Many of those bonuses are due to contractual obligations.  AIG signed contracts that said, essentially, “You do this, you get this bonus.”  Well, those people met the contractual obligation, whatever that was, and will be paid that bonus.  A contract, especially a business contract, is a difficult instrument to change or undo.  And, in many cases, there are penalties for breaking a contract; so AIG would have the option of paying the bonus, or paying the default penalties and get a black eye.  It’s better to just pay the bonus and non-renew the contract.  The two parties could agree to rewrite the contract, but that takes agreement.  If you worked your ass off for a bonus, did nothing wrong, would you give up what you were deserved?  Put it in these terms: If you boss came to you and said “The company’s in a bad financial position, and we want you to give up one month’s salary.”  Would you?

What if the receiver of the bonus cannot afford to give it up?

What if that person, let’s name him Steve, hired employees, rented buildings, and bought equipment so that he could achieve the objective to get the bonus?  Perhaps Steve took out a one year loan to finance his dramatic expansion and was relying on that bonus to pay off that loan.  If Steve doesn’t get the bonus, Steve has to lay off all of his employees, auction off his equipment (or return it to the leasing company, probably with early lease termination penalties), and try to get out of the building lease he signed.   Steve may have even put up his personal assets (house) to finance the deal.  What is Steve to do?  He cannot afford to give up the bonus.  Furthermore, he shouldn’t have to.  He didn’t do anything wrong.  It was AIG that made bad bets.  Steve was successful.  The government taking that bonus away from Steve is government punishing Steve for its own mistakes.  AIG doesn’t lose.  The government doesn’t lose.  Steve loses, and so do his employees and family.

Several people have mentioned taxing the AIG bonuses at 100%.  First, a tax law written for a specific company is unconstitutional.  They could create a law that says “Bonuses received from any company receiving a bailout are taxed at 100%.” Great.  Define “bonus”.  Good luck.  What if the bonus is stock options?  Or company stock to be issued at a future date?  How do you tax an intangible financial asset that isn’t received yet?  A law to encompass all of the possibilities fairly is not possible.

Many of the people receiving the bonuses aren’t even in the U.S.  So U.S. tax laws don’t apply to them anyway.  They bank the bonus and move on.

Others have suggested that AIG should “pay back” the bonus money to the government before they get their next installment of bailout money.  Great.  How about this deal, from me to you:  I’ll give you $1 Million dollars, but you have to give me $5 first.  Feel free to borrow it from a buddy and pay it back tomorrow.  Or, even easier, I’ll just deduct it from the $1 Million I’m going to give you.  Problem solved.  Great.

Some have said “Bailout money can’t be used for bonuses.”  So, “other” money can be used?  Fine, then move $165 Million out of the reserve fund to pay bonuses and then move $165 Million from the bailout money into the reserve fund to replace it.  Technically, the money wasn’t used for bonuses.  It was used to rebalance a balance sheet item.  Once money was put into AIG, the government lost all control over that money.  It was AIG’s money to spend as they see fit.

The bottom line is this:  The government made a hugely bad decision by believing they could prop up all of these companies without losing any control over the money they pumped into them.  You can let relatives borrow money, but good luck telling them how to spend it.

The best course of action is to just shake your head and move on.  The bonuses are not coming back, nor should they.  The government is getting a huge black eye from the giveout… er bailout, and it isn’t over yet.  The government continues to pump taxpayer money into companies that are too big or too integral to the U.S. economy to fail – whatever that means.

Instead of giving out $1 trillion to banks, the government should have split that money up between every U.S. citizen 18 and older.  The citizens would then put that money in their savings account at banks or spend it.  The banks would then have the funds they need to balance their books and start lending again, and the extra consumer spending would have buoyed the economy.  But, the government decided to trust CEOs and Wall Street money makers instead of citizens.  Wrong answer, we all lose.  The big wigs pocket the money and taxpayers (current and future) are left holding the tremendously heavy bag.

Mark