Let the AIG Bonuses Stand

Update:
I think President Barack Obama is taking more correct (though decidedly unpopular) approach by directing "government lawyers to review the company's contracts to determine whether provisions guaranteeing the payments could be overturned." It remains to be seen, however, if he will be able to maintain his position in the face of public anger and Congressional meddling. His response to any bills sent to him by Congress to intervene in the AIG contracts will be telling.

Barney Frank wants to subpoena AIG for the list of employees who received bonuses. Where was his outrage when Franklin Raines and Jamie Gorelick left Fannie Mae in a shambles, after pocketing hundreds of millions of dollars? Oh, never mind -- they are powerful, well-connected, contributing insiders. The State rolls on.

Either the United States is governed by the rule of law, or is governed by the passions of elected officials who, after all, are supposed to have cooler heads and not be enticed into action by the whipsawing emotions of the public. That is why the United States has a republican, not direct democratic, system of government.


Original Post:
America's version of the Indonesia Tsunami struck our shores this week, in the form of insurance (former) giant AIG's revelation that it paid out bonuses to the tune of $165 million to current and former employees of its subsidiary AIG Financial Products. (The derivative-related shenanigans of AIG Financial Products, in case you've been on Mars, was responsible for the looming meltdown of AIG and its attendant need for $173 billion of taxpayer bailout funds.)

(For those interested, the Washington Post has an excellent three-part series on the genesis of AIG Financial Products, and how AIG morphed from a staid, boring insurance company into a firm that handed out credit-default swaps like Monopoly money.)

Adding fuel to the fire is that many of the bonuses were for retention purposes, yet many of the recipients no longer work for AIG. Only on Wall Street.

There is understandable public outrage at AIG, and politicians -- never ones to shrink from riding the waves of public sentiment to further their self-aggrandizing goals -- are predictably threatening a raft of efforts to "claw back" the bonus pool. Courtesy of Fox News, the proposed actions include the following:

• Ten House Democrats introduced a bill Tuesday to tax all bonuses above $100,000 at 100 percent to recoup all the "outrageous" AIG bonuses. House Speaker Nancy Pelosi said in a statement that recouping a "substantial portion" through taxation is one of several viable possibilities.
  

• Rep. Charlie Rangel, the Democratic chairman of the tax-writing House Ways and Means Committee, authored a resolution that would place a 90 percent income tax on bonuses above $250,000 for firms, like AIG, that received at least $5 billion in bailout money. Initially, Rangel said he was uncomfortable with the idea of meddling with the tax code as a solution to the AIG problem, but he told FOX News he "had an obligation to respond to the fears and anger of the people."

• Senate Majority Leader Harry Reid also said Tuesday that legislation being crafted by Senate Finance Committee Chairman Max Baucus, D-Mont., would subject the bonuses to a tax of more than 90 percent.
  

• Sen. Chuck Schumer, D-N.Y., said, "If (AIG CEO Edward) Liddy does nothing, we will act and will take this money back and return it to its rightful owners, the American taxpayers. We will take this money back by taxing virtually all of it."

• Not to be outdone by anybody, Sen. Charles Grassley, R-IA, said, "...the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."

I think it is outrageous that the very people who caused American taxpayers $173 billion (and counting) were paid millions. Does that mean I think the government should annoint itself with the power to violate private contracts, and to confiscate private property? Absolutely not. While doing so would satisfy the populist hunger for retribution, I think the long-term consequences would be horrific.

Make no mistake about it: the United States has enjoyed the greatest accummulation of wealth and prosperity due entirely to its respect for property rights. Does anyone think that, having plundered legally-gotten gains, the State would never again stoop to such a level? If so, ask yourself why ever more products and services get taxed every year, while taxation, once applied, is NEVER removed.

The Scottish philosopher David Hume described the sanctity and importance of property rights in A Treatise of Human Nature better than I can, and it bears careful consideration:

"We have now run over the three fundamental laws of nature, that of the stability of possession, of its transference by consent, and of the performance of promises. ’Tis on the strict observance of those three laws, that the peace and security of human society entirely depend; nor is there any possibility of establishing a good correspondence among men, where these are neglected. Society is absolutely necessary for the well-being of men; and these are as necessary to the support of society. Whatever restraint they may impose on the passions of men, they are the real offspring of those passions, and are only a more artful and more refin’d way of satisfying them. Nothing is more vigilant and inventive than our passions; and nothing is more obvious, than the convention for the observance of these rules."

On the bright side, I must say it is quite comical to see politicians get purple-faced with rage over having (supposedly) no knowledge of the financial details of the AIG-employee contracts. Given that the Democratic Senators presented the country with almost no time or opportunity to read through the $1 trillion stimulus bill, I must say...

"How does it feel?"