The AIG Witch Hunt

March 19th, 2009 - by Quincy

The AIG witch hunt is a sickening example of how corrupt politicians amass power and threaten individual liberty. Venting anger about the economic disaster may feel satisfying, but this witch hunt is dangerous for at least two reasons. First, it distracts the public from the fraud, waste, and abuse that the Federal Government has committed against the American people, and second, it generates popular support for taking property from unpopular individuals.

Since at least 1970, the Federal Government has been giving away tax dollars to corporations in ever increasing amounts. For a chronology of this corrupt practice, see http://www.propublica.org/special/government-bailouts. Just over four weeks ago, however, the Federal Government took this practice to new depths, siphoning $787 billion from taxpayers to “stimulate the economy.” Naturally, special interest groups sent a swarm of lobbyists to secure their share of the loot. Soon after, the President asked for $3.9 trillion ($1.75 trillion more than the country’s projected receipts) to pay for his programs during his first year. Despite this gross misconduct, our clever political leaders have successfully distracted attention from their own misdeeds by inciting outrage over $165 million of retention bonuses.

As galling as it may be to those of us who aren’t on the AIG gravy train, by paying the retention bonuses AIG is simply honoring a contractual obligation. Isn’t that the honest thing to do? Don’t our ideas of honor and justice encourage people to fulfill promises and pay what they owe? Nevertheless, legislators are calling for blood and the mass media happily assists by goading the public into a frenzy.

Presently there is no evidence that AIG has done anything unlawful by paying these bonuses. Yet our distinguished political class protests that AIG should never have paid out, and suggests imposing a 90 to 100% tax on the individuals who received the bonuses to recoup the money.

To protect individual liberty, the Constitution strictly limits government action and lists certain rights that the government must not violate. Prominent among the rights protected by the constitution is the right to be protected in the possession of property. The Fifth Amendment commands “No person shall … be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.”

If the Federal Government were to use its power to take back the bonus payments, it would undermine the Fifth Amendment’s protection of property rights. No matter how the statists decide to spin it, such an exercise of power would in essence be the use of force by government to confiscate the lawfully owned property of the targeted individuals without due process of law. In effect, such action would amount to a declaration that the property rights of individuals who are politically unpopular are no longer protected. I think that would be a mistake.

2 Responses to “The AIG Witch Hunt”

  1. Sean says:

    This has been everywhere recently, which isn’t surprising, but it is irritating. Apparently, in this industry bonuses aren’t really bonuses, they’re just a lump sum chunk given as part of salary. If true, it seems pretty silly to stiff the people who actually understand the CDO underwriting

    Planet Money (which I really enjoy) just had a podcast on this very subject. They basically came to the decision that galling though it is, the issue is largely a distraction – populist stumping that avoids solving anything. They had a clip from the testimony the AIG CEO gave before congress too, where he said the potential litigation costs far exceed honoring the contracts.

    This podcast also had an explanation about who actually owns AIG – turns out, it isn’t the government directly. In order to avoid day-to-day management of AIG, the federal government created a trust with 80% voting control of AIG, and made 3 non-government employees as trustees. And the trustees are treading lightly. This way the government can’t make business decisions for AIG even though the government owns nearly all the capital in AIG. The insulation maybe designed to protect AIG from becoming a way of carrying out a list of pet projects, but it is also preventing the government from effecting its desires.

    I thought it was really funny that congress was all after this guy who was brought into AIG after the bad securities had been underwritten – he wasn’t the guy responsible, and he’s on our side trying to clean this junk up. I guess that shows Congress wasn’t interested in solving a problem, they were interested in making headlines.

    I have a bit of sympathy for the government in this though. The press found this story and ran with it. If Obama or Congress was to come out and say $140M isn’t a big deal and we should focus on bigger issues, or made a more nuanced argument like you’ve done, can you imagine public reaction? Obama & Congress really need us behind them in order to be effective, and I suppose this is a way to maintain the political capital they need to make the changes they think will fix things.

    Congress is rattling sabers about taxing these particular bonuses at a marginal rate of 90%, leaving the rest for the states to tax. I know Andrew Cuomo (the next Spitzer – AG from NY) has threatened to recoup the money through prosecution. Of course AIG could just return $140M out of the $200B which would show how farcical this whole thing is. I read somewhere that most of the recipients are outside the US anyway, though I can’t find my source to double check that factiod.

    Reason magazine did a very readable and blistering article on this – on how law makers don’t know anything about compensation.

    Then there is the insurance giant American International Group, which unleashed bubbling torrents of outrage when it paid large bonuses to hundreds of employees. Angry lawmakers have no idea what these workers should be paid, except that it should be a lot less.

    Of course, some taxpayers feel that members of Congress should forfeit their salaries in years when they fail to balance the budget. But our leaders’ contempt for failure applies only to the private sector.

    Good post though, I hadn’t thought of the 5th amendment aspect of this story.

  2. Quincy says:

    Reason magazine has published another article on this, focusing on the question of whether this qualifies as a bill of attainder, which is clearly prohibited by the Constitution. http://www.reason.com/news/show/132383.html

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