Re: On Bonuses at AIG

I just wanted to respond to Anne’s recent CLS Blog posting and address the question that the Obama administration seeks to resolve: how can we get the $165 billion in bonus payouts back from AIG employees?

Taxpayers are thoroughly offended that AIG has recently distributed millions in bonus money to nearly 400 of its employees. Indeed, these employees contributed to the financial disaster that plagues AIG, which has already received $170 billion in taxpayer bailout money. So, can we get this money back, or is “a deal a deal?”

Well, some suggest that the answer lies in basic legal principles. And in response to Anne’s call to 1Ls, I think I will whip out my contracts outline from last semester. Ok, so I threw that out. But, if my memory/Wikipedia serves me correctly, it seems that the impracticability doctrine – amongst other fine doctrines – could allow for AIG to rescind these employee-bonuses contracts.

Here, the nonoccurrence of AIG’s financial insolvency – which would necessitate an unprecedented taxpayer takeover – seems like a basic assumption to the contract. And I suppose that it is impractical for any broke company to pay out millions of dollars in bonuses.

Therefore, it could ultimately come down to who ought to bear the risk of this occurrence. Arguably, the AIG bonus recepients – who worked within the company’s financial products unit – were in the best position to avoid the problems that resulted from poor investments and risky trading positions. So, is “a deal a deal?” Probably not.

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4 responses to “Re: On Bonuses at AIG

  1. The only reason the government kept AIG alive was to keep all of the company’s debts from going into default. Most of the money being pumped into AIG is being forced right out the doors into the hedge funds, banks, and other institutions owed money under the CDSs and other insurance contracts. To say that these debts to counterparties should be kept alive by the bailouts but not the debts to employees created by perfectly legal employment contracts doesn’t make a lot of sense to me. Would it be right if the government revived AIG but cancelled AIG’s debts to arbitrary groups of creditors?

    I’m not saying that these bonuses aren’t obscene, but so were the loans provided by banks for leverging purposes and the trading strategies employed by the hedge funds purchasing CDSs. In my mind you let AIG go bankrupt and everyone hurts, or you pump money into AIG to pay ALL the creditors and make sure this never happens again with appropriate regulation.

  2. David Franklin

    Well, the public outcry against the payment of “bonuses” in these times is important. I don’t agree that the public opinion should influence whether the contracts are deemed enforceable, but I think the notion that AIG employees in particular do not deserve bonuses explains why the Obama administration is intent on taking away the bonuses and not the payments to other groups of creditors.

    Also, I agree that the loans provided to AIG by the banks were obscene as well, but in terms of who ought to bear the risk, I think AIG’s own employees – who headed the financial sector – are more responsible for AIG’s situation than are the banks. I am not suggesting that you only repay the creditors who are less responsible for AIG’s situation, but the distinction between some groups of creditors may not be so arbitrary.

  3. I would like to see a breakdown of how much of these payments were actually discretionary bonuses rather than non-discretionary payments that are called bonuses but are in reality part of these employees’ base salaries. Most bonus payments on Wall Street are the latter thanks to the history of financial firms being partnerships where the whole salary was basically a year end bonus.

    I think these employees did exactly the same thing as the banks and pretty much everyone else in the markets: they thought the housing market would never collapse and eventually they were blinded by the pursuit of short-term profits. The banks that should have been reviewing AIG’s balance sheets and other financials before throwing money at them are just as guilty of this as the employees.

  4. Having done plenty of throwing blame around, what I’d like to see is Washington provide some ideas on how to realign executive compensation in a way that focuses on the long-term health and profitability of these companies.

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