, 2008 would have been covered. But if AIG is correct, as seems to be the case, that it was contractually bound to pay the bonuses, it would have had no meaningful impact on the present conflagration. The bonuses would have been paid, and AIG would owe an additional $60 million or so in taxes, all of which would still have effectively come out of taxpayer contributions to AIG. Would that have made you feel better about it?

Gerson carries on,

President Obama vowed to "pursue every legal avenue to block these bonuses," when the proper "legal" avenue was to write a responsible law - a process his own administration apparently undermined.

If you actually look at the legislation back when it contained the Snowe-Wyden language, it didn't just cap bonuses - it retroactively capped pay to an amount not "in excess of the amount of compensation paid to the President of the United States". It did not prohibit or invalidate bonuses - it instead imposed a corporate tax on bonus payments in excess of $100,000. You shouldn't have to be a very strong thinker to recognize why that would trouble the Treasury Secretary who is trying to bring sanity back to the financial industry, as there's every reason to believe that arbitrary salary caps of this sort would have been destabilizing. (Having made the "conservative" case for wage controls, what's up next? Price controls?)

Gerson next imagines a hedge fund manager having to justify a huge return on a purchase of toxic securities.

"Perhaps the witness can explain to us how he justifies such windfall profits with the people's money? Have you no shame? Give us the names, addresses and phone numbers of every millionaire you enriched at public expense so we can leak them to the press."

If Gerson took the time to find out what he's talking about, rather than doing stenography from the party memo, he might have seen the following in the Snowe-Wyden language:

(C) BONUS PAYMENT- The term `bonus payment' means any payment which--

(i) is a discretionary payment to a covered individual by a financial institution (or any member of a controlled group described in subparagraph (D)) for services rendered,

(ii) is in addition to any amount payable to such individual for services performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate, and

(iii) is paid or payable in cash or other property other than--

(I) stock in such institution or member, or

(II) an interest in a troubled asset (within the meaning of the Emergency Economic Stabilization Act of 2008) held directly or indirectly by such institution or member.

Such term does not include payments to an employee as commissions, welfare and fringe benefits, or expense reimbursements.

If he imagines a popular uproar over a subsidized giveaway of troubled assets to hedge fund managers, why does he think there would be no such uproar over the giveaway of the same assets at fire sale values as bonuses to the leaders of bailed-out companies, as would have occurred under the Snowe-Wyden language he endorses?

Gerson concludes,

What sane money manager would want to partner with a government that blames others for its mistakes, urges the violation of inconvenient contracts and threatens to tax benefits retroactively?

No doubt, the lack of effective regulation and oversight of the financial industry, most crucially under G.W. Bush,¹ constitutes a government mistake - but is that what Gerson means? Even if so, it hardly exculpates the financial industry. Also, you don't need to look past the auto industry to recognize that, if it means walking away with billions in your pocket, people are willing to eat a lot of crow (both deserved and undeserved) in front of Congress.

But Gerson's suggesting that it's Obama who "urges the violation of inconvenient contracts"? No, that would be Gerson himself. Although some pretend otherwise, as previously noted, not even the Snowe-Wyden legislation would have abrogated the AIG bonus contracts. The final legislation didn't retroactively modify or abrogate contracts, and instead applied only to new contracts - and that's the very part Gerson finds objectionable.

As for threatening to tax benefits retroactively? I think the new tax on bonuses is bad policy, and I've said so, but give me a break. The entire mechanism by which the Snowe-Wyden amendment sought to reign in "excessive bonuses" was through a tax, retroactive to January 1, 2008.
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1. I have sympathy for the argument that most of the policies preceded Bush, but none for the argument that this somehow excuses the Bush Administration from its responsibility for perpetuating those policies, or failing to notice the walls crumbling all around them.

AIG's Long History of Responsible Conduct

In 1987, AIG made a huge mistake in launching a credit-default-swaps portfolio, the source of the company's eventual collapse. Don't take my word for that - hear it from current CEO, Edward Liddy:

Mistakes were made at AIG, and on a scale that few could have imagined possible. The most egregious of those began in 1987, when the company strayed from its core insurance competencies to launch a credit-default-swaps portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG. Its missteps have exacted a high price, not only for the company and its employees but for the American taxpayer, the federal government's finances and the global economy. These missteps brought AIG to the brink of collapse and to the government for help.

So, how that that happen? As a former CEO is quick to tell you, as long as you make profits on paper nothing should be deemed a mistake:

From 1987 to 2004, the company's financial products unit contributed more than $5 billion to AIG's pretax income.

As you might imagine, in former CEO Greenberg's eyes, there was no cause for concern until after he left the company:

In spring 2005, after I left the company, AIG's credit rating was downgraded. It would have been logical for AIG's new management to end or reduce its business of writing credit default swaps because of the risk it faced of having to post billions of dollars in additional collateral in connection with certain credit default protection. Yet AIG ramped up its credit default swaps business; significantly, the quality of the securities AIG wrote credit protection for deteriorated, and the company plunged into subprime mortgages. The results were disastrous.

