The politics of the AIG situation is interesting, as it demonstrates that while broad and complicated policy may not fully register in the minds of the public, a smaller, specific and easier to understand action can capture public attention and lead to substantial reactions, that in turn can galvanize the media and the congress. While there has been deal of unease, and at times anger, over the entire bailout and stimulus processes, there hasn’t been enough general response to capture the attention of the political system in the same way this AIG bonus situation has.
And, really, it boils down to this: if a company is doing so poorly that it needs to have the federal government come in and infuse so much cash into it that at the end of the day 80% of said company is owned by the feds, then it is difficult to accept that outside of those radically dramatic facts that business should continue as it always has.
Or, more to the point, if a company needed $170 billion ($170,000,000,000) just to survive how could anyone in the company deserve a bonus? This question is made several levels of order more intense when the company in question was at the heart of the current financial crisis that has so damaged the global economy.
The above is far more easy to comprehend than issues of mortgage based derivatives and esoteric financial instruments that have been sliced and diced to the point that no one knows what they are worth and how such items led to the economic situation we currently find ourselves in.
Of course, even given that harsh political reality, the question of how to deal with this situation remains an open one. One thing that strikes me as problematic is that it seems that more political attention is being paid to the AIG bonus situation than was applied prior to the bailout of AIG itself. Certainly the Congress appears to be paying more attention now than they did then.
I will say that the notion of simply taxing of the bonuses strikes me as an inappropriate use of congressional power, as the target of the bill would be so specifically directed, somewhat vitiating the notion that laws should have general applicability. It makes me (and others) think of the constitutional prohibition on bills a attainder, which is the prohibition against the congress passing a law that would specifically declare a given individual a criminal. Given that the tax on bonuses would be neither specific to a given individual nor the declaration of a crime, it wouldn’t qualify, although such a law has the feeling of violating the spirit of that provision to some extent.
Marc Ambinder consulted Lawrence Tribe on the subject, and Tribe believes that a law could be structured in a way to pass constitutional objections.
Nate Silver likens the situation to congress’ intervention in the Terri Schiavo case, and I see the parallel, although in the Schiavo case were really were just talking about a single person, which was ultimately even more problematic than this tax proposal, which at least really does address a class of persons.
Beyond any of the specific of the current problem and the public attention focused on it, two broader points keep cropping up in my mind.
1) The speed of these policies and the lack of thinking through what needs to be done: since this bailout whirlwind started, I have had flashbacks to the Iraq war, i.e., lots of panicked actions by government with longterm implications for the country that were inadequately considered. To put it in specific terms: perhaps if the federal government had been a bit more thoughtful about the AIG bailout, some negotiations for what AIG and its execs would have to give up in order to receive help should have taken place. This whole: give ‘em billions and we’ll figure out the implications later reminds me far too much of Iraq for comfort.
2) In terms of the politics of blame, there is plenty to go around, as the AIG bailout was initiated by the Bush administration and while Geithner was at the NY Fed. This was done with a Democratic majority in the congress and has been continued under a Democratic President and even larger Democratic majorities in the legislature. As such, the notion that either party has exclusive ownership of this situation is incorrect. In other words, pretending the like the AIG situation only started in the last couple of months is simply wrong. And I note this not to defend the Obama administration, or to absolve it of responsibility, but rather for the sake of accuracy. It is rather impossible to fully understand (or even discuss) a situation if one ignores basic facts.
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March 19th, 2009 at 10:34 am
The biggest problem I have with this mess is that all the hypocritical harrumphing about contracts is not a valid point. I’m sick of hearing it, but at least it can be handily refuted with three simple letters: UAW.
If it takes a (relatively) trivial sum equivalent to a couple of dimes from a $10 bill to make people sit up and take notice, so be it. I really dislike the targeted tax idea, think it’s ridiculously bad policy, and hope the Congress figures that out sooner rather than later. One would also hope that even if they do pass something like that, Obama’s constitutional law instructor experience would kick in and he’d veto it.
I think the best way to get the money back that has already been paid out is via the courts — either Treasury goes after the recipients directly, or they take it out of AIG’s hide and AIG has to sue them itself. Barney Frank is right: if we own 80% of the company, we should start acting like it instead of deferentially mincing around like unwanted visitors.
March 19th, 2009 at 11:36 am
Regarding:
“I will say that the notion of simply taxing of the bonuses strikes me as an inappropriate use of congressional power, as the target of the bill would be so specifically directed, somewhat vitiating the notion that laws should have general applicability.”
I would hazard a guess that the vast majority of bills passed by the US Congress would be classified as “inappropriate” by this standard, and probably to a worse degree than this one, which will define a general principle even if it applies only to a few cases.
The general principle behind the bill seems an important (and appropriate) one, for reasons the post above generally (so to speak) articulates.
It certainly is not even remotely a bill of attainder.
March 19th, 2009 at 11:44 am
You may be correct. Still, the very limited number of actual persons involved and the very specific purpose of the bill strikes me as unusual.
I will say that I am somewhat uncomfortable with the bill at the moment, but am persuadable on the issue.
