AIG Bonuses Redux

Nearly this time last year, I wrote in The New York Times, that the inflammatory exchange of “nebulous assertions and hysterical threats” would not get the country any closer to resolving the fury over paying millions in bonuses to employees of American International General, a firm whose wild financial products contributed decisively to the prevailing financial calamity still throttling us, and now propped up by US government financial support.

One year on, while that fury has died out, the country is no closer to a valid substantive answer to the fundamental question of whether the law of contracts requires paying the bonuses or recognizes an excuse from doing so. Instead, tomorrow and next month the same company reportedly will pay the same employees large bonuses, with a slight discount, in the name of honoring what the company continues to call, and the US government now agrees without explanation are, “legally binding” contracts.

During the past year, Ken Feinberg, the Obama administration’s special master on compensation for bailed out companies, urged AIG to reduce the bonuses. The company reports it has done so, though only by about half what Fienberg recommended. It proposes to pay, tomorrow and next month, to the same employee group who enjoyed them last year, a total of about $200 million in bonuses. Employees receiving these amounts this month reportedly agreed to hair cuts of 10-20% off what they say their contracts require (in exchange for getting them one month early); those getting them next month reportedly refused the hair cut and insist on getting 100% of the contractually committed amount.

This post is not to contend that the AIG employees are not contractually entitled to the payments, nor that they have breached any contractual or other duties during this past year. Nor is it to say that Mr. Feinberg, whom I have met and admire, has shirked his duties. But it is not obvious that the new arrangements meet the requirements Mr. Feinberg set and there has not been any publicized analysis, by AIG, Mr. Feinberg or the US government, concerning the enforceability of these contracts.

All we have are assertions that retaining these employees is somehow indispensable to unwinding AIG’s catastrophic business and repeated, nebulous, assertions that the contracts are “legally binding,” along with assertions, by people speaking on AIG’s or its employees’ behalf, including lawyers representing them, that these modest concessions are enough and “should put the matter behind us.”

Amid last year’s public conflagration, I recommended that emotions on this charged issue remain cool. But I assumed that AIG and/or the US government would justify that prescription by providing level-headed analysis of the relevant legal issues. It is difficult to prescribe cool emotions when that analysis has not been provided. Ideally, a responsible authority would provide a definitive legal analysis of why these bonus contracts must be enforced.  Absent that, financial institutions and the Obama administration should expect intensified heat for their ham-handling of large bonuses paid during a deep economic recession to employees of US government-supported financial institutions.

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4 Responses

  1. Ken Rhodes says:

    >>the country is no closer to a valid substantive answer to the fundamental question of whether the law of contracts requires paying the bonuses or recognizes an excuse from doing so.>>

    Perhaps if I were an attorney I wouldn’t be confused. But since I’m not, here goes …

    Doesn’t the same “law of contracts” require AIG to pay all its obligations in re the toxic credit default swaps it sold? So how come they could default on their CDS obligations, but not their bonuses? In my business career, I considered my contractual obligations to my clients who had prepaid for my products to be, perhaps less urgent than the salaries I paid my employees, but certainly more important than bonuses.

  2. It’s kind of an interesting question: A storm smashes your factory, on which basis you go into chapter 11, and short your creditors. May you also, on that basis, short the contractors you subsequently hired to haul away the storm debris and rebuild the factory? Establishing that you can might make it pretty hard to rebuild factories after storms…

  3. Ken Rhodes says:

    Brett wrote, in re my comment/question>>It’s kind of an interesting question: A storm smashes your factory, on which basis you go into chapter 11, and short your creditors. May you also, on that basis, short the contractors you subsequently hired to haul away the storm debris and rebuild the factory? Establishing that you can might make it pretty hard to rebuild factories after storms>>

    “Subsequently?” Try, instead, this analogy:

    Your business is going great guns, so you have a party. Your employees get drunk and careless, and burn down your factory, on which basis you go into chapter 11, and short your creditors. May you also, on that basis, short the employees you subsequently directed to haul away the debris and rebuild the factory? Not short them on their salary, mind you, but merely on the bonuses they were promised as a reward for the great year you had.

  4. I think it’s a factual question which analogy is more valid, and the truth varies from individual to individual in a fine grained manner. Which is why I find the notion of invalidating everybody’s contracts on the assumption of some kind of group guilt so troublesome.