Built on Facts

On AIG and executive bonuses

It’s not all that often I agree with Mike Dunford politically, but in writing about the AIG bonuses he’s right. The bonuses ought to stay with the executives who were paid them. Neither congress nor the president ought to try to tax these bonuses back.

Now obviously no executive at a failing bank deserves a bonus, even with the bank’s money. Even more obviously it’s repugnant to fund bonuses to failed executives with our tax dollars. But what’s done is done, and there are three facts to be faced.

1. The executives’ contracts require the bonuses, and the bailout bill specifically and explicitly contained provisions preventing the abrogation of those contracts. To unilaterally tear up a legal contract after the fact undermines the very foundation of the concept of a legal agreement. Imagine if for instance the government tore up a factory’s contract with a union to remove bonuses for workers. Obviously executives are a lot less popular than Fred the pipe-fitter, but the unpopularity of a person ought not affect his right to enter into binding agreements.

2. Additional targeted taxation of a legally paid bonus is a penalty to previously legal conduct after the fact. This appears to be an ex post facto law, explicitly prohibited under the constitution.

3. The taxation is directed against specific individuals who have not been legally accused or convicted of wrongdoing. This appears to be a bill of attainder, explicitly prohibited under the constitution.

And those are aside from the completely true point brought up by Mike, that it’s a horrible idea for the government to be in the business of using the tax code as extrajudicial punishment. It’s also aside from any of the other reasons put forth elsewhere online. In practice the constitutional issues may or may not actually be interpreted as unconstitutional by the courts, but on their face they look pretty darn unconstitutional to me.

I know a lot of people are angry; I am too. I saw a nightly news broadcast yesterday that all but tried to incite a riot. But that justified anger should not be an excuse to trample the constitution. The thing that separates free democracies from banana republics is adherence to the rule of law. Let’s let the rule of law stand.

Comments

  1. #1 Kobra
    March 18, 2009

    I know a lot of people are angry; I am too. I saw a nightly news broadcast yesterday that all but tried to incite a riot. But that justified anger should not be an excuse to trample the constitution. The thing that separates free democracies from banana republics is adherence to the rule of law. Let’s let the rule of law stand.

    I agree. It’s bullshit that they’re taking our money and running… er, FROM, the bank. However, we legally cannot do anything about it right now. The best course of action is to make sure we’re getting our money’s worth from those rich fat cats.

  2. #2 Patrick
    March 18, 2009

    The outrage is misdirected. AIG behaved like a business behaves. It saw money and opportunity and went after it. Noone bothered to stand up and say ‘no’. Like a puppy, if you don’t tell it to stop digging thru the trash or whatever, it’s going to keep doing it if it’s rewarding.

    We oughta be mad at congress and the treasury who either lacked the foresight to address this in the bill, or knew these bonuses would be paid but put it into the bill that all contracts have to be honored. The populist outrage is right and just, but misdirected. And Obama played it well yesterday in further misdirecting it…

  3. #3 Halcy0n
    March 18, 2009

    Indeed, let’s imagine what it would look like if the government forced a factory to renegotiate a union contract to remove bonuses for laborers. Perhaps even as a precondition for bailout money. Oh, wait…

  4. #4 amar
    March 18, 2009

    while i completely agree that there is no justification whatsoever for taxing the bonuses, let’s not fool ourselves into thinking that contracts cannot be forcefully renegotiated. what is so frustrating is that the issue of compensation previously came up in bail-out discussions for the auto industry, before the money was given to them. the same discussions did not happen with the same vigor for AIG or any of the other banks. there was plenty of time last year when AIG was begging for bail-out money to force them to renegotiate those contracts as a condition of accepting the money, but it was never seriously considered, and even laughed at by the republican leadership. the same republican leadership (with the exception of rush) that is now ‘disgusted’ by the bonuses. hah.

  5. #5 Moopheus
    March 18, 2009

    It does seem likely the a bill targeting AIG specifically would not pass constitutional muster. But it is also true that the contracts of the financial industry have been treated as way more “sacred” than the contracts of other industries. Contracts are violated and renegotiated all the time! And do you think the contracts contained no possible out for the company? Does the contract say “you will pay me a bonus, no matter what happens or how poor my performance turns out to be”? It seems unlikely.

  6. #6 Gary
    March 18, 2009

    Employment “contracts” are regularly re-negotiated by employers facing financial difficulty. WE, as 80%+ owners of AIG, should have re-negotiated the bonus terms of the contracts, but instead we chose to let the idiots continue to run things.

