The Divagator: bonus edition

No one can quite shut up about the $165 million in bonus compensation that certain AIG employees are raking in, so I thought I would add my two cents.

When Charlie Rangel (D-NY) and Chuck Grassley (R-IA) agree on something, it’s probably either a really good idea…or a really bad one. So it is with the AIG bonuses. Senator Grassley suggested that AIG execs “resign or go commit suicide.” Congressman Rangel thinks the fat cats “have gotten away with murder in what they’ve done to our communities.”

The result of this bipartisan anger? A uniformly rotten piece of legislation designed to address the tax status of the bonuses in the financial industry, but will likely have unintended consequences far beyond TARP, AIG, and Wall Street.

Predictably, the blogs and op-ed pages of The Wall Street Journal, The Economist, et. al. had nary a kind thing to say about the legislation, citing an “increasingly hysterical” Congress’ opportunism. “Rank populism.” “Rabble-rousing.”

And yet…

These bonuses are an outrage, particularly when they are being paid to folks who worked in the very unit that got AIG into so much trouble. The news organs of free-market capitalism would do well not to let this simple fact get lost in their outrage over the legislation, no matter how bad it is. People are justifiably angry about the AIG situation, and to talk about “retaining talent” is not helpful in dispelling that anger. It strikes Main Street as a markedly stupid premise in the first place, since these are the very people who screwed up.

Many folks are left, then, with not much of a choice in the affair: support out-of-control populism (= stupid) or defend the indefensible financial industry (= stupid).

Edward Hadas, writing over at Breakingviews.com, has struck upon an important idea in his thinking about Bonusgate – moral suasion. As he has it,

“While lawmakers and citizens fulminate, some bonus-recipients are discovering their consciences. Bonuses will be renounced by 15 of the 20 financiers at the centre of the US storm, the top employees at the financial products operation of American International Group. They join Swiss and French peers in giving up contractually guaranteed income. The head of Dutch financial group ING has made a “moral appeal” for similar asceticism from its top 1200 earners.

"The threat of punitive legislation, not to mention death threats, has certainly helped stimulate these behavioural improvements. Such suasion may be rough and tough, but it is better than actually codifying revenge.”

Too bad the estimable intelligence gathered in Washington, DC didn’t realize that suasion can be more powerful than law. My first sense of the bonus affair was simply not to pay the money (treble damages be damned!). My thinking was to force the AIG bonus recipients to sue the company if they wanted their bonuses, and for all the reasons Mr. Hadas wrote about, I somehow didn’t see that happening. But, it’s too late now…the issue has been turned into cowhide, inflated, and passed around the Capitol by self-righteous windbags, the same windbags whose lack of competence created the bonus loophole in the original AIG bailout.