AIG Bonuses

I am scared. I have lost my job because of the economic/financial crisis and I am concerned about my future, but this is not the reason why I am scared. I am scared that the federal government is once again attempting to destroy the very principle that has made this country great and that will ensure its recovery and continued greatness: the rule of law. Congress, and even the President in this case, seem to be driven by political populism and sound bites, rather than a sober assessment of the facts and the law.

Personally, I find the AIG bonuses extremely distasteful, especially since the majority of the money went to the Financial Products division that created this mess. Then again, a lot of individuals who were part of creating this mess have received compensation for their poor judgement. More than anything else, though, the political and media furor over the compensation AIG paid to its employees has been driven by the fact that they are labelled "bonuses". Had these funds simply been paid out as "base salary", I highly doubt anyone would be crying bloody murder. This is the very reason why the government should get out of the business of regulating executive or any other kind of compensation; companies will always find a way to attract and retain individuals they deem necessary. In any case, these are private contracts and the government has no business placing limitations on them. Certainly, with the entities that have received federal support, the government has the same rights as any creditor, guarantor, or shareholder, to attach contingencies to its support or to force changes through the company's board, but changing contracts ex post facto is simply unjust. The government should, instead, focus on oversight of the companies it already owns (AIG, Freddie Mac, and Fannie Mae) and enforcing and enhancing shareholder protections and transparency laws. Let's get past this "bonus" is a dirty word nonsense and focus on the real issue.

With respect to AIG, I have major legal problems with the proposed bills to "tax" the bonuses in question. I am not a lawyer, but as an educated citizen who has read the Constitution, I am shocked that noted constitutional law scholar Laurence Tribe at Harvard has come to the conclusion that "taxing" AIG bonuses is legal. Far be it for little me to put my plain language reading of the Constitution and basic legal analysis against his years of scholarship, but I must try because I am scared.

The biggest issue with taxing AIG bonuses is the question of whether any such bill would be a considered a Bill of Attainder. In the case SBC Communications, Inc. v. FCC, Judge Jolly of the Fifth Circuit applied a two-pronged attainder test: (1) had the legislature acted with specificity and (2) had the legislature imposed punishment. While the court did not address the question of specificity, in my opinion even targeting all employees of firms receiving bailout money is clearly targeting punishment of a specific class of individuals. Regarding the punishment question, Judge Jolly laid out a three-pronged test: “(1) whether the challenged statute falls within the historical meaning of legislative punishment, (2) whether the statute, ‘viewed in terms of the type and severity of the burdens imposed, reasonably can be said to further nonpunitive legislative purposes’; and (3) whether the legislative record ‘evinces a congressional intent to punish.’” First, I argue that a special 90%+ "tax" is actually a fine enforced using the tax code, and a fine does fall within the historical meaning of legislative punishment. Congress will argue it is in fact imposing a tax, but this is not like any tax that I have heard of: only applying to specific, identifiable individuals and only applying to income received in a single circumstance. The government can call it a tax, but common sense tells us it is fine. Second, this law doesn't serve any purpose except to punish AIG employees; if there is a legitimate purpose stemming from AIG having received federal money, then that opens the door for the Congress to fine all employees of any company receiving any federal money or, in fact, employees of any federal agency on any portion of income or wealth whenever it chooses and to whatever extent it chooses. To be clear, the bonuses in question will already be subject to the normal income tax liabilities of the recipients, so the "taxation" of any amount above that is, in fact, a levy on wealth. As the majority owner of AIG, the federal government has broad powers over that company, but its employees committed no wrong in this case and should not be fined. Third, there is a definite record of Congressional intent to punish; suggestions that employees commit suicide are evidence enough.

As a taxpayer, I don’t want my money going to pay for the AIG bonuses, but I am much more fearful of the government abrogating private contracts and passing bills of attainder. The damage to liberty and economic freedom in this country would doom it. In any case, AIG’s employees are legally blameless in their receipt of bonuses. They negotiated contracts, which their ultimate employer, the federal government, approved of, if not directly, then at least tacitly. Like any other acquirer, the government could have renegotiated the contracts upon its purchase of 80% of AIG. Because it did not, it assumed those bonus payments as liabilities when it took over. I know this is distasteful to many people, including myself, but again, having the government breaking private contracts and punitively punishing individuals is even more distasteful. The government cannot play by different rules; if rule of law breaks down in this country, we are no better than Russia or China.

From a broader perspective, I think the government has been completely inept in managing these bailouts. We already have three major government-owned zombie-like entities - AIG, Freddie Mac, and Fannie Mae, and we are on the verge of creating another one, Citigroup. The government should spend its time and political capital to come up with a clear resolution process to wind down these firms: (1) put all the toxic assets into a sufficiently capitalized subsidiary that will restructure the assets and sell them off when the markets recover, (2) sell off all separable pieces of the company to private buyers to raise cash, and (3) either sell whatever viable entity remains back to the public market or liquidate the business and dividend the remaining cash to payback taxpayers as much as possible. Instead, the government seems to be happy owning 80% of these entities yet not taking an active role in their day-to-day management, so much so that Treasury claims to not even have known about the AIG bonuses until they were paid. The truth is, the government, or at least the Federal Reserve, did know about the bonuses, but they still allowed them to be paid because they know they are in the wrong, legally, and if they did not allow the payments, AIG's employees would have sued AIG in court, and would have likely won.

I am still confident that the legal system in this country will strike down any potential Congressional excess, and I hope that President Obama is smart enough to not let any bill of attainder "taxing" AIG bonuses to even reach his desk. If somehow the "taxation" of AIG bonuses goes ahead, don't be surprised if the federal government "taxes" your bank account at 90% because you are part of a broad class of individuals, that only includes the employees that work at your company, by claiming a "legislative purpose" of needing to raise money for its next "fiscal stimulus" program. After all, it's your fault that your company got into trouble because you worked there and you should [commit suicide] [be punished] be taxed. Yes, I am scared, and you should be scared too.