To AIG Execs: Give It Back!

Apparently the contracts that were signed by AIG (AIG) with its executives in its Financial Products unit — the part of the company that wrote all the Credit Default Swaps and sank the company and almost sank the world financial system - are iron clad. So says Treasury Secretary Tim Geithner and AIG CEO Ed Liddy (installed at only $1 a year after the mess had been made).

I’m a finance and economics guy, not a lawyer, but it does strike me that there are probably several grounds on which the contracts are at least ambiguous enough that the company should have avoided paying them. If a company knows it is in financial trouble, it cannot strike sweetheart deals with some parties that transfer the assets of the company to them at the expense of other interested parties. This is the essence of the idea of fraudulent convenience.

It would have probably made sense for AIG to have refused to pay, and then let the executives sue the company. I just wonder how a jury of 12 normal citizens would feel about their claim that they had to get millions of dollars in extra pay to stick around and help create.

This is the largest mess the world has seen since Hercules cleaned out the Aegean stables. I am sympathetic to the idea that it is not a good idea for Congress and the Administration to go around abrogating contracts. The double standard here is glaring - Congress seemed to have no trouble in forcing the UAW to renegotiate its labor contracts.

The very representatives and senators who now are most outspoken about the sanctity of contracts in the case of Wall Street were the ones who were most forcefully pushing the UAW to renegotiate, and laying all of the blame for the troubles of the Auto Industry at the feet of the assembly line worker.

Still, the damage is done and the checks have been already given out. How can it be rectified? Some are proposing a confiscatory tax on bonuses over a relatively low level (say $50,000) received from any financial institution which has received more than $5 billion of aid from the TARP program.

This would also mean that the taxpayers would recoup the bonuses from people at places like Bank of America/Merrill Lynch (BAC), Citigroup (C) and Wells Fargo (WFC).

This, however, would set a bad precedent and risks turning the tax code into a political weapon. As sympathetic as I am in this case to the idea, I am afraid of the precedent.

So what can we do? My suggestion would be to persuade the executives who got these totally unjustified bonuses to simply give the money back. How would we do that? Appeals to patriotism are not likely to be terribly effective for folks who are motivated by greed more than by virtue. However, they probably do care about their good names and reputations.

In the markets, the antidote to greed is generally fear. I would simply suggest that if the money is not given back within 30 days that their names - along with the exact amounts of base salary and bonus they received - be made publically available on a website and in the newspapers.

The idea is to shame them into doing the right thing. There is a very good precedent for doing this. In many towns, police will publish the names and pictures of men caught soliciting prostitutes in the local paper. When you think about it, compared to crashing the entire world economy…not that soliciting a prostitute is a good thing, but the scale of the damage is orders of magnitude less.

All these executives would have to do to avoid this shame and infamy is to simply tear up the bonus check they got. It’s their choice, their privacy and reputation, or their bonus check. I suspect most would do the right thing.

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