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.