There's no reason to doubt Greenberg's word that everything was peachy until the day he left.... except for the fact that he was ousted from AIG over dubious accounting practices, and the financial products division was his baby:

But in 2005, amid an investigation by then New York Attorney General Eliot Spitzer, Greenberg was forced out by AIG's board. He had refused to cooperate with the company's own probe.

He is still fighting civil charges being pursued by New York state, as well as a string of other lawsuits outstanding between him and AIG.

But detractors say he could face a tough time saving face given the latest loss revelations since the former chieftain was sole architect of AIG Financial Products - the business that poured itself into the CDS market, and ultimately cost AIG so much.

Under Greenberg and Joe Cassano, the former Michael Milken associate who headed the financial products group, there was trouble. In 2001 the financial products division engaged in illegal conduct, resulting in a $80 million fine and its return of close to $40 million in fees, back in 2004:

To make the transactions look legitimate, Financial Products had set up a company to "invest" in the entities, while receiving an equivalent amount in fees, investigators said. The structure of the deal violated securities laws, FBI agent Randy Tice asserted in an affidavit filed in federal court as part of the simultaneous settlement of a criminal case and an SEC civil complaint.

AIG and two Financial Products subsidiaries agreed to pay an $80-million fine and give back $39.8 million in fees it had earned, plus $6.5 million in interest. PNC paid a $115-million fine.

The settlement also required AIG "to implement a series of reforms addressing the integrity of client and third-party transactions." A group of senior AIG executives would review complex transactions from the previous few years, working with an independent monitor chosen by the Justice Department, the SEC and the company.

Unsurprisingly, the company's auditors wanted to take a close look at its operations - and was apparently told that they had to take "no" for an answer:

Both PricewaterhouseCoopers, the company’s auditor, and an independent accountant complained of a lack of access to the London unit and its leader, Joseph Cassano. The accountant, Joseph St. Denis, said in a statement to the committee that he had been deliberately blocked from questioning Mr. Cassano because he might ”pollute the process.” Mr. St. Denis later resigned in protest.

(There were a lot of red flags.) When things reached the breaking point, Cassano was allowed to retire with a sweetheart consulting deal, until negative publicity brought it to an early end.

He was forcibly retired in March of 2008, but kept on a $1 million per month retainer and allowed to keep living in the AIG-paid for apartment in London. It was only in September 2008 that Rep. Henry Waxman flipped out when he heard that the guy who blew up AIG and put taxpayers on the line for tens or hundreds of billions of dollars was still getting a $1 million a month retainer. That's when they killed the retainer too.

As things crumbled around them, those within the financial products division "negotiated" an incredibly one-sided "bonus" package based upon their division's illusory 2007 profits.

These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard.

Although the recent payments are supposedly necessary to keep on board the people needed to unravel AIG's mess, as it turns out the hardest work in wrapping up the mess was completed months ago.

The work of defusing the most dangerous bets placed by American International Group was largely concluded by December, according to documents and interviews, long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown.

The remaining people at the financial products division could be replaced - unless they all quit at once.

But what about the argument made by top AIG officials that the people receiving retention bonuses have unique skills and knowledge that make them indispensable?

"They are replaceable," Pasciucco acknowledges. "If we were running a long-term business, we could probably replace them over time, not all at the same time."

So the sole remaining justification for the bonuses is that a bunch of replaceable employees might walk off the job at the same time, into the loving arms of the current financial industry job market, rather than "settling for" their salaries or a renegotiated bonus package based upon such absurd measures as their job performance.
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Update: Here's a more comprehensive summary of AIGFP's history. It provides a bit more context to some of the bad decisions made along the way.

Keeping the Rats on the Sinking Ship

Steven Davidoff takes a look at the AIG bonus contract, and finds a few surprises. Well, not really surprises if you're as cynical as I am, and inferred that these extraordinary bonus contracts were negotiated in anticipation of a government bailout.

These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard.

Payable without relation to performance. Payable based upon 2007 compensation. In other words, negotiated with full awareness that the Financial Products division was going down the tubes.

This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

That was a question I had hoped somebody would get around to asking Liddy during yesterday's Congressional hearing, rather than grandstanding. Dare I say, the hearing met my expectations, which means it fell far short of meeting my hopes?

Davidoff harrumphs that people focusing on the bonus scandal are missing the forest for the trees:

Yet, as I said in my post on Tuesday, “Seven Sad Truths About A.I.G.,” the real concern over the insurance giant should be about the $170 billion in government bailout money it received and and A.I.G.’s subsequent payments of tens of billions to a myriad of banks.

* * *

But of course, this is all merely a diversion for what should be the main focus: Where did the $170 billion go that taxpayers spent on A.I.G and why, and what we are going to do with A.I.G. going forward.

As should be obvious, the bonuses are an easily understood metaphor for everything that's wrong with this bailout. Most of the people in this country have suffered financially as a result of the financial crisis. It's absurd for taxpayer money to insulate those responsible for the crisis from feeling any pain - and even more absurd that it happens time, and time, and time again.

