The past few months have been unusual – but this week has taken the cake – the circus has come to town and does not seem to be ready to leave anytime soon.
While President Obama was flying to the west coast to become the first sitting president to appear on the “The Tonight Show with Jay Leno,” Congress was voting to retroactively tax AIG bonuses. AIG received government bailout money, but legislation that could have prevented bonus payments was changed prior to the passage last month of the stimulus bill. Senator Christopher Dodd, chairman of the Senate Banking Committee, said the idea to change the provision “came from the administration."
AIG received U.S. government bailout money. AIG paid bonuses. The actions and sequence does give one pause and stir up feeling of outrage – how could this happen?
While the concept of paying out bonuses while receiving money from the government is outrageous, the contracts would have allowed for bonuses three times the size of what was paid, according to the White House transcript of Obama on “The Tonight Show.” “ Obama continued with his opinion (remember he is a lawyer) “they were making a legal calculation, and their legal judgment was not necessarily wrong.”
Based on Obama’s statement, AIG was legally required to pay the bonuses – and in fact if they had not paid the bonuses then the company was possibly facing almost $500 million in bonus payments, more than three times the $165 million that was paid.
The news story around these same facts could have been – while Congress rushes stimulus plan and edits provision that might have prevented$165 million in AIG bonuses – AIG executives save $330 million by following the law.
While I am personally not thrilled with the idea of U.S. government money going to AIG executives – let us review the facts: There was not enough clear definition regarding how the bailout money could be spent and the company was legally obligated to pay now or pay more later. It did what most companies do –it followed the law and paid now to avoid paying more later.
Good senior executives in companies obey the law and make decisions based on their understanding of economics. First you follow the law. Whether it makes you personally upset or offends your sense of fairness does not matter – if the bonuses were contractual – which, according to Obama they were, then you have to pay. Second, you decide which legal decision costs you the least money. In this case, the decision was to pay now to avoid paying more later.