UPDATE: Note that my analysis only applies provided these contracts were genuine compensation packages and not deliberately created for the purpose of siphoning money from the government as some (unreliable) reports are suggesting now.

UPDATE 2: The bit about fraud seems to have been more populist BS spread by Andrew Cuomo, the New York Attorney General. It seems highly likely this was just an attempt to ride the wave of populist anger to ‘get those guys.’

Anyone who has been paying attention to the media lately will have noticed the outrage over the bonuses being paid to AIG employees, particularly employees in AIG’s financial products division. The division responsible for the deals that necessitated the government bailout. Disgustingly even relatively clearheaded individuals have jumped on this populist bandwagon and just in case we needed another lesson in the failures of democracy congress is demanding heads. People complain about the lack of transparency about the government’s response to the financial crisis but if this is how the public responds maybe they don’t deserve it.

Let’s be totally clear. This outrage is over mere terminology. No one was making a fuss about the fact that AIG employees, even those in the financial products unit, continued to be paid their salaries. Getting mad because some employee compensation is called bonuses rather than salary is about the stupidest thing imaginable. No one even looked at what these people were payed before this bonus scandal. People are mad for no other reason than the fact that wall street pays out significant chunk of it’s employee compensation in the form of bonuses. Sure, there were demands that the very top level of the company (CEO, CFO etc..) no longer be paid their huge salaries but we aren’t talking about sweatheart deals cut by a friendly board in this case but relatively standard payments on wall street to top level talent¹.

Just in case rational thought escapes you on this issue let me put this question another way. Do you think that the government should stop payment on all uncashed paychecks to AIG employees in the financial products division? Even those employees who did their job well and are needed to help unravel this mess? If not why do you think it should take away bonuses for these employees? In both cases the employee was promised certain compensation in return for certain work/performance and calling it a bonus or paycheck doesn’t change that fact. Certainly it’s totally unacceptable for the US government to void valid employment contracts made by AIG after tricking those workers into continuing to labor under them since the bailout.

More reasonably one might think that the government should have allowed AIG to lapse into bankruptcy and simply fail to honor employee compensation agreements in general, no merely the bonuses. Of course this has nothing to do with the outrage being expressed by the public and their elected officials but it’s at least coherent enough to rebut. However, this would undermine the very motivation for rescuing AIG from bankruptcy as it would have created doubt about whether AIG would make good on it’s debts. Sure, the government could have decided to guarantee some AIG debts despite the bankruptcy but that leaves everyone wondering if the government will pay off their claim or if some unpopular behavior on the part of the creditor would convince congress to leave them on the hook. Any plan that let the government pick and choose which preexisting AIG obligations they would honor would have been a disaster.

Still, whatever you think about the wisdom of the bailout of AIG at this point it would be totally unacceptable for the government to renege on these bonuses. The government choose to simply infuse capital as if they were some private investor rather than to nationalize the company now it needs to live with that choice. Trying to use it’s legislative power to eliminate these bonuses now would induce fear in other AIG creditors, reduce the government’s flexibility to infuse banks with capital, and generally do great harm to future bailout attempts. Not to mention that the cost to the taxpayers from the resulting lawsuits and our interest in keeping top talent at AIG to unravel their finances. Even assuming none of the employees due bonuses leaves in anger or can find a better offer (the best people always have offers) so long as the government still owns part of AIG every single highly paid employee will wonder if they will really get the package promised them.

What’s so particularly absurd about all of this is that all this opposition that is being generated towards future bailouts or stimulus packages as well as the potential for harm if the government really voids these contracts is happening over about 1 400th of the amount we paid to bail out AIG. It’s like lending your friend $1000 to cover his mortgage this month and then making a big fuss over the fact that he still purchased coffee for the girl he asked out the month before.

The more I see the more convinced I am that democracy is a truly awful system.