Pundits pontificate about bubbles, and the government's role in creating and sustaining bubbles, without giving heed to the fact that there's a huge bubble waiting to burst - a bubble that's sustained only through direct taxpayer subsidy: The financial sector's compensation bubble. If we would stop listening to people like Ruth Marcus and Andrew Ross Sorkin yammer about how seven figure bonuses - bonuses entirely divorced from profit and performance - are necessary to prevent people from fleeing the companies they've ruined for "better paying jobs" at some other financial institution, we might start seeing financial sector salaries come down to earth. One way or another, it's absurd for companies that are bankrupt but for multi-billion dollar infusions of taxpayer cash to be paying gargantuan bonuses completely divorced from anything that would justify their payment.

A lot of what's happened, including the payments Davidoff deems outrageous, has happened with straight-faced politicians assuring us that it's completely necessary, for the greater good, and will help keep things from getting worse. Sure, if you take the time to look under the hood, figure out what "counterparties" are, and really think about such atrocities as the manner in which AIG, with the full knowledge and participation of the likes of Geithner, Bernanke and Paulson, has tossed around taxpayer money rather than trying to cut deals that could help "save us" money, you have every right to be appalled.

If you hear somebody like Edward Liddy suggest that these bonuses help AIG "save" taxpayers money as it unravels the hideous mess it's Financial Products division made, you have every right to be outraged - AIG should be put through bankruptcy, but we're told that the magnitude of the harm that would cause necessitates our bailing it out, but its obscene to suggest that taxpayers had a choice here, or that they're being "saved" money when they shouldn't have been asked to contribute so much as a penny in the first place.

To say people shouldn't be angry about the AIG bonuses, or that they're overreacting, is a bit like asking, "That guy's been kicking you in the shin, hard, every day for the past six months, and the most you've done is grumble. Why did you get so angry today?" Does it really need to be explained?

Edward Liddy's Tin Ear

I feel a bit sorry for the man, actually. As he points out, "My annual salary is $1. My only stake is my reputation." But without going too deeply into his superficial analysis of why we must pay bonuses that he concedes aren't merited by the employees receiving them, and that he would not have approved had he been CEO at the time, this conclusion is astonishing:

In America, when you owe people money, you pay them.

Sure, but you pay them with your own money.

If I send Liddy my mortgage bill and say, "Dude, pay this for me," at best he'll ignore me and at worst he'll make an alternate suggestion of where I should put the bill. But there's no chance - zero, zilch, nada - that he won't recognize that I'm asking him to pay my bill with his money.

It's not a difficult concept to grasp.

Friedman on the AIG Bonuses

Thomas Friedman gets it pretty much right, explaining why the AIG bonuses have created such a problem for the Obama Administration, why the financial bailout is not yet complete, and how difficult it may now be to get the bailout back on track.

I don't agree with everything he says, I don't think Friedman's call for AIG employees to voluntarily give up their bonuses is going to inspire so much as the return of a dollar, and I don't know that his conception of how the bailout might proceed will be successful - nobody does, and Friedman admits that his conception is premised on hope, not certainty - but in a big picture sense he gets it. (And without the Washington Post's condescension.)

It's CYA Time?

So really, who knew what, and when?

One minute we're told,

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments.

The next, it's,

U.S. Treasury Secretary Timothy Geithner found out about the impending bonuses to executives at insurer AIG last Tuesday and alerted the White House on Thursday, an administration official said.

If I were to interpret the second article uncharitably toward Geithner, I would say that Geithner found out Tuesday that the bonuses were going forward (that's the literal claim), not that he first learned about them on Tuesday. If in fact he didn't learn of them at all until Tuesday, who kept him in the dark and have they been fired yet?

Let's not forget - Timothy Geithner's job before he became Secretary of the Treasury was president of the Federal Reserve Bank of New York. Was he kept in the dark by all of his employees at both jobs? Even as he engineered the takeover and bailout of AIG?

(And enough with the anonymous sources - start naming names.)
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And it keeps coming:

Geithner waited 2 days to tell Obama about AIG bonuses

A new timeline released by White House officials late Tuesday evening reveals the president first learned about the $165 million in AIG bonuses last Thursday, days before the story leaked to the media over the weekend.

Thanks for the (lack of a) link, guys. Now I gotta go find that timeline....

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Well, Tim Geithner's sticking with his "I didn't know until Tuesday" story - he put it in writing. If only the Washington Post had named its sources, we might be able to figure out how so many other people knew of it for months, including lawyers who worked for Geithner at the Fed, while he was in the dark. Even though Geithner claims Liddy sprung this on him at the last second, he has nothing but praise for the man. It's enough to make me think that Liddy could blow the lid off of Geithner's cover story. But I guess I"m just suspicious by nature.

There's also this doublespeak from Press Secretary Robert Gibbs:

Q. Robert, we understand from your answers here that you don't have knowledge of the exact timeline, but would it be accurate to say that you were blind-sided, that the President was blind-sided by this?

MR. GIBBS: No. And I will certainly seek better timeline answers to enumerate the negative answer I just gave you.

Q. Why wouldn't it be accurate to say that?

MR. GIBBS: Because the Secretary obviously took steps last week to lessen the blow of what was both contractually obligated and what had been promised but was not part of a contract that lessened the amount of money that was paid out.

