Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

18 March 2009

Bonus Lessons


We can learn a lot about our leaders by studying their response to “Bonusgate.” There are many villains but only three heroes that I can discern.

Let’s review the sordid facts. Friday 73 employees of the derivatives unit that destroyed AIG got bonuses of over $1 million each. They got them not for their performance—which indirectly destroyed the global economy!—but for agreeing to stick around instead of leaving their unit as their “work” began ruining it.

AIG’s other employees, whose work was good and whose units were profitable, got no bonuses in this down economy. The bad guys reaped all the gelt.

Now we learn from Andrew Cuomo, New York’s Attorney General, that some fifty of these rascals didn’t even actually stick around. (The Wall Street Journal reported only eleven—a discrepancy that underscores the dearth of accurate facts in this story.) They’ve already left AIG, for reasons unreported. Whether they left before their contracted time is also unreported; maybe they stuck around just long enough to collect their bonuses, settle in Rio, and watch their good work melt the world’s economy down while drinking rum and coke.

One person who is definitely not a hero of this story is Treasury Secretary Tim Geithner. He claims he learned of this debacle for the first time only last week. But representatives of the Federal Reserve sat on a board that reviewed the matter last November, and AIG’s public disclosure documents outlined the bonus plans last May, provoking criticism by legislators. Someone was asleep at the switch and politically insensitive, although whether Geithner was personally responsible remains to be seen. Maybe if he had the managerial skill to fill the ranks at Treasury, he might have had people on tap who could handle things like this while he kept his mind on larger matters.

Our representatives in Congress responded to the inevitable public outrage in their accustomed manner, with posturing and grandstanding. After having doled out hundreds of billions, apparently without the slightest genuflection at due diligence, they prepared to run after the long-fled horse with bills of attainder and ex post facto legislation, both of which our Constitution forbids. Specifically, they prepared to pass confiscatory taxes, aimed at the bonus recipients alone, to claw the money back.

You don’t have to be a constitutional scholar to know that tax legislation aimed at punishing individuals for past non-criminal conduct (after all, the bonuses are already paid!) is not the way to go. That’s the kind of thing that Dubya and Cheney would do. It’s what we elected Barack Obama to put behind us.

Fortunately, there was one hero: the redoubtable Charlie Rangel, much maligned Democratic representative from Harlem, New York. Asked by reporters what he thought of this legislative “solution,” he pronounced our tax code not “a political weapon.” Since he’s chair of the powerful House Ways & Means Committee, his cooler views will likely prevail. Chalk up one lone hero in Congress.

The biggest villains were the bevies of government and AIG lawyers who reportedly approved these bonus contracts as unbreakable. Really? I’m not a courtroom lawyer, but I can think of at least five theories that might get these cases past a judge and to a jury. They include fraud, duress, extortion, unconscionability, and contravention of public policy. And that’s without even considering the possibility that some of the bonus birds might have flown the coop before their appointed times.

As the Wall Street Journal reports, “Government lawyers concluded abrogating the contracts would cost more in legal fees than letting the bonuses go forward.” Really? The bonuses so far amount to $165 million, with $450 million in all to come. Ken Star only spent $80 million going after the President of the United States, and he was hardly a penny pincher. How quickly we forget.

More important, think a bit. In addition to being President, Barack Obama is now at the very hub of the Harvard Law School alumni network, the biggest wheel of distinguished legal alumni in the country. He taught law at the University of Chicago for over a decade and has that network, too. Lawyers are among his strongest supporters, so he’s probably got tens of thousands of their names on his e-mail list. All he need do is send out an e-mail, and he’d have the best lawyers in the country working on these cases pro bono publico—meaning for the public good, for free.

Some would serve for the visibility and prestige of these high-profile cases. Younger ones would serve for the experience and exposure. But serve they would, in droves. All the President has to do is ask.

One free high-powered lawyer is already in motion. That’s Andrew Cuomo, New York’s AG. He’s already working on clawing the money back under New York law, which would probably apply to the contracts at issue. He’s the second of the rare heroes, although his personal motivation is undoubtedly political ambition. Maybe the Justice Department and the New York AG’s office can form a join venture to get that money back.

So who’s the third and last hero? I hope it’s our President, but we won’t know for a while. He’s right to point out, as he has, that the amount of money at stake is negligible compared to the economic problems we face. To put numbers on it, the $165 million reportedly paid out so far is 0.02 % of the Stimulus Package and 0.005 % of his proposed $3.2 trillion budget. With his customary sense of perspective, the President was right not to put this scandal at center stage.

But the politics are not as simple as the economics. The crisis we face is mostly about confidence and trust. Bonusgate does nothing to restore them and much to undermine them.

How can we have confidence in what is left of our banks and industry when something like this happens? Is $165 million (reportedly $450 million when future similar bonuses are included) too small for insolvent and bailed-out AIG to conserve? And what about GM’s CEO Wagoner, who today reportedly twisted in the political wind like a plastic mobile on the question of GM’s bankruptcy? Can ordinary people trust anything when they see these sorts of games being played with sums of money that their families have never seen and never will?

The President’s speech of outrage was a good start, but only a start.

There are perfectly legal and constitutional ways to make sure the recipients of these undeserved bonuses never enjoy them, or negotiate most of them away. When they see the Department of Justice, the New York Attorney General, and a horde of the best civil lawyers in the country, working pro bono, arrayed against them, they will have a strong incentive to settle for pennies on the dollar. If their cases ever get to a jury, they will likely lose all.

Courts don’t enforce every contract as written. Contracts are still matters of common law, under which judges have discretion to let juries decide. It takes unusual circumstances to get judges to balk at enforcing clear contracts. But what could be more unusual than rich rewards for the folks who destroyed the global economic system and put their once-solid firm into bailout territory, while their competent colleagues in that same firm’s profitable divisions got nothing?

If the law can’t find a way to do justice on this one, it ought to hang up its hat. The common law and the jury system are designed precisely for that purpose.

But it all depends on how your instruct your lawyer. If you ask, “Are the contracts sound?”, you’ll get one response. If you order, “Pull out all the stops to get this money back,” you’ll get quite another.

The President doesn’t need to handle this problem personally. He needs, as is his wont, to keep his eye on the ball. But he does need to give the right instructions to the right people and make sure they get heard, obeyed and widely reported.

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