AIG Reaction Provides a Teachable Moment

March 20, 2009 at 6:16 pm Leave a comment

by John Young

The surreal situation surrounding the AIG bonuses provides an opportunity to discuss the importance of principles and ideas, as well as an opportunity to discuss an important aspect of ethics.

For those who haven’t been following the news, let’s set the stage.

AIG is a huge multinational insurance company that provides various types of insurance throughout the world. One aspect of its business is the provision of insurance to banks so that they are made whole in the event that a debtor defaults on a loan. Like practically all insurance companies, AIG works on two principles. First, it wants to collect more in premiums than it pays out in claims; and second it invests available funds in order to grow them against the day when a large number of claims may come due.

It turns out that AIG made a number of bad decisions in insuring certain loan packages for banks, combined with bad decisions regarding where to invest their own money. This put AIG in eminent danger of going out of business. Because of the pivotal role that AIG plays in the banking industry, if AIG went out of business, the effects would have been devastating. Therefore, the Federal government opted to provide AIG with taxpayer funds sufficient to take an 80% ownership stake in the company and keep it from going under.

Meanwhile, now that AIG is solvent from the cash infusions, AIG management opted to fulfill its pre-existing contractual obligations to its employees by providing them with fairly substantion bonuses amounting to, on average, $1M apiece within the very division largely responsible for AIG finding itself en extremis.

Democrats in Congress have responded by putting forth a tax law intended to deprive these employees of fully 90% of their bonuses

The brokers at AIG make poor sympathetic figures. After all, they are involved in a pretty sleazy industry to start with, and intimately intertwined with an upside-down system in which people who place bets on stocks make factors more income than the people whose hard work actually gives those stocks their value. In short, to the average person, it appears as though the brokers at AIG probably haven’t done an honest day of real productive work in their lives.

As a result, it is very easy for the Obamunists to seize upon these brokers as poster children for the application of outright communistic interference. This is no different than when Ted Kennedy points to the one out a million legal gun owners who kills an innocent person as justification for draconian restrictions on our right of self-defense while completely ignoring the millions of times every year that legally owned guns are successfully used for self-defense without ever harming anyone. (In fact, legally armed citizens with carry permits kill fewer innocent people by accident than police.)

The technique used by the Obamunists of the world is to capitalize on the revulsion we may feel for a particularly unsympathetic example in order to create laws and set precedents that apply to an entire group of people, the overwhelming preponderance of whom should be left alone.

It is here that it is important for us to separate, in our minds, the actual people involved in a situation from the underlying principles at issue.

The underlying principles at issue are the terms of employment between an employee and an employer. While there are reasonable rules applied to these agreements; particularly when it comes to compensation beyond the minimum legal wage and payment for overtime, government has very little to say.

There are a wide array of fields in which objective performance of an employee is so important to an employer’s bottom line that performance and compensation are intimately tied together. One example is food service in a restaurant. In this case, a waitress works for a minimal hourly wage, counting on her performance in that task to provide her with additional compensation in the form of tips.

The same applies to a sales-woman. Usually, sales professionals are provided with a minimal “base” salary, but receive additional compensation based upon a formula that gives them a percentage of the money they made for their employer. This works to the benefit of both the employer and the employee. For the employer, it minimizes the risk of shelling out money for an unproductive employee. For the employee, it means that the more effectively she works, the more money she takes home. When a sales-woman enters into an employment contract of this type, she is counting upon her commissions and bonuses to make up the difference of a salary that would otherwise be insufficient.

This same principle applies to traders on Wall Street or working in the derivatives department at AIG. Employees take a calculated risk that through sheer performance, they will make up the difference in an otherwise insufficient salary. Their performance bonuses are usually based upon measurable and objective criteria that are spelled out in a contract.

If the AIG personnel had known, in advance, that they would not be receiving performance bonuses they would have either gone to work for another company or they would have demanded higher salaries.

For Chuckie Schumer to come in after the fact and impose a special tax that effectively renders the terms of their compensation agreement null and void is manifestly unfair because it changes the rules in the middle of the game. It is no different, in principle, from taxing a waitress 90% on her tips because Congress deems them somehow “excessive” or taxing a sales-woman 90% on her commissions. The fact that this tactic is being applied — at the moment — to unsympathetic figures doesn’t make it right. It will have established a principle that will allow the Obamunists to run amock and eventually tax to death anyone whose business even remotely touches government and whose performance-based compensation is deemed somehow “excessive.”

Naturally, this is terribly disingenuous. If you really want an eye-opener just take a look at the MILLIONS OF DOLLARS A YEAR that former members of Congress usually earn after they leave Congress and join forces with the VERY INDUSTRIES THEY WERE ENTRUSTED TO REGULATE while in Congress. But I digress.

So the first problem is that effectively nullifying the terms of the AIG employment contract after the fact provides an open avenue to implement seriously destructive tax policies in the future that will destroy incentives for achievement. This is not acceptable.

The second problem lies in the effective nullification itself. While such nullification doesn’t violate the letter of the Cosntitution, it certainly nullifies the spirit. Article I, Section 10 of the Constitution states:

No State shall pass any … Law impairing the Obligation of Contracts …”

In fact, using a strict constructionist view of the Constitution as would be applied by James Madison, Article I Section 8 — which enumerates the powers of Congress and in so-doing limits them — gives Congress no power to pass such laws either.