    Fine, let ‘em stand at this point, but PLEASE don’t give AIG any more $$$!!!!

  7. #7 Todd
    March 18, 2009

    The outrage over the bonuses is a media distraction. The real concern should be over the fact that some of these AIG executives haven’t been indicted, yet. It appears that may actually happen.

  8. #8 D. C. Sessions
    March 18, 2009

    Has anyone mentioned yet that running AIG through bankruptcy (which can be very fast) would have solved this, since those bonuses would have been avoidable?

    NB: “avoidable” is a term of art in bankruptcy law. The bonuses would have been at best unsecured debt and perhaps an executory contract (which IIRC has even lower priority than unsecured debt.)

    Once again, the piecemeal dribble of tax dollars to maintain the fiction that these banks are going concerns is producing the worst of both worlds.

  9. #9 Mark P
    March 18, 2009

    There is the law, and there is justice; the two are not necessarily the same. I say take the bonuses away from the executives and let them sue. Then let a jury do a little nullification of the contracts. It will be strictly legal – a jury can do what it damn well pleases – and it will be just.

  10. #10 Mark
    March 18, 2009

    I like how the financial stability of the country depends on giving 73 people $1 million; else, financial ruin. That’s what the constitution would want.

  11. #11 Nattering Nabob of Negativism
    March 18, 2009

    If the contract is breached, the aggrieved party can file suit in civil court and let a jury decide the outcome. To steal government funds, claiming they were due the money, is patently false: they were due money, but not that money. Those who gave away the federal funds as bonuses committed theft, and those who received the stolen monies are entitled to a fair trial in criminal court, but they are not entitled to keep the money.

  12. #12 Art
    March 18, 2009

    I find it ridiculous to have anyone from AIG raise that claim that because their bonus is required in a contract that they have to get it. This is an insurance company. Circumventing, sidestepping and outright violation of the terms of their contracts, as long as they think they can get away with it, is a good part of how they make money when they aren’t diddling the bottom line with CDSs.

    The contract that makes health insurance work is that if you get sick your health care costs are taken care of. Fair enough except there is the temptation for insurance companies to illegitimately avoid paying by claiming the problem was ‘pre-existing’, simply not covered or, to just deny coverage of costs to people who are likely to die because even if they sue they are likely to die before the company is forced to pay.

    By violating the terms of the contract they make more money. Fact being this is pretty common and large insurers keep large numbers of lawyers on retainer to twist the legal system to let them get away with it, or to delay the adverse judgment until the plaintive goes broke and gives up, settles for less than their legal right, or dies. Violation of a contract has never been a problem for insurance companies. Not if they thought they could get away with it.

    So when an insurance executive holds up a contract and demands satisfaction we need to place it in context. We, the taxpayers and owners of the company, need to simply say no and allow them the recourse offered anyone denied benefits they think are owed them. Let him go to court and go broke explaining it to a judge. And doing it all again as the government appeals. After spending most of what the claim is worth getting it he will receive his due, ten or twenty years late.

    Certainly the executives understand this and will be glad to do the dance they designed.

  13. #13 Kurt
    March 18, 2009

    “The executives’ contracts require the bonuses, and the bailout bill specifically and explicitly contained provisions preventing the abrogation of those contracts.”

    Yes and Chriss Dodd (D) put that there! And Obama and the treasury secretary knew about it!! What a sham.
    I am angry about this but unfortunately you are right on as usual.

  14. #14 CCPhysicist
    March 18, 2009

    Something that is REQUIRED by the contract is not a bonus, it is an attempt to evade some part of the tax code by pretending that a salary paid in a lump sum is not a salary by calling it by the wrong name. There is something quite wrong, probably a “legal” evasion of corporate or personal taxes, hiding behind this story.

    I’m with NNofN on this one. Taking money under false pretenses (like accepting a “retention bonus” and immediately leaving the company) sounds like fraud to me. Do that playing 3-card monte in the street and you go to jail. Do it for a million dollars and you walk away.

    Madoff must be shocked that he is in jail just like someone who robbed a bank of thousands of dollars.

  15. #15 JM
    March 18, 2009

    Sorry Matt, this line that the bonuses are “contractural” is bollocks

    Yes they’re written into the contract but they are always contingent and never guaranteed. I’ve only ever had one bonus clause that was *not* contingent on success. It was contingent on me still working with them at the end of the year, and that was just a charade to get the agreement past HR as my payrate exceeeded the guidelines.

    Every other bonus clause I’ve seen or heard of has been contingent (and they are often discretionary as well)

    Bonus’s are always linked to performance of the firm and/or the team. Bankruptcy doesn’t count as success does it?

