In Practice March 22, 2009
IMHO: Business as Usual
Like many, perhaps most, Americans I have viewed the unraveling “Bonusgate″ scandal with a mixture of disgust and incredulity.
Reported by Nevin E. Adams
Essentially, the federal government, operating in crisis mode to restore the financial system and markets to “normal” – extracted through a kind of political blackmail (“you have to approve this now without questioning, or this will be on your hands”) enormous sums of money that they handed over, largely without condition, to allow certain firms to stay in business. Those firms, right or wrong, are still in business – and, much to the consternation of the American public, have then proceeded to conduct business as usual. That, of course, means honoring their financial obligations and – like it or not – that includes those now-infamous bonuses.
Of course, the American public is struggling to understand how a company that is so badly off it has to take on millions, and in AIG’s case, billions, of taxpayer dollars, can afford such apparent “largesse”. And, of course, most cannot even begin to get their intellectual arms around the enormous sums of money these companies are handing out (the largest bonus was $6.4 million, six employees got bonuses of more than $4 million, and 66 got bonuses of more than $1 million each of the $165 million, though the Connecticut Attorney General indicated over the weekend that those amounts could be understated).
Now, at least in theory, those bonuses were earned – and paid based upon objective, job-related criteria (and if they weren’t, that will surely come to light in short order, considering the number of regulators currently scouring the contracts). It may well be that they acknowledge extraordinary efforts and performance under conditions of extreme distress. None of that will matter to the average guy on the street, any more than it mattered to the US House of Representatives which last week passed a retroactive, targeted, and admittedly (even proudly) punitive tax on the individuals who received those bonuses.
As irritating as that situation is, however, what’s more concerning IMHO is how easily it could have been avoided. We know now, for example, that the agreement between the federal government and AIG had a provision in it that could have blocked the bonuses – but that changes were inserted – and inserted deliberately – at the last minute to allow them (1). We know that, of course, only after being treated to the spectacle of a U.S. Senator first expressing outrage that someone had inserted that language into his amendment – and then, less than 24 hours later, getting to watch that Senator admitting that he was the inserting “culprit” (albeit allegedly at the behest of the Administration – which, of course, denies such wrangling).
Ultimately, I suspect that tax won’t hold water in court – assuming it makes it into law, and that any of the bonus recipients are willing to contest the issue (once the current crisis is past, I suspect some would). I also suspect that the American taxpayer will be “stuck” with all of the other bonuses and expenditures paid by these firms; they’re legal obligations, after all, and in the absence of the intervention of a bankruptcy event or conditions imposed by the federal government along with those TARP infusions, not paying those bonuses is probably no different legally than not paying their electric bill. It is, it seems, “business as usual.”
Those implications notwithstanding, advisers have a vested interest in how this current imbroglio plays out. Many work for the firms drawing fire for these practices, of course, and even those who don’t, work in an industry tainted, at least for the moment, by its associations with the markets and those who sought to profit from the trust of others. Not to mention that the financial futures of many plan participants (and advisers) still rest on the futures of these institutions.
The $165 million is a lot of money, but a mere drop-in-the-bucket compared with the BILLIONS already promised to AIG and other firms – and as cathartic as it may be for some to watch the “fat cats” getting their comeuppance, the ultimate consequence of scrambling to close the barn door after the cow has already been loosed is likely less confidence in our financial services system, not more – and that will doubtless lead some to think that the solution is more intervention, not less – and that will, based on every historical precedent of which I am aware, retard, rather than accelerate the process of economic recovery.
It should be of no small concern that lawmakers would be willing to rush not just to judgment, but to a “solution” to the current situation with so little appreciation for its origins or implications. To attempt to dramatically, and radically redress a situation that, IMHO, could have been avoided with a modest amount of contemplation and thoughtful evaluation. The kind of contemplation and thoughtful evaluation one might reasonably expect to come naturally with the expenditure of billions and billions of taxpayer dollars, as a matter of normal business. The kind of thoughtful evaluation and contemplation we should be able to expect from those we elect to represent our interests and to guard the public trust as a customary means of conducting the people’s business – and that we should now demand in times that are anything but mundane or commonplace.
Because, IMHO, we’ll never get back to normal by simply conducting business as usual.
(1) Editor’s Note: The provision said the new limits “shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009. . .”