Of course, the Congress-critters know this; so they are doing an end-run by using their powers under the 16th Amendment (income tax) to effectively render a private agreement null and void without declaring it to be so.

This is akin to a car-jacker arguing that he committed no crime because the victim of his behavior was driving a tractor-trailer rather than a car.

So this very dangerous tactic by our Congress puts the income of all Americans at risk (or, at least, the 50% of us who pay taxes), opens the gateway to communist policies that will suppress achievement and violates the Constitution.

On these basis alone, Congress shouldn’t even dream of passing a 90% tax on the bomuses of AIG executives, no matter how lowly we may regard them.

But now let me get to the real meat of the issue — the combination of Constitutionalism and Ethics.

At the time of our nation’s founding, it was thought that the greatest threat to the loyalty of our representatives would come from foreign states. Thus, Article I Section 9 states in part:

“No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.”

From the above, it is abundantly clear to anyone with an IQ above room temperature that it was the intention of our founding fathers to prevent the corruption of our legislators and other public servants. Naturally, the partisans of foreign states (such as China and Israel) who are also citizens of the United States get around this restriction and adversely affect the loyalty of our legislators; but the issue of corruption by large corporate entities is far more pervasive and insidious.

At the time of our nation’s founding almost any concentration of wealth of any consequence was in the hands of either governments or the aristocracy composing those governments, and nobody dreamt of the existence of behemoth corporations with greater monetary throughput than entire states. Some of the corporations in this country are financially larger than some first-world nations. But this outcome — and its next consequence — were not foreseen.

With great wealth comes the ability to share some of that wealth with others. And if the wealthy entity shares strategically with legislators, it can secure special privileges that allow it to quash competition and grow to a size beyond all sense and reason — to the point that it becomes so big that if it fails our entire economy will collapse. That’s exactly what happened with AIG.

A quick perusal of financial contributions by AIG yields stunning information not provided on the daily news. In all honesty, I don’t personally find it stunning at all, because I’ve been talking about this for a long time. Either way, it turns out that AIG contributed gargantuan gobs of money to political campaigns for decades under a wide variety of names. I count 23 obvious ones, ranging all the way from AIG Global Investment Corporation through AIG SunAmerica. Just since 1990, AIG has dumped nearly $10 million into Congress. This is just money for campaigns, and doesn’t count the bribes that come in the form of special so-called “consulting assignments” that members of Congress receive after leaving.

Certainly, AIG got their money’s worth. But let me cut to the chase.

The only reason that AIG became “too big to fail” in the first place is simple corruption. Because it became so big, when it reached the point of failure, our Congress violated our Constitution wholesale by giving them hundreds of billions of dollars in taxpayer money and even taking an ownership stake in what was supposed to be a private enterprise. Then, when the company sought to provide employee retention bonuses, all hell broke loose in Congress with Chuckie Schumer and the other Obamunists vowing to levy a 90% tax on the recipients.

There is an important ethical principle here. Notice that when you do the wrong thing, it leads to crisis after crisis in which you must either undo what you previously did or commit further immoral acts. This is the way of the world, and there is no escaping this.

When our Congress was faced with a faltering AIG, it had three choices. It could allow it to fail — thus throwing us into an immediate global depression; it could bail it out — thus breaking the U.S. Constitution and guaranteeing our children a dismal future; or it could have undone the wrong it committed by allowing AIG special privileges that allowed it to grow so big by breaking it up into its 23 or so constituent parts so that the strong parts could be saved and just the weaker divisions would fail.

By failing to put right their initial mistake, Congress created yet another debacle — the image of a bunch of slimy derivatives traders receiving nearly $200M in bonuses where the money for paying those bonuses came from taxes being paid by people who can barely afford to put food on the table. Rather than taking the opportunity to right that wrong, they instead jumped to yet another outrage: a wholesale jump to embrace communist principles by taxing those whom they deem to make “too much money.”

This is no different, ethically, than the woman who has an affair on her husband only to discover that the one circumstance necessitates other wrongs just to sustain the first one until she discovers that she has wrapped herself in a cocoon of lies and deceptions that necessitate her destroying her children’s stability even though that was never her intention in the first place.

Many of our members of Congress are very bright individuals. But they have become so impressed with themselves that they believe they can evade the natural consequences of their behavior forever, when they cannot. The further they go without righting their multitude of wrongs, the more difficult making the right and honest choices will become until they have painted themselves into a corner and wrapped themselves in a straightjacket whose material is spun from their own deceptions.

The politicians are using this relatively small issue of a few bonuses at AIG to distract us from the big-picture issue of why our money had to go to AIG in the first place.

Very few of them, if any, have asked themselves what they are going to do about the wave of inflation that is bearing down upon the shore of our economy caused by the meteoric Deep Impact of incessant money printing to fund the stimulus. For smart people, they really are pretty stupid. But, then again, for anyone who has watched Congress for a while, this isn’t exactly shocking.

Entry filed under: Economics, Western civilization. Tags: , , , , , .

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