Saturday, March 21, 2009

The Big Picture of the AIG Bonuses

One thing I try to do here at Bottlenecked is get past the noise and focus on reality. I understand people's outrage over giving bonuses to AIG managers who played a part in the failure of a institution that threatened the entire economic system. However, I believe the payment of these it is necessary for that economic system for 3 reasons:

1. First and foremost it is unconstitutional. Article 1, Section 9 of the United States Constitution states that "No bill of attainder or ex post facto Law shall be passed." This means two things: a) the government cannot declare a person guilty without trial and b) the government can't pass a law that punishes acts done before the law. To punish managers for doing something perfectly legal by targeting them specifically, through taxation, is exactly what James Madison warned against in the Federalist Papers #44: "Bills of attainder, ex-post-facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation."

2. They need these people. I'm not ruling it out, but I don't think AIG guaranteed this money as a way to help their fellow AIG friends using taxpayer money. They did it to keep important, knowledgeable, and skilled individuals through hard times. More than ever this company needs people who know how to unwind this financial maze. As frustrating as it may be, the people who created it, know a lot more about it than anyone else. AIG is not the ideal place to work and they need to offer big bucks to keep the know-how in house. Now that the US citizens own most of the company, our success is tied to their success.

3. Voiding contracts is very bad. Whether its businesses trusting employees, lenders trusting borrowers, or consumers trusting producers, capitalism needs trust. Formal or informal, all economic relationships involve contracts. If the government suddenly assumes the power to break legal contracts between parties, massive uncertainty will be created and we might really have the Great Depression II.

So what is the solution? It's the same song I've been singing all year. They should do what they should have done in the first place, file for bankruptcy, which is essentially the legal system for renegotiating contracts. This problem shouldn't remind us how greedy corporations are. Instead it's proof that the tax payers should never have been forced into this position.

1 comment:

  1. Good stuff sir. As my grandpa used to always say to me, any law that is ex post facto is de facto malus peior pessimus!


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