A More Modest AIG Bonus Proposal

Mar.23.09 | About: American International (AIG)

We need to set aside our self-righteous indignation with respect to AIG (NYSE:AIG) paying bonuses for a moment.

We are concerned with what could be viewed as the House of Representatives attempting to set aside our Constitution with its proposed ex post facto "after the fact" bill.

For a Democratic-led House HR1586 to have approved by a 328-93 vote ("yes" votes were 243 Democrats and 85 Republicans, with 6 Democrats and 87 Republicans opposed) to impose a 90% "punishment tax" on bonuses given to employees with family incomes above $250,000 at AIG (and other companies that received at least $5.0 billion in government bailout money) cheapens our entire political and judicial systems.

We are only as trustworthy as our word. If individuals in a Presidential administration or a legislator by design or by omission did not put a caveat into the Troubled Assets Relief Program (TARP) to curtail or eliminate such bonuses, then we as a society have given up the right to make changes after the fact.

Now, what we would contend is that Mr. Liddy did have a bit of a moral obligation as Chairman. We think it should have gone something like this for everyone expecting a $1.0 million or higher bonus in the division responsible:

Mr. Liddy says, "We intend to pay you a bonus, however it will be in stock and based on the December 31, 2007 close of $57.14 per share that would start you out at 17,501 shares.

"However, the shares of AIG decreased to $1.57 per share or 97.2% as of December 31, 2008 compared to 33.8% compression in the Dow. As such, your division was responsible for the excess decline in the shares of our company and facilitated the need for government intervention for our survival.

"But to be fair, we are reducing the shares you are entitled to by only half of the excess decline or 31.7%, which would yield 13,159 shares. Now, do you want the shares or a payout at the March 12, 2009 close of $0.41 per share, or $5,395 pre-tax?"

We suspect no one would have complained.

Now, if the employees and management of the notorious division would have accepted the shares, they would have been more likely to stay on to correct the problems they created. And suppose that over the next 5 years the shares increased in value to the December 31, 2007 level of $57.14 per share. The employees in question would reach approximately 751,900 tax-free, or approximately 20% more than what could have been received if they are able to keep their original bonus.

We remain less concerned for the bonuses paid at AIG, as they were contractual. We continue to take exception to the bonuses doled out by Mr. Thain, the former CEO of Merrill Lynch, which was paid out after receiving government aid and being acquired by Bank of America Corp. (NYSE:BAC). Clearly these payments fall under ex post facto, and should be given back.

We need to remember that on our way to making AIG -- and by extension its employees -- one of the poster children for this economic downcycle, AIG is not the only company at fault.

Moreover, even though AIG made mistakes in its underwriting of the risk (insurance companies do that from time to time), the U.S. government was able to use the company as a backdoor tool to prop up the banking system in the U.S. This has potentially staved off an even more significant decline in the market if financial institutions and municipalities would have been forced to shutter their respective doors.