There are plenty of things to be outraged about these days. I am outraged about something almost everyday when I read the newspaper or listen to the news on television. I am outraged every time I see or read about a politician who is outraged. Politicians are usually outraged over something they caused or could have prevented, although they always blame someone else for their outrage.
Everyone, including me, has been outraged this week over the special retention bonuses paid by American International Group, Inc. to some of its key employees. I share the outrage over the retention bonuses because they seem to me to have been unnecessary or excessive or both. But my outrage over the retention bonuses pales in comparison to my outrage over the way the President of the United States and most members of Congress, both Democrats and Republicans, have reacted with outrage to the retention bonuses. Our politicians are attempting to incite a public riot over a problem they knew about or should have known about and could have prevented.
Let’s try to put aside our mutual outrage for a moment and look at the facts. Retention bonuses are not unusual. Companies that are being sold or are under financial stress frequently use retention bonuses in order to retain the key employees who will be needed to complete the sale process or to solve the company’s financial problems. A key executive who realizes his or her position is likely to be eliminated due to the company’s sale or financial difficulties will probably start looking for other opportunities. The more talented and marketable executives will have the most opportunities and will be the first to leave. Retention bonuses are designed to give key executives an incentive to remain in their current positions until a sale can be completed or until other issues can be addressed.
The AIG Financial Products Corp. 2008 Employee Retention Plan, effective December 1, 2007, was adopted by AIG to provide incentives for employees of its Financial Products Group to remain with the company during a period of uncertainty due to losses in AIG’s complex financial portfolios. The AIG Plan covered the calendar years 2008 and 2009 and provided for the payment of guaranteed bonuses on or before March 15 following the end of each calendar year. Each participant had to remain as an employee of AIG on the payment date in order to receive his or her guaranteed bonus. AIG retained the right to terminate any employee who was not performing his or her duties in a satisfactory manner.
The AIG Retention Plan was adopted and was in effect before the government invested taxpayer money in and took control of AIG. Before purchasing or making a substantial investment in a company, the normal process requires the purchaser or investor to conduct a due diligence investigation. The purpose of the due diligence investigation is to identify all of the problems and liabilities that will be assumed by the party making the investment. The AIG Retention Plan was fully disclosed and was known or should have been known to the government before it made its investment in AIG. The government had three choices: (1) make the investment and thereby indirectly assume AIG’s obligations, both known and unknown, including its obligations under the Retention Plan, (2) decline to make the investment, or (3) agree to make the investment on the condition that AIG amend the contractual obligations that were unsatisfactory to the government.
In short, the government could have required AIG to amend the AIG Retention Plan as a condition to the government’s bailout of AIG. It did not do so. AIG, of course, did not have the unilateral right to negate its contractual obligations to third parties, including its employees. Both the government and AIG, however, had tremendous leverage over AIG’s employees before the government bailout. AIG was going down the tubes. The government could have said to AIG, “We are not bailing you out unless you can get your employees to release you from your obligations under the Retention Plan.” If the government had done so, the employees would have been under tremendous pressure to release AIG from its obligations under the Retention Plan. It is not unusual for a purchaser of or an investor in a company to require changes to contractual obligations as a condition of the purchase or investment.
Our government knew or should have known about the Retention Plan when it bailed out AIG. It did nothing. It allowed the AIG employees who were participants in the Retention Plan to continue to rely on their guaranteed bonuses. Congress even included language in the recently enacted stimulus legislation to protect the AIG bonuses. Of course, most members of Congress now say they were unaware of the language in the stimulus legislation protecting the bonuses. This should be no surprise because no one in Congress read the legislation before voting on it. The stimulus bill contained hundreds of pages and was only available a few hours before the vote. As for the AIG Retention Plan, it was only after the bonuses had been paid and became public knowledge that members of Congress began blaming everyone but themselves.
Here’s where we find ourselves today. The President and most members of Congress, both Democrats and Republicans, are furious because a company controlled by the government fulfilled its contractual obligations. Members of Congress this week publicly blasted Edward M. Liddy, the newly appointed Chief Executive Officer of AIG who took the position at the government’s request, who is working for $1 per year, and who did not create but inherited AIG’s obligations under the Retention Plan. All Mr. Liddy did was fulfill a contractual obligation by paying the bonuses that had been promised to AIG’s employees. For that, members of Congress excoriated him. They have also excoriated the employees of AIG who received bonuses under the Retention Plan, some of whom have received death threats and are embarrassed to leave their homes. According to The New York Times, some AIG executives have retained private security guards. They and their children are being humiliated by their angry neighbors, who are being encouraged by politicians who are pouring fuel on the fire in an effort to avoid any personal blame for the problem.
When members of Congress were told that nothing could be done because AIG had a contractual obligation to pay the bonuses and the bonuses had already been paid, they decided they would simply confiscate the bonuses from the individuals who had received them. Amazingly, 328 members of the House of Representatives, both Democrats and Republicans, voted this week to impose a 90% retroactive tax on the bonuses that had already been paid. According to The Wall Street Journal, the 90% federal tax combined with state, local and Medicare taxes would result in taxes equal to 102.5% of the bonus payments. There is no honor among thieves, and our politicians are thieves. They are shameless.
We cannot rescue our economy without private investment. The government is relying on private investors to purchase toxic assets from banks and to rebuild the financial markets. We need to be able to attract the best talent to run the companies in which the government has invested taxpayer money. Unfortunately, it is clear the government cannot be trusted. Why would anyone run the risk of relying on the government’s promises, which obviously don’t mean anything? Even if the government does fulfill its promises and allows investors to make a little money, there is always the risk the government will later decide to confiscate 100% or more of an investor’s earnings.
I am sure much fault can be found with the AIG Retention Plan. The plan probably included too many participants, including participants whose continued employment with AIG was not essential. Many of the bonuses that were guaranteed under the plan were clearly excessive. I am not defending the merits of the AIG Retention Plan. I am simply pointing out that the AIG Retention Plan was a contractual obligation of AIG that the government, as the controlling stockholder of AIG, had a moral and ethical obligation to honor. The employees who were participants in the Retention Plan and who fulfilled their obligations under the Retention Plan had the right to rely on it. An honorable government would not unilaterally and retroactively take away the rights that were earned under the Retention Plan, even if the Retention Plan was misguided.
It’s easy to be outraged these days. I am outraged over the politicians who are outraged over the outrageous bonuses paid by AIG.
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