These bonuses were a contractual obligation. If the problem had been allowed to run its course, a bankruptcy judge would have determined how to discharge all of the company's debts.
But that time is past. The US government has elected to keep AIG afloat, and to do so without allowing the company to reorganize its debts. Thus, it still owes 100% of its debts to all of its creditors.
The company cannot now go picking and choosing which debts to pay. To do so would do far more damage than failing to retain the executives in question now. While the US government has been trying to shore up confidence in AIG, an action like this would cause ALL of its creditors to question whether the debts that it is owed would be the next to be ignored. Thus, failing to pay these debts would set expectations that future debt might not be paid. This risk would at best increase all costs to AIG, and at worst completely prevent it from doing any business in the future when they can't be trusted.
In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided.
"In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided."
I think this is true of the payments made to AIG's counterparties, not so much of the bonuses being paid to the financial services division. Pretty much everyone on Wall Street's compensation has gotten hosed so I don't think trading partners are going to flinch about seeing employees go bonus-less.
There's a bit of irony in me saying this (think about who I might be doing technology for[and it's not AIG] that would make my words the most ironic...), but bonuses only work as a positive motivator up to a point. Past that, you end up getting people doing the wrong things for the wrong reasons--there were a few good HN posts about this concerning case studies conducted on bonuses and why companies should pay above the market average but not be at the top percentile.
I was under the impression that "bonuses" are discretionary, and not contractual.
Every company I've worked with has a baseline bonus based on how the company did and (sometimes) a spiff on top of that due to individual contributions and/or your team's contributions.
There seems to be little debate over the facts, including that these were, in fact contractual. The debate is only over whether AIG is somehow not bound by those contracts, and if not, whether they should break them. See, for example, http://roomfordebate.blogs.nytimes.com/2009/03/17/when-bonus...
FWIW, I have a small contractual bonus in my own compensation (not from AIG)
I would imagine that any employment contract worth its salt would subject to immediate termination any committing fraud. But you and I have no idea about these particular contracts, do we?
But that's really academic, because the AIG employees did not commit fraud.
And we're talking about investment bankers. Their job is to take calculated risks. These are very finely calculated. In the case of AIG, the problem isn't that their gambles went south. The problem is that somebody changed the rules on them, so the paper value of the investments (said values not having been realized yet) was changed, changing the calculations going into AIG's credit rating and thus making lenders wary.
you are correct that I know nothing of what's in their contracts. and you know nothing of if they committed fraud...or do you?
The real problem is AIG is an INSURANCE COMPANY, not an INVESTMENT BANK. At least the part that the gov is bailing out is about its insurances. An insurance company is only supposed to invest its moneys in very low risk investments. The reason is they are supposed to constantly monitor the costs of covering their underwriting and keep enough funds on hand to cover their bets. They have not done so. This is the root of the problem.
Is it fraud for an insurance company to not have enough to cover its underwritings and to continue to take on more? I think so...and that's the core of this problem.
This is why all of the recent fury against bonuses is so mis-guided. People literally don't understand what they're angry about.
The irony is that bonuses are how people everywhere should get paid. Can you imagine how much better our schools would be if there was a mechanism to pay good teachers more than bad teachers?
The irony is that these "bonuses" aren't meritocratic like your good teacher/bad teacher scenario. These are retention bonuses contractually agreed to by AIG and their employees.
Last year, back when AIG knew things were hitting the fan, they decided to offer a carrot to employees who would stay through the storm. Turns out, AIG is "too big to fail" so those that decided to stay with AIG through our current adventure appear to be getting rewarded for incompetence.
That a 'bonus' is discretionary or conditional is the common usage -- but the condition set in these contracts, staying through certain dates (even if the recipients are not there now) was apparently met.
It also seems the case that in certain fields, 'bonus' is essentially a part of contractually or traditionally guaranteed compensation. They've stretched the term -- but that's become the new meaning, in that field, for years if not decades. So a lot of this hullabaloo is caused by terminological confusion.
But that time is past. The US government has elected to keep AIG afloat, and to do so without allowing the company to reorganize its debts. Thus, it still owes 100% of its debts to all of its creditors.
The company cannot now go picking and choosing which debts to pay. To do so would do far more damage than failing to retain the executives in question now. While the US government has been trying to shore up confidence in AIG, an action like this would cause ALL of its creditors to question whether the debts that it is owed would be the next to be ignored. Thus, failing to pay these debts would set expectations that future debt might not be paid. This risk would at best increase all costs to AIG, and at worst completely prevent it from doing any business in the future when they can't be trusted.
In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided.