Misplaced Anger on AIG: Yet Another Example of why Congress Should Not be Running American Businesses.

COMMENTARY Government Regulation

Misplaced Anger on AIG: Yet Another Example of why Congress Should Not be Running American Businesses.

Mar 27, 2009 3 min read
Hans A. von Spakovsky

Election Law Reform Initiative Manager, Senior Legal Fellow

Hans von Spakovsky is an authority on a wide range of issues—including civil rights, civil justice, the First Amendment, immigration.

The proposed AIG bill, which would confiscate the bonuses and compensation of company employees, offers yet another example of why Congress should not be running American businesses. It also illustrates that many U.S. lawmakers lack a basic understanding of the way our economy works, how businesses sell their goods and services to make a profit, and how individuals make decisions about their own careers.

The controversial legislation would impose confiscatory tax rates on employees of all companies -- AIG and others -- that received funding from the Troubled Asset Relief Program (TARP). It would levy a 90 percent tax on any compensation beyond an employee's base salary of $125,000; that includes retention and performance pay and even deferred compensation.

By coincidence, I have personal experience with the issues at play in this debate. In the mid-1990s, I was the in-house counsel for the U.S. division of a large Canadian insurance company. It was one of the oldest and most profitable insurance companies in Canada. But the executives running the company were dazzled by the idea that they should be managing a financial-services company instead of a boring and staid insurance firm. So they started a trust company in Canada that eventually got into such major financial difficulties (because of bad commercial-mortgage investments) that the entire company was pulled into receivership -- including the very profitable U.S. insurance division. At the time, it was the largest insurance failure in North American history.

This should sound familiar to everyone who has been following AIG's travails. For more than a year before my company went into receivership, employees knew about its worsening financial condition. And as anyone but a member of Congress would have expected, key employees started leaving. It was much easier, and much smarter, to grab a job with another company while still working and receiving a paycheck. The other option was to continue working for a failing company and run the risk that you would suddenly lose your job without notice when the company shut down. That would leave you looking for a new job without any income.

When the firm hired by the receiver to run my employer came in, it had no choice but to offer retention and performance pay to keep the remaining employees -- people who were needed to run the company. I was one of those employees. Without the incentive of bonuses and retention pay, why would I have stayed at a failed company? I wouldn't have stayed -- and neither would any of the other employees who were rehired by the receiver. Retaining those employees was important because they were the ones (like me) who knew the company, knew its products, knew its customers, and knew its problems.

Our government has loaned or bought equity interests worth more than $150 billion in AIG. We have been assured that this money will stabilize the company, giving it the ability to survive and eventually pay back the American taxpayer. But how do lawmakers expect AIG to become profitable again if the company cannot use bonus payments to retain its top talent, the people who are responsible for selling its services and products?

The earnings of an insurance company such as AIG are fueled by the firm's ability to convince companies in a wide variety of industries to renew their policies and purchase new products. The same is true of the banks that have received TARP funds -- they are profitable only if their employees are out convincing the public to come to their particular banks for their financial services and products.

Employees have an incentive to stay and sell their company's products only when they know that they will be compensated and offered the possibility of career advancement. If they know that they will not get paid, and will instead be viciously condemned, embarrassed, and even threatened for working for their company, why would they stay?

If Congress wants to drive out all the AIG employees who have the experience and knowledge necessary to help the company recover, it has come up with a good plan. By threatening to confiscate $165 million in AIG bonuses, Congress is apparently trying to guarantee that U.S. taxpayers never recover their $150 billion investment.

It is understandable that Americans are outraged by the use of public funds to pay executives at a failing institution. But they should be less outraged about the narrow issue of bonuses and more outraged about the fact that public money is being spent to prop up failing institutions in the first place. The AIG bonuses represent contractually defined deferred compensation. They are providing incentives for top company officials to continue the work that is necessary for taxpayers to see a return on at least some of the money they poured into AIG. There is no receiver to determine whether the bonuses were justified.

There is an old proverb about a battle being lost for want of a nail. In this case, our battle to get back $150 billion of taxpayer dollars may be lost because of misplaced anger over one-tenth of one percent of that amount. The mob mentality currently gripping Washington is irresponsible, unreasonable, and short-sighted.

Hans A. von Spakovsky is a visiting legal scholar at the Heritage Foundation. He is also a former commissioner on the Federal Election Commission and counsel to the assistant attorney general for civil rights at the Department of Justice.

First Appeared in the National Review Online