Again, the Secretary of Treasury did good work in changing what was potentially out there, and I think obviously he did so in order to protect the American taxpayers. And that's why I think - that's the basis for me answering that question.

Geithner protected the American people by taking steps to lesson the blow, even though those steps proved ineffectual, and that meant that two days later when he finally got around to telling Obama, nobody was blindsided? What part of that makes sense.

Julie Hirshfeld Davis does some actual reporting, pointing out that this was on the radar screen (and by implication should have been very much within the awareness of Geither in his former position, as long ago as November:

AIG's plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored. A November SEC filing by the company details more than $469 million in "retention payments" to keep prized employees.

Back then, Rep. Elijah E. Cummings, D-Md., began pumping Liddy for information on the bonuses and pressing him to scale them back. "There was outrage brewing already," Cummings said. "I'm saying (to Liddy), 'Be a good citizen. ... Do something about this.' "

Around the same time, outside lawyers hired by the Federal Reserve started reviewing the bonuses as part of a broader look at retention and compensation plans, according to government officials who spoke on condition of anonymity. The outside attorneys examined the possibility of making changes to the company plans — scaling them back, delaying them or rescinding them. They ultimately concluded that even if AIG's bonuses were withheld, the company would probably be sued successfully by its employees and be forced to pay them, the officials said.

In January, Reps. Joseph E. Crowley of New York and Paul E. Kanjorski of Pennsylvania wrote to the Federal Reserve and the Treasury Department pressing the administration to scrutinize AIG's bonus plans and take steps against excessive payments.

"I at that point realized that we were going to have a backlash with regard to these bonuses," Kanjorski said in an AP interview. In a meeting with Liddy later that month, he said he told the AIG chief that "all hell would break loose if we didn't find a way to inform the public ... and that we should take every step to put that information out there so we wouldn't have the shock."

All of this eluded Geithner, engineer of the AIG takeover?
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In an unsigned editorial, Fred Hiatt's crew is suggesting that Tim Geither is either incompetent or a liar (the bonus plan, apparently, was public information for the past year, and everybody knew about it), and is telling everybody else to get over it:

Thus, the attorney general of New York, Andrew M. Cuomo, among other Democrats, floated the argument that the AIG employees should get stiffed because "it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money." True. But the bonuses were set in motion well before the U.S. takeover of AIG, which was done to avoid a Lehman Brothers-like meltdown that would have cost taxpayers a lot more than $165 million, and the compensation plan has been public information for a year.

Hiatt's crew also suggests that AIG "is hemorrhaging knowledgeable employees" and not paying bonuses, with no exception indicated for bonuses paid to people who have already quit, "would probably accelerate the exodus, with the likely effect that the country would lose much more money on AIG than it would otherwise." If the situation at AIG is so bad despite these bonuses, perhaps it's time to think of solutions that don't depend upon the work of people who can't be replaced (even as other Washington Post editorials suggest that they've already been replaced).

Andrew Ross Sorkin, Contrarian

Addressing the AIG bonuses, Andrew Ross Sorkin argues that the American taxpayer should bend over and... I'll leave out the middle part, but at least it ends with "get over it" as opposed to "pretend to like it." It's an essay apparently designed to provoke; unfortunately it doesn't do much to persuade. Quoting President Obama, Sorkin states,

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

The sanctity of contracts? I assume at this point that Sorkin's never had to negotiate with his insurance company over a claim or wrongful denial of benefits. It goes without saying that he's never gone to law school, let alone practiced contract law. I wonder if he takes a similar absolutist position on divorce - marriage is a contract, after all, yet here's the government letting people off the hook, all the time.

The world of AIG revolves around contracts - building contracts that are tightly binding on the other side, but loosely binding on AIG. They have platoons of lawyers that they can turn loose on their contracts to determine ways to deny claims, reinterpret provisions in their favor, revise contracts to take advantage of the latest changes in case law and statute, and otherwise to put the people on the other end of a transaction at contractual disadvantage. When there's a dispute over a contract, those lawyers don't hesitate to argue that the contract should be voided on any number of grounds, including fraud, mutual mistake, and violation of public policy. The only time they talk about the "sanctity of contracts" is when they're on the other side of the argument, and probably then only for the benefit of a jury - I can hardly imagine what a judge with any experience would make of an insurance company arguing that contracts are sacred and inviolable.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

You mean, like if the government offered things called "courts" where people could go and claim, "I'm in a contract dispute with this other person, and want you to vacate part or all of the contract," and had a person called a "judge" who had the power to in fact do that? Or a special type of court called a "bankruptcy court" where people could erase part or all of their financial obligations? Or where there was an elected "Congress" that would tell a company in financial trouble, "We'll help you - but only if you first tear up your contracts with your labor union"? The horror - thank goodness we don't live in a country like that.

Do you find yourself transported back in time to last November, when Sorkin felt quite differently about contracts?

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships.

Wow.... G.M. would need an industrial-strength shredder. And it gets better... Why should auto workers have their salaries slashed and lose their benefits, despite the "sanctity" of their contracts?

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O’Neill, 39, an assembler at G.M.’s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. “I think we’ve given enough,” she said about the cuts to her salary and pension plan.