  16. #16 Tualha
    March 18, 2009

    I’m with Patrick (#2). I don’t blame investment bankers for chasing bad incentives; I blame the government for allowing those incentives to stand instead of looking after the interests of all the people.

    Likewise, I don’t blame Microsoft for selling cruddy software; I blame their customers for putting up with it when there are quite reasonable alternatives.

    I don’t even blame upper-class Republicans for pursuing their own self-interest at the expense of the rest of the country; I blame working-class Republicans (who are in the party for reasons of social conservatism) for letting the rich minority define the party platform.

    (I make no claim to be politically sophisticated, and if anyone would like to educate me by showing flaws in my reasoning, that would be welcome.)

  17. #17 CCPhysicist
    March 18, 2009

    Lets look at your arguments:

    1) Another bailout bill forced the abrogation of existing contracts onto the UAW and US auto companies. Why is one contract better than another in this situation, particularly given that the misrepresentation of specific “assets” that led to the collapse of AIG was carried out by these very people, some of whom are no longer with the company. Something similar cannot be said of line workers at GM, who did not choose the product line or how GMAC invested its funds.

    2) I don’t recall anyone claiming that a retroactive tax cut (one applying to income earned before the tax law changed) was unconstitutional when those were passed. The ex post facto clause has only been held to apply to criminal law, as I understand it. Further, taxes are not a penalty, they are a tax. There is historical precedence for a “windfall profits tax”. This seems little different. Your argument would only apply to criminalizing the acceptance of the bonus.

    3) The law being proposed does not single out individuals. It applies to every member of a broad class of people who collect a “bonus” for their contribution to the failure of a company that had to accept money under the bailout. If they pay back all of the bailout money, they can keep the bonus without paying any extra tax. In any case, there are numerous instances where US Tax Law has been written so that a particular provision applies to only one person in the entire country. The proposed tax applies to lots of people.

  18. #18 Mike
    March 19, 2009

    CCPhysicist,
    I am going to address each of your 3 points.

    1. You made an incorrect analogy with regards to the UAW contract and the AIG contracts. The bonuses paid to the AIG executives were retention bonuses. If those people worked for so long, they were to be paid a bonus. To take away the bonuses would be to retroactively take away compensation for work already performed. In contrast, the UAW was not asked to change compensation for work already performed, but rather to change the terms for work to be performed in the future.

    2. The Supreme Court disagrees with your assessment of taxation. They have recognized that the power to tax is the power to destroy. So yes taxation can very much be a penalty.

    3. But many of the businesses were forced to take bailout money. The Wells Fargo CEO has repeatedly criticized the federal government for forcing them to take bailout money and the resulting restrictions when Wells Fargo did not need any of it due to their less risky business practices. Paying back the bailout money is not allowed.

  19. #19 Tom
    March 19, 2009

    IANAL, but I believe CCPhysicist is correct regarding the ex post facto clause only applying to criminal law, not taxes. Also, that the tax will be applied to anyone employed by a business receiving TARP funds, which makes it harder to make the argument that AIG employees are being singled out and that this falls under the bill of attainder restriction.

  20. #20 Matt Springer
    March 19, 2009

    Tom is probably right. It is nonetheless a bad precedent, even if the courts so hold. “Getting away with” something by the letter of the constitution is a bad way to run government.

    A better way to have avoided the whole mess would have been to let the senators and representatives actually read the stimulus bill before voting. There’s no doubt that it still would have passed, but we might have seen idiocy like this removed.

    As it is, it’s still kind of a mystery how this provision got there in the first place. Dodd denied it at first, but now he’s sort of admitting to adding it.

    I would like to say something about a particular point raised by CC: “I don’t recall anyone claiming that a retroactive tax cut (one applying to income earned before the tax law changed) was unconstitutional when those were passed”

    It’s not the retroactivity in itself that makes something bad. What’s forbidden is retroactive punishment. Deserved or not, it’s a horrible idea. Should you or I run afoul of government, I’d hate to see us suddenly in some purpose-built tax bracket removing 90% of our income without having been tried or even accused of lawbreaking.

  21. #21 DaleP
    March 19, 2009

    Matt wrote:
    It’s not the retroactivity in itself that makes something bad. What’s forbidden is retroactive punishment. Deserved or not, it’s a horrible idea. Should you or I run afoul of government, I’d hate to see us suddenly in some purpose-built tax bracket removing 90% of our income without having been tried or even accused of lawbreaking.
    ——————-
    Again, a tax, even a retroactive one, is not in law a punishment, even if it is the power to destroy the activity. The decision about sulfur matches allowed the prohibitive tax. This tax on the bonuses would not be imposed to punish law-breaking; no one serious is now arguing that the bonuses per se should be recovered due to law-breaking, at the time or ex post facto. It is reasonable to argue that to recover the bonuses is a bad policy decision, but you still haven’t offered a solid reason it is unconstitutional.

