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A Different Perspective on AIG Bonuses: Preserve Sanctity of Contracts, Keep Employees to Clean Up Mess

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Posted on 17 Mar 2009

Everyone from President Obama to Treasury Secretary Geithner to NY Attorney General Cuomo to Main Street and taxpayers are voicing their outrage over AIG's staggering $165 million bonuses for employees of the insurer that nearly took down the financial system. It seems to boggle the mind and it doesn’t seem fair to many.

Yet in today’s New York Times and on various networks during the early-morning news shows, a different perspective on the issue is being debated. For example, in the Times, the article raises the question whether finding ways around these contracts as Obama has requested is something we should be doing.

Some lawyers, Wall Street types and compensation consultants are wondering whether this action will put into question the fundamental value of the sanctity of contracts.

Is there something to this argument? Or is it just convenient legalese? The article asks: Imagine what the economy would look like if the business community started to worry that the government would start abrogating contracts left and right?

As much as we might want to void those AIG 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. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (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.)

Yet what about the company’s commitment to taxpayers? Here is the second, perhaps more sobering thought: AIG made this mess, perhaps it is the only one that can turn things around.

AIG employees concocted complex derivatives that worked 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 AIG book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these employees in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Giving bonuses to retain employees is the explanation offered by AIG CEO Edward M. Liddy.

“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.

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

Yes, if taxpayers had not bailed out AIG these contracts would not be worth anything. Andrew M. Cuomo, the attorney general of New York, made the point on Monday, when he subpoenaed AIG for the names of the people who received the bonuses. If AIG had spiraled into bankruptcy, its employees would have had to get in line with other unsecured creditors.

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