Here’s Exhibit A why the government shouldn’t be bailing out firms like AIG: The company says it is “contractually obligated” to pay $450 million in bonuses to the group that wrote the credit default swaps that have already cost U.S. taxpayers $170 billion.
Timothy Geithner howled in protest–but to no avail. AIG merely reduced the bonuses modestly and explained that taxpayers had better let it pay them, or taxpayers would never get any of their money back.
This, needless to say, is outrageous: If AIG had gone bankrupt (in an orderly fashion), these bonuses would not be paid. The executives holding the contracts would just get in line with AIG’s other creditors. And U.S. taxpayers would not be out $170 billion and counting and enduring insult after injury every week from the national embarrassment known as AIG.
Washington Post: Insurance giant American International Group will award hundreds of millions of dollars in employee bonuses and retention pay despite a confrontation Wednesday between the firm’s chief executive and Treasury Secretary Timothy F. Geithner.
But the company agreed to revise some executive payments after what chief executive Edward M. Liddy called a “difficult” conversation.
The bonuses and other payments have been exasperating government officials, who have committed $170 billion to keep the company afloat — far more than has been offered to any other financial firm.
The issue came to a head when Geithner called Liddy and told him the payments were unacceptable and had to be renegotiated, an administration official said.
In a letter to Geithner yesterday, Liddy agreed to restructure some of the payments. But Liddy said he had “grave concerns” about the impact on the firm’s ability to retain talented staff “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”
Lawyers at both the Treasury Department and AIG have concluded that the firm would risk a lawsuit if it scrapped the retention payments at the AIG Financial Products subsidiary, whose troublesome derivative trading nearly sank AIG. The company promised before the government started bailing out the firm in September that employees would be awarded more than $400 million in retention pay this year and next.