The AIG Bonus Furor: Let's Focus on What Really Matters

Don't get me wrong: I believe that taxpayer funded bonuses for the employees of failed divisions at failed companies is as egregious as the next guy, however I do think that we have some bigger fish to fry.

Rising unemployment, saving the banking system, rebuilding the regulatory framework for the financial sector (look at Canada - its regulatory framework has kept their banks profitable), saving the domestic automotive industry, and administering the bailouts, stimulus plans, etc., all require much more focus than AIG's compensation model. Especially when we also consider the problems related to the collapsing manufacturing sector, the national debt, education, energy, healthcare, the wars in Afghanistan and Iraq and the overall war on terror.

Call me crazy but I think that the government needs to stop running around like a chicken with its head cut off every time something happens that raises the ire of the populists, and learn to triage the issues at hand and focus its energies on our biggest problems.

Taking back bonuses isn't going to create jobs.

If anything the populists should focus their energy on the fact that the government is currently infested with the very politicians whose blind eye, ignorance, affinity for deregulation, etc., are all heavily responsible for the current economic crisis. Wall Street may have been infested with greed and risk addicts, but Congress is literally infested with their enablers.

We need to stop focusing our energy on the things that upset us, and focus instead on the things that will generate the most positive benefits from an economic perspective. Should we go after AIG for the bonuses if we can? Sure. But let's worry about our biggest problems first.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[JohnnyC:]

I agree there are bigger fish to fry - and this matter should handled by Obama's team - not him. I think they're going to deduct the bonuses from the next payment to them, so it's done (should be). It's just finger pointing at this point - not very impressive.

Mar 19 08:54 AM

[Silk32:]

Great post. Also what really matters is that AIG may no longer be a going concern regardless what the government does. If it cannot generate new business then the bail out funds will go to fund future operating losses. If a group of innercity kids can figure it out then I know adults can. To learn more go to www.newyorkshockexchan.../

Mar 19 09:10 AM

[I weep for ...:]

The real genius here is the architect of this outrage residing in the current adminstration. They were able to turn the country's attention to these bonuses (which they knew about for months and endorsed since AIG's Board is unable to take any action without running it by the Fed) and away from the billions that went to the counterparties, i.e., Goldmen, etc... They were the ones bailed out, not AIG. They were the ones who created the mortages not AIG. The day the identity of the counterparties were released the outrage from Washington was created.
It is obvious, but still the sheep all waive their pick signs and our upset that these folks got bonuses because they are trying to unwind accounts that could cost the taxpayers way more than they have paid so far!
_
The greatest trick the Devil ever pulled was getting the world to believe he didn't exist!

Mar 19 11:11 AM

[Bruce Miller:]

Deregulation was the right thing to do. If a corporation is under mandatory regulation of the government, essentially tying their hands, then that corporation fails. It then becomes the responsibility of the government to bail them out. However, when it is deregulated, the government should be no longer responsible. Bankruptcy should be the avenue that is being taken, not bail outs. I do not agree with the government bailing out any corporation. These corporations should have pay for their own mistakes by ceasing to exist. Our national debt now exceeds our gross national product. AIG too big to fail, But our government is not? How much money can you throw down a bottomless pit before the pit fills up? These bail outs I thought would be an annual occurrence, looks more like they are a quarterly occurrence.

Mar 19 02:25 PM

[Buckoux:]

"AIG too big to fail, But our government is not?"

Socialist believe that government is alway too big to fail. Government is God.
The US has been run by socialists, baby boomers and Harvard alumni, since 1993. Grab your wallet (if you have one left).

Mar 19 04:51 PM

[mediapro:]

There's another post from Investment U that points out the scheme perpetrated EVERY YEAR on the taxpayer. The AIG et.al. bonus story is simply shining a light on the compensation and tax avoidance structure common within American Corporatocracy. It is THAT structure that needs to be addressed.

For the benefit of other SA readers here's the quote from Investment U:

"For many in the financial establishment, bonuses are simply part of their compensation packages. They have no tie to performance at all. Much of the rank and file receives bonuses as a normal part of their “salary.”

It’s because companies use bonuses as a way to minimize expensive payroll obligations.

Think of it this way, if I’m an average corporation and I pay a qualified employee 100k as their salary, I am required to withhold taxes, insurance and a host of other items – in addition to setting aside money for federal programs. However, if I pay that individual 60k, and a bonus 40k, the situation looks much better. The employee has to handle withholding taxes on the 40k and I am only required to deal with the payroll effects of 60k."

So what the light of day is now shining on this tax avoidance scheme is a pay structure that should be patently illegal. How can they avoid paying the payroll taxes (etc.) that they, as Employers, owe the Government? If this is legal, why not simply pay thier entire salary as a "bonus"?

Why are salaried employees and small businesses hit time and time again, while big business always seems to 'bend' the rules and still come out on top?

Here are a few issues about tax fairness that remain unaddressed:

1. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

2. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck.

3. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the "bonus structure", offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

4. Finally, would someone please explain to me why there is a ~$100 K cap on wage contributions to Social Security?

Mar 19 05:10 PM

[Responsibility:]

Obama himself acknowledged this AIG problem: " - - - promising to do everything he could to “get these bonuses back.”

He acknowledged also the problem of excessive bonuses and salaries in businesses, particularly in the financial businesses, as highlighted by many people years ago before this crisis. “These financial industries are holding us hostage, - - - ”

Obama said the AIG payments raised moral and ethical problems, but he stressed that the bigger problem was the culture that allowed traders to claim them.

We should hold him responsible and help him to make the CHANGE on this greedy culture.

Mar 21 12:59 PM