“Everybody wants to come down hard on the workers,” she said. “Nobody knows what we do inside there but the people who work there. It’s hard. It is not an easy job.”

When you read a line like that you might sympathize with her, but then you realize that nothing can be accomplished without bankruptcy. Ms. O’Neill: your company is asking the taxpayers - many of whom don’t have health care coverage - to pay your salary and health insurance.

And Mr. Sorkin, you're asking the taxpayers, many of whom aren't getting $3 million bonuses this year, to... Oh, why am I still pretending that you intended your argument to do more than give you a lot of media attention for being contrarian. I can't believe you're so obtuse as to not see the contradiction, or have had a transformative experience that has caused you to abandon your earlier anti-contract stance. Do you believe a word you wrote in either article?

Seriously, here we have AIG that is bankrupt - it survives only through the injection of gargantuan amounts of taxpayer money and the implied (or is it express) promise that the U.S. Treasury continues to stand behind its obligations with a blank check. No, it hasn't gone through bankruptcy proceedings, but only because it's the unique and special recipient of an unprecedented bailout. It's perfectly reasonable, and perfectly consistent with contract law, to argue that the bonus contracts requiring a huge outlay of taxpayer money to reward AIG employees violates public policy.

But let's take a step back - Sorkin argued, "imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right." My response so far treated that remark seriously, whereas it's not a serious comment. It's a slippery slope argument - and he admits it ("As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is.") I guess he hasn't studied logic.

My sarcasm should not be used to feed the slippery slope - although the government gives businesses and individuals both tools and opportunity to escape contracts, for the most part the government does seek to uphold contracts, and help others uphold them. Nobody in the business community would look at the AIG bailout, and the billions poured into upholding AIG's poorly considered contractual obligations, and conclude based upon the voiding of an oversized bonus contract, "The U.S. government can't be trusted to uphold contracts." Sorkin has to know that.

(The auto industry unions are facing a similar issue - but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

First, no, it wasn't a negotiation - it was a condition the government imposed as a prerequisite to issuing GM and Chrysler bailout money. The contract was entered through a negotiation, and is being abrogated because the government didn't want bailout money to support a compensation structure people like Sorkin argue is unjust to taxpayers. You know, because UAW members get health benefits. Second, Sorkin himself favored unilaterally tearing up their contracts through a Chapter 11 filing.

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave - the buzz on Wall Street is that some have, and more are ready to - they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

That's speculative, and although beneficial to AIG is not something I find particularly compelling. I suspect that, had it wished to do so, by now AIG could have brought people into the Financial Products division and got them up to speed, to the point that the people who created this mess could be given their walking papers. Sorkin's argument actually lends weight to the argument that the contracts should be declared void. If in fact their was an implicit threat, "Give us millions and millions of dollars, or we'll finish ruining the company and take down the world economy," it would be unconscionable to reward that behavior. The idea that they could walk away and trade on their inside information to the detriment of AIG and the country? Probably illegal, and certainly something AIG should have covered in its employment contracts.

And how does any of that explain why AIG gave these bonuses to employees outside of the Financial Products division, under the same exceptionally generous terms?

For better or worse — in this case, worse — someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

And again the question arises, why? Why these unusual, "bulletproof", anti-employer contracts that guarantee extraordinary bonuses over a two-year period? The only compelling reason I can think of remains that AIG suspected that it would be taken over by the government and wanted to be sure that compensation would not be affected - regardless of performance, losses, or taxpayer subsidy. Liddy's comments support that thesis:

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

So this pay structure was created in anticipation that the U.S. Treasury would take over AIG?

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work - against taxpayers’ interests.

What's that supposed to mean? First, if people are able to be more productive outside of AIG, you create an economic efficiency by having them switch jobs. Second, how are the people at the heart of this disaster "real moneymakers"? You're going to gamble your company on their next scheme? Third, why are we assuming that they, and any other employer they join, would be working against taxpayer interests? Fourth, no small number of the employees getting these bonuses no longer work at AIG - how in the world does it benefit anybody to give them a retention bonus now?

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says.

How does that justify the bonuses, even if we leave aside those paid to employees who have already quit? A retention bonus is only persuasive if it's higher than the next guy's signing bonus. If these guys could get the same or more elsewhere, the bonuses won't keep them at AIG. If they can't, but we're obligated to pay them more than their market value if we keep them on AIG's payroll, then AIG should be searching the job market for their replacements. In contract talk, that's called "increasing efficiency".

The Washington Post on AIG

Earlier, I commented that this article represents exceptionally bad journalism. I think it's fair that I highlight some of the many reasons why.

The mediocrity of the piece is foreshadowed by the suggestion, provided by an anonymous AIG executive, that if you don't like the bonuses you're part of a "mob effect" that is "putting people's lives in danger". (Mind you, he's keeping the bonus - he's just upset that you're mad about it.)

Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy.

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

How irresponsible to relate an anonymously sourced comment like that one. How lazy and apathetic would anybody who pretends to be a reporter have to be to not demand further explanation: "You're stating that after this much time and close to $180 billion in taxpayer money, you're company is still on the verge of a financial meltdown that will take out the world's economy?"

If you hadn't guessed by this point that this article was going to be stenography of the AIG viewpoint, that passage should take away any doubt.