    If there was serious law-breaking, then fines of various sorts can be imposed to recover the money, after a trial and conviction, as is proper. Taxes wouldn’t be necessary. There is some possibility of fraud and perjury in AIG as the auditor for AIG corporate was denied access to the books of the unit doing the deals, and so false documents might have been filed with the SEC.

  22. #22 Chris P
    March 19, 2009

    Interesting – Colorado is an “at will” state you can be fired for any or no reason. Why should bonuses be sacrosanct?

    Plenty of my friends have LOST their jobs. I am working a 4 day week with a reduction in pay.

    These guys should be glad they got their salary. They don’t “make” anything. They provide no real contribution to the economy at all.

  23. #23 CCPhysicist
    March 20, 2009

    #18 point 1)

    You are incorrect about the changes in the UAW contract. Almost all of the changes concerned benefits that had already been earned, including ones earned by persons who were now retired. Some of those changes were negotiated long before the recent events (because it was clear that what GM and others had agreed to was unsustainable because the corporation had not managed those promises in an actuarially sound way), but they all changed the terms of contracts people had worked under and retired under.

    #18 point 2) and Matt at #20:

    But that is the point: Taxes are not a punishment, so no tax law can fall under the prohibition against ex post facto laws (or a bill of attainder) in the Constitution. And the courts apparently agree.

    According to Wiki
    “In the 1994 opinion United States v. Carlton, the U.S. Supreme Court unanimously held that retroactive tax laws did not violate the constitutional prohibition on ex post facto legislation.”

    Taxes are not punishment for a crime. I have no idea what talking points you are echoing here, but it is utter nonsense to claim that a sales tax is a state-imposed criminal punishment for buying a car. Absolute utter nonsense.

    #18 point 3)

    Wells Fargo didn’t need anything until they picked up a piece of crap pretending to be a banking company. Without it, they would be under capitalized and very vulnerable no matter what someone may be saying to spin their share price on the markets.

    As for tax brackets, I’m pretty sure that I pay at least as large a fraction of my total income in taxes as that hedge “manager” would otherwise have paid on that million dollar bonus, despite living in a low-tax state. He pays no FICA on that “bonus”. And he wouldn’t have gotten any of it if the company had failed, as it was going to do, as a result of his contribution to its bottom line.

  24. #24 Matt Springer
    March 21, 2009

    Taxes are not a punishment, so no tax law can fall under the prohibition against ex post facto laws (or a bill of attainder) in the Constitution. And the courts apparently agree.

    Fair enough. But I wonder: had GWB and the pre-2006 Republican majority passed a retroactive 90% income tax on Kerry contributors, we would rather fairly assume that was a punishment, and unconstitutional. Obviously there would be other constitutional issues as well, but I think it’s an instructive reductio ad absurdum as to just how banana-republic this kind of thing really is.

    Again, I hope no one construes this as a defense of the bonus. As a taxpayer, I’m beyond disgusted. Doubly so since I opposed the bailouts and the stimulus from the beginning. Even more so since a post-bailout AIG contributed money to various political campaigns including those of McCain and Obama.

  25. #25 Bob Sykes
    March 23, 2009

    Unless the House legislation is very carefully worded, the tax on the bonuses would be a bill of attainder (i.e., targeting specific individuals), which is explicitly forbidden in the Constitution. The courts will decide.

    The bigger issue is the deliberate incitement to violence by the Democrats in the House. The Acorn bus tour of the private homes also is an explicit threat of violence. Combined with Newsweek’s call to “silence” Rush Limbaugh, we seem to be rapidly approaching our own Brown Shirt era.

  26. #26 arlo shaddy
    March 27, 2009

    You and mike dunford are full of shit. The executives that were given bonuses should be punished to the full extent of the law.

  27. #27 Don Pellinen
    April 14, 2009

    The people who have really lost on the collapse are the shareholders if have in vested their savings and retirement investments in these companies. Executives who are also board members have voted unreasonably large bonuses even when the company is loosing large amounts of money.
    Bonus money should be awarded for causing the company and investors to gain value, not to pay them for loosing everything. Investors should file suit against directors for failing to do their duty to the people who have invested their hard earned savings in the company.