AIG bonus outrage takes its toll on enterprise

Stephen Ontko

A lot of outrage has ensued due to government bailout money going to AIG employee bonuses. But concerning the response to this supposed injustice, a much graver threat looms that has the potential threat to weaken business confidence even further than the economic downturn has already.

Barack Obama catered to sentiments that greedy corporate workers’ indecent practices contributed to the financial downfall. Reuters quoted him on March 19 saying these workers’ bonuses, “will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.”

This may be a good tactic for directing public anger toward the policy goals Obama wishes to pursue, but it isn’t an accurate portrayal of who’s really responsible for these bonuses or whether or not these bonuses were indeed given to employees who actually deserved them.

Sen. Christopher Dodd was reported by CNBC on March 18 as saying the Obama administration actually wanted him to make sure the AIG bonuses would be securely made to its employees under their contracts. Yet CNN reported on March 21 that, “Dodd initially denied that he had anything to do with the language that AIG used to justify paying out millions in bonuses.”

The CNBC article goes on to cite AIG CEO Edward Liddy from a House panel “that decisions to pay the bonuses to AIG executives were made ‘in cooperation’ with Federal Reserve officials.”

And the Federal Reserve isn’t the only possible coordinator of the AIG bonuses. Wall Street Journal columnist Holman W. Jenkins, Jr. wrote March 25 that Treasury Secretary Timothy Geithner was grilled, in detail, about AIG’s bonus plan on March 3, a week before he feigned the growing distaste for these bonuses with everyone else.

A large part of the misinformation concerning the AIG bonuses, however, is that they’re directed toward executives responsible for the financial disaster. Jenkins also mentions Liddy’s House testimony, saying the bonuses weren’t going to those who initiated the disastrous investments on mortgages.

Unfortunately, AIG isn’t the only company to be hit by corrective action taken by the government due to executives receiving bonuses. The tax on bonuses is going to effect every bank and its employees that receive $5 billion in bailout money from the government.

On March 23, Jonathan Clements, a financial director for a branch of Citicorp, wrote in the Wall Street Journal how workers will hurt from the 328 votes from the House approving the tax bonuses at 90 percent after $250,000 of income.

First, the 90 percent bonus tax will not only hurt those who irresponsibly chose to invest in subprime housing, assuming they will even get a business, but also workers who have nothing to do with the current financial crisis. Also, after $250,000 is earned, there will be lower output, since earners will hardly find it worthwhile to earn anything after that, since a 90 percent tax rate isn’t far from a 100 percent tax on income. There’s no point in working if what is earned cannot be collected.

As a March 23, Wall Street Journal editorial points out, these 90 percent bonus taxes are being applied after the contracts for them have been negotiated. This political posturing is an egregious overstep of government, using the government to punish those who, rather than break any laws, are merely political scapegoats. As the editorial put it, “The sanctity of U.S. contracts has long been one of America’s competitive advantages in luring capital.”

The 90 percent tax on businesses sets a dangerous precedent. Even if these bonuses would be taxing those who were irresponsible in investing into mortgages (but weren’t fraudulent about it), a contract still must be respected, even if it’s a poor one. This is why the true outrage should rest on those coercing companies out of their bonuses because they receive government compensation.

If a company’s bonuses truly are ridiculous, then the company should take the fall for it, not the taxpayers. It’s when emotions unravel the rule of law, which underwrite contracts, that trouble will begin to a greater extent than where we’re at now. If business confidence and the markets are risky, imagine the chaos that would follow without the enforcement of agreed business dealings.

Stephen Ontko is a senior economics major and columnist for the Daily Kent Stater. Contact him at [email protected]