It has been recently reported that AIG has paid a significant amount of the bailout money received from the US government as bonuses to executives and trading partners.
Obama and his administration seem surprised about this and many in the media have been angered by AIG for paying the money. I believe that AIG has an obligation to uphold the contracts as long as it’s a going concern. If AIG was to go into bankruptcy then the contracts could be voided.
The US government shouldn’t have bailed them out in the first place and let them go into bankruptcy where at that point the government could have chosen to salvage the assets then without any threat of being sued over the contracts or even better other insurance agencies could have purchased the assets through bankruptcy procedings.
Again, a contract is a contract that must be upheld as long as both parties are alive. Even if AIG was purchased by another firm, the purchasing firm would need to honor the contracts as when you buy business you are not only buying the assets but the liabilities as well. I imagine this is why no one wants to buy companies like GM because they have more liabilities than assets… essentially someone would need to be paid to take GM off their hands, a very bad situation to be in.
A local example of this problem with contracts here in Burlington… when Clavelle was in office city employees were promised a certain return on their retirement funds at the peak of the market in 2000 as if it was never going to slow down or pull back. The problem is these were contracts and the city still has to honor them as bad as they may be. The schools have the same problems with their teacher’s salarly/benefits contracts.
Who is to blame? With the AIG situation, the company should be allowed to setup whatever pay/bonus structure they wish. However, they should also face the consequences when it doesn’t work out. The market was already punishing them for their mistakes and rewarding other firms that made better decisions.
However, the government got in the way and decided to reward AIG for their mistakes instead. The government, when deciding to purchase a 80% stake in AIG, should have analyzed the assets and liabilities of which they should have been made aware of this problem with the bonus contracts. If they bother to look, that was there fault and they should face the scrutiny of the tax payers. If they knew about them and were ok with it then they are an accomplice in this whole deal of wasting taxpayer money. Which is it complicity or stupidity?