Word: aig
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...million in bonus payments sent out in mid-March to executives and traders at AIG's Financial Products subsidiary (also known as AIG FP, or the people who tried to bankrupt the world) is an "outrage," President Barack Obama has said. His top economic adviser, Larry Summers, called the AIG saga the "most outrageous" of the current financial crisis. "It's an outrageous situation," agreed Senate minority leader Mitch McConnell. His House counterpart, John Boehner, said the Obama Administration's handling of the AIG mess was "outrageous." Senate Banking Committee chairman Chris Dodd claimed to have warned Treasury Secretary...
Then I reconsidered. A Wells Fargo sales trip to Vegas - to name another recent, and recently canceled, source of Washington outrage - is a triviality. The AIG bonuses, on the other hand, are emblematic of the heads-I-win-tails-you-lose nature of Wall Street pay. This incentive structure was a major cause of our current crisis. It is an Important Thing, and the danger in the current Washington frenzy to do something is not that it will go too far but that it won't go far enough...
...AIG bonuses were retention payments promised early last year, when it was clear that London-based AIG FP was in trouble but not yet apparent that its parent company wouldn't survive without $170 billion (and counting) in taxpayer aid. Without that aid, AIG would have gone bankrupt in September and the bonus promises would have been torn up. AIG was not allowed to go bankrupt because Lehman Brothers had just failed and the people at the Treasury Department and the Federal Reserve worried (with reason) that another failure - in particular, the failure of a firm that wrote default insurance...
That is outrageous. But it's not any more outrageous than the even bigger bonuses paid out in past years to the masterminds of the AIG FP mess who no longer happen to work there. Slightly less so, in fact: the remaining AIG FP employees are being paid essentially to work themselves out of jobs by winding down all the unit's contracts. It's an awkward situation that means at least some of them probably would have gotten retention pay even in bankruptcy...
Members of Congress are talking up bills to levy a 90% or 100% tax on current bonuses at AIG and other financial-industry wards of the state. But if such selective tax increases are constitutional - and it appears that they can be - another approach would make far more sense (I am brazenly stealing it from financial blogger Steve Randy Waldman): impose a less punitive (50%?) but retroactive tax on the past four years of bonuses above a certain amount ($1 million?) paid out by any financial institution that receives a bailout. That is, spread the net wider to catch...