The facts and figures are all but familiar to those who haven't been living under a rock: $165 million paid to an estimated 400 AIG executives, HR1586 passing with flying colors (328-93) with the promise to return 90% of all post-January 2009 retention payments to the tax base, and an outraged public. Sure enough, it doesn't require a Harvard mathematician to figure out that the average bonus handed out per executive was $165million/400 = $412,500 – an amount more than what 90% of American households make in a given year. Some reporters of the Associated Press have even reported what they think is a more accurate figure of the amount handed: $218 million.
Regardless of what the real amount was, for the purposes of my mini-analysis, it will suffice to say that this recent action (both on the part of those handing out the bonuses and those accepting them) was unwarranted. By unwarranted we mean unethical, or simply put as violating an implicit social contract meant to enhance the aggregate benefit to society. We need not get into a meta-ethical debate as to the exact definitions of ethics and actions which qualify as ethical or unethical. Most, if not all, would agree that distribution and acceptance of $165million retention payments given in the current temporal context was unethical.
We move on to the essence of the analysis. My thesis: HR1586 will be almost completely ineffective in eradicating prospective corrupt usage of American tax dollars by bailed-out corporations. It might effectively collect 90% of the $165million handed out to AIG executives. However, it still keeps open possible instances of future scandals of the sort. Why? Suppose you are an executive in a non-AIG firm receiving bailouts with overwhelming influence on the preparation and distribution of bonus payments. Your line of reasoning – given that you capably carry sound judgment – will go as follows:
AIG execs got away with 10% of their distributed bonuses; therefore even in a worst case where 90% of my bonuses were taxed, I can still creep away with 10% of the money which was not even mine to begin with. Not bad, I think giving this a shot can help me more than it can hurt me. And even if some Draconian move on Congress's part took away 100% of my bonuses, my firm will in essence have lost only a fraction of the bailout originally received, which will hardly make a dent in my firm's current operations and cash flows. Therefore, I have myself a win-break even situation; where I win in a best case, and break even in a worst (and even unprecedented) case.
Simply put, the lack of punitive action on the part of both the House and Senate will not necessarily avoid (and even possibly give leeway to) similar instances of corruption and greed in the future. Then what solution, if any, do I have to offer? Abstractly speaking, an ideal solution will be one that perpetuates AIG's business transactions (as the company is indeed “too big to fail”) while having the scandal-inducing executives and decision-makers serve both punitive and compensatory sentences. By this I do not mean jail-time, as putting managers behind bars is inconsistent with a firm's operational perpetuation. The compensatory sentence is simple, a 100% tax on the bonuses will suffice. The punitive sentence will undoubtedly become the heat of more controversy: income and asset redistribution of up to 50% of all executives willing to receive American tax dollars in the form of retention payments. A loss of 50% of a given year's annual income and all personal assets will still keep executives' continued work in the firm as personally more beneficial than quitting altogether. This is only a ballpark estimation of the sort of punitive action that must be carried out to effectively eradicate the problem from its root. The redistribution may be slightly higher or lower than 50%, however it must be substantial to remain effective. And that is ultimately what we need – namely continued operations of these firms with gargantuan disincentives of future scandals of the sort.
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ReplyDeleteDid you by any chance catch the 60 minutes interview with President Obama earlier today? It was interesting because it relates to this whole AIG catastrophe. He felt that the problem of the bill that you speak of wasn't that the tax levied was to much or too little. It was problematic because the bill was targeted to only a small amount of the American people. He felt that any bill passed should have a wider applicability to the public.
ReplyDeleteWell how else could we have taken immediate action? Your solution takes it even a step further by its punitive actions. However, this approach would also most likely be opposed by our president because it only targeted those AIG execs. So, do you agree with the President that we should have taken more time to examine each bonus by case by case analysis? Or, was Washington right to act in a what Obama hinted as a vengeful manner by it 90% tax on those bonuses received? To me, the latter and what you suggested seems more appropriate because it is more swift and sends a message to all the other companies who are also being currently bailed out not to abuse our tax dollars.
I think this is a complex issue. The way I look at it is that the government had three options with AIG. One, nationalize the company and have the government run it for some amount of time. Two, do nothing and let the company fail or three, give the company a bunch of cash to get them through the hard times. Our government opted for the third option. In my mind, what AIG does with that money is their own business and it is not the place of the government to intervene. I agree that AIG shouldn't be giving out huge bonuses with government bail out money, but i worry about the precedent being set when the federal government feels comfortable tell a private company how they can spend their own money. The government wrote AIG a check and but it was trust in the company executives to run the company the right way. If the government wants to tell AIG how to run its company then they should just nationalize it.
ReplyDeleteTo Matthew Malamut: I did not catch the 60 minutes. Although it would be theoretically ideal to review each bonus case by case, doing so is highly impractical. And as you mentioned, a punitive precedent must be set to avoid future actions of the sort.
ReplyDeleteTo Newborn: It seems hardly convincing to lend out someone your money with a complete blindeye. If a bank were to make a loan, they would necessarily want to run a report on all your current assets, debt, and essentially equities - the principle being that they want to make sure your loan will be paid off. They do not just hand you the money and look the other direction. When a university hands you a grant, they want to make sure you use the grant towards your education, therefore they credit the amount to your tuition with or against your will. AIG, for the overall well-being of the aggregate economy, is too big to fail, therefore that option is out. Nationalization of the company may be unnecessary and even costly, therefore not worthy of doing. However, I somehow find it hardly convincing why government should throw a large sum of money and turn a complete blindeye. Any institution nowadays, government aside, will make sure their loaned or 'granted' money, as more suitably analogized in this case, will be used wisely. Government is no different of an institution and possesses the same basic right to make sure its allocated funds are used properly.
Don't punish the business people of AIG. Punish the politicians that made it all happen. The ones that were first to criticize AIG for the bonuses. The ones that wrote in the stimulus package that the bonuses should be honors.
ReplyDelete" Dodd told CNN on Wednesday that he was responsible for language added to the stimulus bill to make sure that existing contracts for bonuses at companies receiving federal bailout money were honored.
A Treasury Department official said the Obama administration had pushed for the language. Both Dodd and the official, who asked not to be named, said administration officials worried that the government would face lawsuits without the language."
http://www.cnn.com/2009/POLITICS/03/21/aig.dodd/
We wouldn't have this issue if the free market prevented this from ever happening (fear of failure = no stupid action). The government did not turn a blind eye. The government initiated it.