By John W. Schoen
updated 3:00 p.m. PT, Mon., March. 16, 2009
John W. Schoen
If President Barack Obama wants to find a scapegoat for the mess at American International Group, he needs only to look east from the White House to the halls of Congress.
That's where the legislation was enacted that laid the groundwork for AIG's collapse, its subsequent multibillion-dollar bailout and even the millions of dollars in bonuses being paid to AIG executives that have so outraged Obama, members of Congress and taxpayers.
Call it the law of unintended consequences.
The controversy boiled over Monday when Obama took aim at the bonuses going to executives who oversaw the risky bets that sank the giant insurer.
"It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"
AIG has taken out $170 billion in federal funds, and federal officials overseeing the company say it is not out of the woods yet. The backlash intensified over the weekend when the company, now 80 percent owned by U.S. taxpayers, said it was locked into paying $165 million in bonuses to key executives.
Members of Congress Monday echoed voter outrage at the big rewards being reaped by the architects of the financial flameout of one of the world's biggest insurance companies.
“We've asked the car dealers to restructure their organization, including workers restructuring their union contracts in order to save the auto industry,” said Sen. John Cornyn, R-Texas. “We ought to be asking the leadership at AIG to make the same kind of concessions to save AIG and the taxpayers' dollars.”
But experts in executive compensation say those contracts, written before the government stepped in to bail out AIG, would be difficult, if not impossible, to break. Challenging those contracts might end up costing AIG and the government even more money including legal fees, according to attorney Aliza Herzberg of Olshan Grundman Frome in New York.
“These are contracts from a year and a half ago," she said. "We have to live by them.”
The employment contracts became so complex, with pay packages consisting of stock options and other forms of deferred compensation, largely because of Congress' attempts to control soaring executive salaries. In 1993, Congress limited the tax deduction companies could take for cash payments to $1 million. The result was a cottage industry of lawyers, consultants and advisors who structure even bigger pay packages with creative legal strategies that now make the AIG bonuses difficult to rescind.
“Before Congress got involved we used to give them a $2 million salary and a corporate jet,” said Lynn Stout, a UCLA professor who specializes in corporate governance and securities regulation. “And it was much cheaper and safer.”
Congress played an even bigger role in the mess that forced the government into a taxpayer-funded bailout of AIG to stem a potential global financial meltdown.
CONTINUED : $62 trillion missed opportunity