March 19th, 2009 at 5:10 pm
Well, I do know that Congress regularly passes tax breaks that apply (de facto) to one or a few corporations or wealthy individuals, rather than to some broad class of taxpayers. So why not tax assessments, when the abuse is as egregious as in the case at hand?
(Just trying to persuade the open-minded…)
(I can’t say whether bills like this have happened before, but I am reasonably certain that have.)
March 19th, 2009 at 7:07 pm
I think the real atrocity is bailing them out. If you’re going to give them, this is what is going to happen. We can’t just keep these banks running, because it’s killing productivity, and that’s what we have done for the last five decades. It’s time to feel the true effects of the economy, so we can actually have strong fundamentals that brought us to prosperity, rather than postponing the dreadful effects that await us in what may turn into a depression.
The constitutionality of said bill, is not really relevant. Where was the constitution when they start making laws on religion and speech? Where is it when they force state’s to do things when the tenth amendment says otherwise? Where’s the warrants for arrest and habeas corpus? I disagree with this bill, that they are taxing the money back, but this is all a waste of time, and we can’t say that this blowback was not predicted by the same people who warned of the real estate crash. Yet, they are ignored, and those who want to shred the constitution continue to get richer.
March 19th, 2009 at 11:11 pm
If I can play devil’s advocate, as I understand it, none of these bonuses were for performance, but rather for retention. It also seems quite clear that the nature of AIG’s financial dealings is remarkably complex, so individuals with very specific skills and experience are needed to do this work. From Mr. Liddy’s testimony yesterday, it appears that the work of the group that received the retention bonuses has successfully mitigated the risk to the federal government (i.e., the taxpayers) by at least $1.1 trillion so far. But they still have about $1.6 trillion to continue to unwind., so we need them to keep working. What is the increase in financial risk to the taxpayer if they all quit because of the manufactured outrage over these bonuses?
March 20th, 2009 at 6:00 am
[...] less public response, to quantitative easing fits perfectly into what I was trying to get at yesterday: The politics of the AIG situation is interesting, as it demonstrates that while broad and [...]
March 20th, 2009 at 6:07 am
ts,
I think that those are legitimate questions and concerns.
However, I don’t think that the outrage has been manufactured–indeed, I think it is quite genuine, which makes all of this political quite significant, despite the relatively small amount of money under discussion (vice the whole bailout).
I will say that the notion of these persons quitting en masse in this economy strike me as an unlikely scenario.
March 20th, 2009 at 6:46 am
Dr. Taylor -
I think the outrage issue is a question of perspective. I find it hard to swallow any outrage coming from politicians who voted for a bill including language that protected bonus payments and then act surprised that a company took that seriously. I also find it highly suspect when the President expresses outrage when the language became law under his signature, especially when it appears that the language was included at the prodding of his people from Treasury.
At the street level, the outrage is more understandable. Interesting article in the Washington Post this morning about the whole thing. What I am outraged about, and you addressed, is the breakneck speed at which hugely expensive pieces of legislation are being passed. The absence of substantive debate and the ignorance of our legislators with respect to what is in the bills they are voting on is what makes me angry.
March 20th, 2009 at 7:06 am
There is little doubt that some (most?) of the outrage by politicians is manufactured to some degree (but then I take that as a given). My point, and I think we are in basic agreement, is that there is real general outrage on this issue and that, in turn, is affecting congressional behavior.
March 20th, 2009 at 8:28 am
The real problem here lies in the fact that no one from AIG or speaking on behalf of the government have done a particularly good job articulating the logic of the retention bonuses in the first place. We are just now seeing the beginning of this with Mr. Liddy’s testimony. These executives could have left the company in September when the situation at AIG was in crisis mode to pursue other roles in the financial sector but instead were asked and agreed to stay behind and help manage down the gargantuan financial risk that remained inside the company, with the retention bonuses being the primary incentive for staying and dealing with a situation most of them were frankly not responsible for (those that were responsible saw the writing on the wall and were long gone). Now after doing that work, they are being attacked for saving the taxpayers billions of dollars. This is not comparable to asking GM workers to cut their pay as part of receiving government assistance. These executives are working on behalf of all of us to mitigate a disastrous sitatuion and I fear all those that remain will now leave given they’ve lost their bonsues and are being publicly flogged for their “greed” only to be replaced by people who do not fully understand the situation, the history and the complexity of the business all of whom will require appropriate compensation - and bonuses! - to do the work. Washington and the public are taking out their collective frustration with the greed and recklessness of so many on Wall Street and at AIG on a group of well-meaning executives that actually stayed to clean up the mess that the real culprits abandoned with the 8 and 9 figure pay packages safely in their bank accounts. It isn’t right, and it is certainly not fair to this group of executives.
March 21st, 2009 at 6:27 am
[...] Steven Taylor makes a point I made on Wednesday’s edition of OTB Radio (”AIG Bonus Brouhaha“) about why seemingly minor matters resonate with the public while major issues often don’t. [W]hile broad and complicated policy may not fully register in the minds of the public, a smaller, specific and easier to understand action can capture public attention and lead to substantial reactions, that in turn can galvanize the media and the congress. [...]