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

And the anonymous sourcing goes on. Nobody in the Obama administration will attach their names to these claims? Not one person?

If none of these people would go on the record, we deserve to know why. Is it because they fear retaliation? Because they want to hide their relationship to AIG? Because they're lying?

Also, if this analysis has been literally going on for months, it's been going on from the day Obama took office - probably longer. There would have to be a stack of memoranda and analyses explaining how the government concluded that nothing could be done, probably spanning two administrations. So why is it that, by all appearances, the only thing that's been made public is AIG's self-serving analysis? Why haven't we been able to review a copy of one of these amazingly bulletproof employment contracts.

Why, for that matter, was no question asked about how these contracts came into being in this particular form? No competent employer guarantees on year - let alone two years - of oversized bonuses to employees, with absolutely no recourse or ability to back away from those bonuses if those employees are found to have been incompetent, to have damaged company profits, to have engaged in misconduct or criminal activity, to have drowned the company in a bathtub.... What gives?

The payments represent only the most contentious of a larger group of bonuses being paid throughout AIG. The company's top seven officials, including chief executive Edward M. Liddy, agreed in November to forgo bonuses through this year.

If the excuse for not cutting off the bonuses to the division that killed the company - the Financial Products unit - is that it could constitute a default that would make trillions of dollars in obligations immediately payable, or that their transactions were so complicated that only they could undo the incredible damage they caused, what's the excuse for giving similarly "bulletproof" bonus deals to anybody outside of that division? Was this done in anticipation of a government takeover, to protect oversized bonuses against public pressure?

In addition, the company is set to pay another $600 million in retention awards to about 4,700 people throughout its global insurance units.

Just as "bulletproof", we should assume?

At the Federal Reserve Bank of New York, which has directly overseen AIG since its federal takeover in September, officials have studied the possibility of rescinding or delaying the bonuses. They even brought in outside lawyers for advice. The conclusion: If the bonuses weren't paid, the AIG staffers would be able to sue the company and probably would win, not just what they were owed but also punitive damages that would make the ultimate cost perhaps two to three times as high as the bonuses themselves.

We're again bypassing the question of why this extraordinary bonus deal was entered, and why it was entered on terms that are so unfavorable to management. Yes, there are excuses of fearing the loss of "valuable employees", presumably offered to justify giving the most outrageous bonuses to AIG's most culpable bad actors, but even assuming that this was an exceptionally one-sided giveaway, and why it was extended to so many employees who were far less valuable or in other divisions? I recognize that state laws are protective of employees who aren't paid their wages, and how they could factor into the question of whether it's wise to default on the obligation, but are we to pretend that this was accidental?

Moreover, Fed officials also hope to keep current employees with the company. The senior executives whose decisions caused the company's collapse are long gone. Most of those left behind are trying to unwind complicated derivative contracts.

Oh, really? And we know this because you are again giving us anonymously sourced, undocumented stenography? Other than Joseph Cassano, precisely which of the senior executives from the Financial Products division left AIG? Exactly how much bonus money did their departure save AIG - and dare I ask, was the value of their severance packages greater than that savings?

Completing that process correctly is essential to preserving as much value as possible for taxpayers, officials at both the government and AIG have argued. If it is mishandled, it could expose taxpayers to billions of dollars in additional losses.

This reflects the tin ear of this entire article. There is no upside for the taxpayer here. Nobody said to the taxpayers, "Hey, you mind if we spend a few hundred billion of your money bailing out AIG?" Nobody said, "You wanna be on the hook for all of the liabilities created by greedy, incompetent AIG executives in partnership with their Financial Products division?" And obviously nobody said, "Since we did all of that without asking you, anybody mind if we also give most AIG employees gargantuan, taxpayer-funded bonuses, with the biggest and best bonuses going to people in the Financial Products division?"

If you produce an article that so eagerly accepts and repeats the statements of AIG employees and government officials, without once challenging the claims made, asking obvious questions, or wondering, "Why won't anybody let me use their names," you're pretty useless as a reporter. Four Washington Post employees worked together to create this? Amazing. Bob Woodward must be spinning in his grave.¹

Meanwhile, also offered as "front page news", comes this gem:

House Minority Leader John A. Boehner (R-Ohio) said the bonus issue added to his belief that there will be almost no Republican support for any expansion of a bank-bailout program that passed Congress last fall with broad bipartisan support.

"What is the government's exit strategy from this sweeping involvement in private business?" he asked in a statement, adding that "taxpayers are not receiving an adequate accounting from either the Treasury or the management of the companies that received taxpayer funds. Unfortunately, we have not yet seen such a plan."

At least Boehner was willing to be named, but would it have been to difficult to ask the obvious follow-up: "G.W. Bush led the team that took control of AIG and these massive financial industry bailouts - what was his exit strategy?" Why is it always somebody else who must come up with the exit strategy for Bush Administration boondoggles?

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1. I know. It was a joke.

The (Indefensible) AIG Bonuses

Although this article is exceptionally bad as journalism, it does suggest a few things to me:

• The bonus issue is even worse than people think - the contract calls for similar bonuses to be given next year, as well.

