Wednesday, March 18, 2009

Rule of Law 3: AIG Bonuses, Government Bail-outs

A corporation aiming to keep its bright people to produce bright work needs to provide them bright incentives. Bonuses are one of such incentives. So when AIG decided to give bonuses to its people who stuck with it through these past few months, so that those people will help the company recover from its shameful position of being bailed-out by a government just to escape bankruptcy, AIG was doing the right thing.

Unfortunately for AIG, by soliciting and accepting bail-out money from taxpayers and the politicians in the first place, AIG has politicized its corporate nature. It has abdicated its corporate independence and embraced political dependence. The moment it accepted the bail-out money, it should expect intervention anytime anywhere by politicians and taxpayers. The current howl against AIG giving bonuses to its personnel is understandable, but AIG's desire to keep its people is also understandable, and that those bonuses are stipulated in the contract between the company and its personnel, and that contract was made before the financial crisis emerged.

If the rule of law is to be respected, US legislators and the President should stay away from internal arrangement and contract between employers and employees. The rule of law also stipulates that AIG should pay each and every single dollar and cents that it owed the US Treasury. There are harsh penalties if the debtor will not fulfill its obligations. This gives teeth to the rule of law.

If giving bonuses will keep good staff or attract new people who can make the company recover financially so it can pay all its debts to the government and other private creditors, so be it. What the US politicians and taxpayers are howling is that by giving huge bonuses at the time the company is bleeding financially and asking for billions of $ of bail-out money, the likelihood of that company paying back all its debt to the government and taxpayers will become small.

The politicians and bureaucrats who extended the bail-out, as well as private citizens who supported the bail-out, are playing double-talk when they howl against the AIG bonuses. Governments and corporations have their own set of profligacies and wastes. That is why it is important that they keep to themselves those profligacies, and not extend or infect the other. Government bail-outs are perfect tools of co-inflicting those profligacies.

Should AIG justify and proceed the bonuses?
I say Yes.
Should AIG get more bail-out money?
I say No.

AIG should limit the foolishness of losing its corporate independence and embracing political dependence. The sooner it can do it, the better for its staff, shareholders and clients. By cutting or reducing its bail-out loan, the better. When it has brought down its bail-out debt to zero, then it can give double, triple, or whatever multiple, of current bonuses or whatever profligacies to its people.

On a related note, I wrote this last October 07, 2008:

Failing Big Business Marries Big Government

One Cato scholar I read said the Democrats and other big-government advocates among the Republicans passed the bail-out bill because it will give them additional power to regulate big banks and other financial institutions, on top of SEC, Fed, other US government agencies' regulation work. He called it, "where failing big business marries big government".

Private enterprises should be allowed to grow big or go bankrupt -- without government intervention. The job of the government is to ensure the rule of law, that parties honor their obligations and contracts with other parties, and that robbers, thieves and killers along the way are neutralized.

Meanwhile, I am wondering where the left, the socialists, anti-imperialists, the anti-capitalists, anti-market, etc.. position themselves first on the bail-out debate last week, and the implementation of the bail-out and more regulations in the coming weeks and months as a result of the bail-out law.

If they have to be consistent as leftists and socialists, they should have clapped and supported the bail-out plan and its full implementation. Because it means more taxes, more regulations, more protection for the irresponsible.

Leftists and socialists who oppose the bailout and its future implementation have no right, or are inconsistent, to do so. The job of opposing more government regulations and taxation is the task of the free marketers, not the statists and leftists.

About the Lehman brothers investigation in the US congress yesterday, I was curious -- why did Congress investigate the firm that the government did not rescue and now bankrupt? Why did it not investigate first the firms that got tax money, that's why they're not bankrupt yet? Why save IndyMac, Fannie and Freddie, and AIG, but not Lehman and Washington Mutual?

Regulators and politicians who chose whom to save and whom to allow to sink, whom to investigate and demonize in a congressional hearing and whom to spare from investigation and given tax money, are practicing double-standard. So I don't see the logic of trusting the same regulators and politicians or institutions to do more regulatory powers. Only big government can do such double standard.

Have no sympathy for Lehman and its top executives who were receiving millions of dollars in compensation and perks while the firm was bleeding. It's good that such firm has already collapsed. But the same corproate callousness and irresponsibility could be said of Freddie and Fannie and other firms bailed out and soon to be "rescued" by the US government.

See also:
Rule of Law 1: Entrepreneurship and Government Permits, September 16, 2008
Rule of Law 2: Property Rights and Lefts, March 02, 2009


LuboŇ° Motl said...

Complete agreement. Contracts must be honored. Greetings from Czechia.

Anonymous said...

Rule of law must mean something. Contracts must mean something. I can speak from experience that it does not always. I was in a civil law suit with Governor Tom Vilsack's (now Ag Secretary)long time friend. Vilsack
inappropriately intervened. The judge abused he judicial discretion and denied a jury trial and through the abuse of judicial discretion ignored the facts presented at the bench trial and refused to rule on the laws that were violated. Results. Dam the law, corporation documents, corporation documents and common sense.

Dixie Burkhart
Facts Don't Matter