Shorter Andrew Sorkin: Leave AIG ALOOOONE
Andrew Sorkin tried to defend the indefensible today and make the case for the AIG bonuses, on the grounds that contracts must be honored.
That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.
As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.
If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue — but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)
That just seems wrong to me. Government did not write this bonus contract. I have no doubt that unscrupulous business types would use this as a pretext to wriggle out of their own contracts, but that doesn't mean it would be successful. And in fact, the parallel to the auto industry is perfectly analogous, because nobody is actually talking about breaking the contract but using taxpayer bailout money as leverage to force the outcome, which is what was done there. If this tax law to claw back AIG bonuses is pushed through, in fact the contract wouldn't be broken at all. So this sanctity of the contract strikes me as bogus. Furthermore, taking a stand now against exorbitant bonuses for bailed-out companies will serve as a deterrent to those who would search for loopholes in executive compensation caps and bonuses in the future.
Then there's Sorkin's second point.
But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.
A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.
So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.
Certainly the idea that the only people who can properly unwind these derivatives are the ones who wrote them is hard to swallow. It also doesn't entirely make sense.
That’s nonsensical. It’s clear they made a lot of mistakes and we need to undo what they did. If they really understood what they did in the first place, seriously, they probably wouldn’t have done much of it. Secondly, when you are trying to undo something, it is often not the case that the people who did it are the ones to put in place. People are sometimes committed to not admitting mistakes. … So that argument I think is in fact almost counter, because the argument that you take the people who made the mistake and put them in charge of undoing the mistake goes against the human impulse not to admit a mistake.
Sorkin just seems to be calling for a unilateral protection of elites because of their superior experience and intellect. I agree that it takes smarts to destroy your company AND get a bonus of well over a million dollars - some of which were retention bonuses which the individuals responded to by LEAVING THE COMPANY. But trusting them again to put the national interest ahead of self-interest just seems unwise.
If you truly want to throw up, read that report by Andrew Cuomo on who got the bonuses. This is ugly.