• Geithner has probably known about the bonus plan from the day the government took control of AIG. Obama has probably known since he took office.

• Recognizing how this would look to the public, Obama instructed Geithner to do something about the bonuses.

• Working closely with Liddy and AIG, Geithner apparently chose instead to find ways ot justify the bonuses, or depict them as unavoidable.

• There's no excuse - none - for this having been sprung on the public at the last second.

I'll take another look at it later, along with anything else that comes down the pike, to see if any of those impressions change.

Avoiding Consequences

You would think, from the way the latest bailed out company bonus scandal hit the press, that nobody could have seen this coming. Wrong. Quite obviously, AIG CEO Edward Liddy saw it coming. For that matter, everybody within AIG who was "entitled" to a bonus saw this coming. To the extent that Geithner and Summers didn't see this coming, it was because they were deliberately kept in the dark - and perhaps also that they chose not to ask.

Here's an interesting theory (albeit most likely incorrect) on how Liddy may have tried to scare Geithner out of any meaningful confrontation over the bonuses.

I take this to mean that if a bunch of AIGFP managers quit because they didn't receive bonuses promised in their contracts, then France could, if it wanted, to appoint its own designee. And if that happened, then it would equate to a default and those contracts would kick in, at a cost to AIG the US government of at least tens of billions.

I doubt that such an outcome was likely and, if it were, my preference would have been to talk to France about the many reasons they weren't going to do any such thing.

But really, I think the legalistic rationalizations are just meant to give Liddy cover - he wanted to pay the bonuses, and the best way to do what he wanted to do was to keep quiet about them until the secret could no longer be kept, thereby avoiding the chance that Congress will revise the strings it has imposed on bailout money, then dump a convoluted legal rationale on the credulous and compliant Timothy Geithner in order to avoid any serious action before the bonuses can be distributed. [Addendum: Certain key people, probably including Geither and Summers, knew about these bonuses for a considerable time before the news was made public; so part of this assumption was unfair to Liddy.]

Larry Summers is worried about having policy created out of anger? This is increasingly looking like the straw - a word that strangely enough fits, because in the larger scheme of things these bonuses are a tiny part of the bailout - that broke the camel's back.

Larry Summers: Liar?

Larry Summers dissembles as follows:

"If we simply throw up our hands, refuse to deal with any of this, we'll have the kind of financial catastrophe that we saw after what happened at Lehman Brothers," Summers said. "[Treasury] Secretary Geithner has negotiated very forcefully with AIG. He has done everything that is legally permissible for the government to do to limit the payment of bonuses. But where there are contracts, binding contracts that were entered into long before the government put any money in to AIG - we're not a country where contracts just get abrogated willy-nilly."

The government can do a lot of things - put AIG in receivership, sell off its profitable pieces, and liquidate the rest. They could avoid fear-mongering about what happens if it fails, and either create a "Chapter 10" bankruptcy for companies that are "too big to fail" or simply say, "If you don't renegotiate those bonuses, bankruptcy court awaits."

Again, quite obviously, the "sanctity of contracts" isn't an issue in relation to the auto industry bailout. Abrogation and renegotiation of contracts has been made a condition of any bailout. This is different only because Summers and Geithner are continuing the Bush Administration's incompetent, poorly conceived bail-out that somehow deems it wrong for the people who ran our economy into the ground to suffer a financial consequence. Not when they can be fully paid, courtesy of the taxpayer.

Flashback to November:

Someone in the Obama administration, with both business savvy and a suitably tough-minded approach, could bring together the parties, including the dealers, the union and the company. He (or she) could force the union and the company to renegotiate their contracts. With his input, Congress could perhaps pass a law that dealt with the state laws governing dealerships. (Or the government could pay off the dealers itself, instead of having G.M. do it.) He could sign off on plant closings. He could force the companies to come up with real plans that would return them to profitability. And in return, the government would make federal loans that would give them the breathing room they need.

Come to think of it, this would be a perfect first job for Lawrence Summers, who is expected to become an economic adviser to the president-elect. If he can’t knock these heads together, nobody can.

When did I miss the retort from Larry Summers that we don't renegotiate contracts in this country, no matter how unprofitable a business, and no matter how much taxpayer money is on the line? It would be a nice thing to clear up, now that he's actually been given that job.

When he makes the same type of "A contract is a contract", "the government cannot just abrogate contracts" statement about the auto industry, we'll know he's not a liar. Otherwise....

Note to Obama: I know these guys haven't been on the job very long, and neither have you, but this combination of spinelessness and rudderlessnes on the financial crisis has to stop. If you believe that this type of continuous bailout of AIG, despite its complete lack of willingness to take responsibility for its past actions or financial condition, or additional TARP-type bailouts of banks are necessary, you had best be thinking of alternatives - this may have just destroyed the chances that you'll get the funding.

Update: Josh Marshall's observation,

I don't believe the bonuses themselves are the heart of the matter, nor the fact that they're going to the very executives who caused AIG's implosion or even the galling reality that, since all money is fungible, they're being paid with taxpayer dollars. What's really driving this forward - and what makes it such a dangerous moment for the White House - is the jarring image of the administration's impotence....

Few exchanges have so captured the disconnect that makes this situation so politically explosive. We're collectively taking our country's future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we're receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us - dictates we promptly accede to. There's a beggars can't be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we've been told, that in addition to picking up the tab we're being played for fools.

Update 2: Glenn Greenwald addresses Summers on the "sanctity" of contracts:

Legal strategies aside, just as a business matter, one of the first things which every compnay in severe distress does is go to its creditors, explain that it cannot make the required payments, and force re-negotiations of the terms. That’s as basic as it gets. To see how that works, just look at what GM and other automakers did with their union contracts – what they were forced by the Government to do as a condition for their bailout....

There may be other reasons why the Treasury Department decided it wanted AIG to pay these bonuses (Marcy Wheeler considers some of those reasons here), but this claim from Larry Summers that the sanctity of contracts precludes any alternatives is not just false, but insultingly so.

Update 3: Summers suggests that withholding the bonuses could have caused AIG to fail.

"Secretary Geithner has used all the legal authorities that are open to him to contain and limit the payment of bonuses," said Summers, chairman of the National Economic Council. "What he did not do, and what would have been irresponsible to do, as outrageous as these payments are, would have been to put at risk the stability of the financial system.

"To have courted the kind of disaster that followed the decision to let Lehman Brothers simply collapse might have felt good briefly, but it would have touched the lives of a huge number of Americans who would have unnecessarily become unemployed or seen destruction of their lifetime savings."

Are we really supposed to believe that? Other than the AIG lawyers who were paid to tell Liddy exactly what he wanted to hear, who actually believes that a refusal to pay the bonuses could constitute a default and cause AIG to fail?

"Okay, Then. Pay Back Our Money, and Do What You Want."

Why isn't that a perfectly legitimate response to the failed CEO of a failed company as he describes a plan to use perhaps half a billion dollars of taxpayer money to pay bonuses to the people who ran the company into the ground... so they won't quit. Seriously, had I presented this scenario to you last year as fiction, wouldn't you have protested, "Nobody is going to believe that"?

AIG has burned through $173,000,000,000.00 in taxpayer money because these yahoos screwed up. When the auto industry asked for a fraction of that, Congress was sputtering endlessly about overpaid workers and the need to renegotiate labor contracts as part of any bailout. Why are the idiots who played a central role in the collapse of the world economy immune from a similar demand?

If in fact AIG can't get out of paying these absurd bonuses because of "contractual obligations", well, guess what. Those obligations change the second AIG enters bankruptcy. So how about sending them into Chapter 11. Seriously.¹

You can blame the failure of AIG on... well, the division that's supposed to get the lion's share of these bonuses, and say, "The rest of the company was doing good work," but the incompetents in that division bankrupted the entire company. As for this nonsense,

But [AIG Chairman Edward Liddy] also told Geithner that he felt it could be harmful to the company if the government continued to press for reductions in executive compensation.

“We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers - if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” Liddy said.

If he can't attract sufficient talent to lose hundreds of billions of dollars and run his company into the ground, my heart bleeds for him. But he thinks they're going to quit? Who's going to hire the losers who crashed and burned AIG? Liddy - if you finally get around to doing your job and firing the clowns who ruined your company, will you still owe them these bonuses?

Update: It just gets better:

"Any credibility that could have been given to Mr. Liddy’s argument that these payments are necessary to retain top talent was completely destroyed in last month’s 10-K filing when AIG itself disclosed that nearly $60 million of those retention payments are going to employees who will be terminated."

How incompetent do you have to be to negotiate a contract unavoidably requiring payment of "retention bonuses" to employees you're not retaining? This doesn't exactly back up AIG's other line, that they can't fire these people because they're the only ones who understand the toxic witch's brew they created well enough to produce an antidote.
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1. There would be a question of whether these bonuses constitute wages, and thus get priority for payment in bankruptcy; but I suspect that in a bankruptcy AIG would be shedding employees long before bonuses were due, while renegotiating compensation packages for any who remained on the job - provided the company didn't just liquidate.

The AIG Bailout

In relation to the collapse of AIG, and the beneficiaries of close to $200 billion in U.S. taxpayer money, I suspect Jim Hoagland is right about all of this:

The best guess I hear is that the banks were not buying insurance at all - they seem never to have diligently asked if AIG could pay off, which it manifestly could not. They were in effect buying a piece of the firm's AAA rating, which enabled the Europeans to inflate artificially their required credit reserves and lend out ever more of their capital for bigger profits - until the crash came. Or as financial blogger John Carney has put it, the customers were in on the scam.

Hoagland continues,

If that is not the case, the administration needs to make public the facts that refute it. If these reports and suspicions are founded, the administration needs to explain what happened and get in front of what could become destabilizing public anger.

I suspect that the Obama Administration, in continuation of Bush Administration policy, is trying to undo as much of AIG's damage as possible before "destabilizing public anger" prevents further action - and I suspect that would be the very moment the President confirmed Hoagland's suspicions. Sad though it may be, the concern appears to be that telling AIG's customers, "Sorry, you knew what you were doing, AIG's bankrupt, and you're not getting more money," could put the world financial system back into a tailspin.