The AIG bonus payments controversy began in March 2009, when it was publicly disclosed that the American International Group (AIG) insurance corporation was going to pay approximately $218 million (~$ in ) in bonus payments to employees of its financial services division.
AIG is notable for having received taxpayer bailouts and in the fourth quarter of 2008 posted a loss of $61.7 billion (~$ in ), the greatest ever for any corporation. A total loss of US$61.7 billion during the fourth quarter of 2008 is equivalent to an average loss of approximately US$670.7 million per day, US$27.9 million per hour, US$465,731 per minute, and US$7,762 per second (assuming a 92-day quarter).Beyond the $165 million in bonus payments that were announced in March 2009, the total bonuses for the financial unit is unknown; it was estimated that it could have reached $450 million and bonuses for the entire company could have reached $1.2 billion.
The event sparked widespread outrage among both Democratic and Republican politicians, and from media commentators on all sides of the political spectrum. Both the House of Representatives and the Senate adopted bills that taxed these bonuses at a very high rate, but these bills were never signed into law and were opposed by the financial sector and President Barack Obama.
In the end, some AIG employees, including 15 out of the 20 top executives of the company, paid back the bonuses they received to the company. In total, 50 million dollars in bonuses paid were returned to AIG. Following this announcement, House Majority leader Steny Hoyer concluded that the scandal did not warrant a legislative response.
Background AIG had insured the toxic financial assets that caused the subprime mortgage crisis without making rigorous risk assessments. They attracted many contracts from Real Estate investors because their investment insurance policies were cheaper than market value. With the windfalls they made during the Great Moderation, they neglected creating an insurance fund large enough to cover what they were insuring, which would have been impossible given the sums involved. Instead, they raised the salaries and bonus of the firm's executive, and paid higher dividends to its shareholders. The investment section of the firm thus became insolvent during the 2008 financial crisis.
The Federal Reserve Bank of New York bailed out AIG by providing an emergency credit liquidity facility of up to $85 billion, which were then repaid by selling off assets of the company. After assessing that a disorderly failure of AIG could worsen the current financial and economic crisis, and at the request of AIG, the Federal Reserve Bank of New York intervened. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG. Presidential candidate Barack Obama supported this bailout at the time, along with most of Congress, who adopted the Bailout Bill that enabled it.
Responses from politicians
On the wake of the scandal, President Barack Obama said, "[I]t's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" and "In the last six months, AIG has received substantial sums from the U.S. Treasury. I’ve asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."Obama Orders Treasury Chief to Try to Block A.I.G. Bonuses, The New York Times, March 16, 2009
Politicians on both sides of Congress reacted with outrage to the planned bonus payments. Senator Chuck Grassley (Republican, Iowa) said "I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide." Senator Chuck Schumer (Democrat, New York) accused AIG of "Alice in Wonderland business practices" and said "It boggles the mind." Senator Richard Shelby (Republican, Alabama) said "These people brought this on themselves. Now you're rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It's outrageous." Senator Mitch McConnell (Republican, Kentucky) echoed his comments, saying "This is an outrage." Senator Jon Tester (Democrat, Montana) said "This is ridiculous." and AIG executives "need to understand that the only reason they even have a job is because of the taxpayers." Senator Dick Durbin (Democrat, Illinois) said "I've had it." and "The fact that they continue to do it while we pour in billions of dollars is undefensible." Representative Paul Hodes (Democrat, New Hampshire) said "I think AIG now stands for arrogance, incompetence and greed."
Representative Barney Frank (Democrat, Massachusetts), Chairman of the House Financial Services Committee, said paying these bonuses would be "rewarding incompetence" and "These people may have a right to their bonuses. They don't have a right to their jobs forever." Representative Mark Kirk (Republican, Illinois) said "AIG should not be on welfare from Uncle Sam, and yet paying bonuses and transferring a considerable amount of taxpayer funds to entities overseas." Federal Reserve Chairman Ben Bernanke said "It makes me angry. I slammed the phone more than a few times on discussing AIG." Lawrence Summers, Director of the National Economic Council, said "The easy thing would be to just say, you know, ‘Off with their heads,’ and violate the contracts." Austan Goolsbee, of the Council of Economic Advisers said "I don't know why they would follow a policy that's really not sensible, is obviously going to ignite the ire of millions of people." and "You worry about that backlash."
Representative Barney Frank said "I do want to stress, this initial intervention into AIG was not part of the congressional rescue plan.", "Before we were even asked by the Bush administration to do the rescue plan, President Bush's two top economic appointees Mr. Bernanke and Mr. Paulson came to us and said--Mr. Bernanke, as head of the Federal Reserve is going to lend $85 billion (~$ in ) to AIG under a statute that dates back to 1932. They didn't ask us. They didn't solicit our opinion. They simply informed us.", and "Since then, when we have voted, we have put tough conditions on. And, in fact, this won't be happening again. The conditions are so tough that there have been articles recently in The Washington Post and The New York Times from banks complaining that we've made the conditions so tough they are going to give us our money back."
Representative Thaddeus McCotter (R-Michigan) said in a speech to Congress, "Every single Democrat in this House that voted for that bill voted to approve and protect those AIG bonuses."McCotter Slams those Protecting AIG Bonuses in Voting for Stimulus Bill, YouTube, March 20, 2009 Senator Jim Inhofe (R-Oklahoma) said that much of the blame for the bonuses should be directed at the 74 Senators who voted for the bailout, "... including now President Obama, who voted in favor of handing over an unprecedented amount of money and power to an unelected bureaucrat last August."Inhofe: Blame Washington For AIG Bonuses , KTUL, March 17, 2009
Tax on bonuses
On March 19, 2009, the House of Representatives approved, by a vote of 328 to 93, a measure to levy a 90% tax on bonuses awarded by corporations receiving more than $5 billion (~$ in ) in Treasury aid from the Troubled Asset Relief Program (TARP). The House bill affects individuals who make $250,000 (~$ in ) or more in total household income and bonuses paid or scheduled to be paid after December 31, 2008. The Senate version of the bill is similar to the House bill except it will levy a 70% tax on bonuses awarded by corporations that are receiving any amount of Treasury aid from the Troubled Asset Relief Program (TARP). The 70% tax will be paid through a 35% excise tax on the corporation and 35% tax on the receiver of the bonus.
Some commentators suggested that such a tax would run into constitutional problems, because Article 1, Section 9 of the U.S. Constitution prohibits Congress from enacting bill of attainder and ex post facto laws. However, Laurence Tribe, quoted in the blog of The Wall Street Journal, said that there were no insoluble constitutional difficulties.Would an AIG-Bonus Tax Pass Constitutional Muster?, Wall St. Journal, March 18, 2009 The New York Times quoted experts on constitutional and tax law having said it was likely the House bill could pass muster. Numerous court rulings have upheld retroactive tax provisions, particularly over short periods (The House bill applies back only to January 1, 2009). The measure is also strengthened by the fact that it does not apply to just one company or group of individuals, and does not take aim only at past bonuses paid in 2009 but also bonuses to be paid in future.House Passes Heavy Tax on Bonuses at Rescued Firms, The New York Times, March 19, 2008.
In a March 22, 2009 Wall St. Journal editorial, Jonathan Clements, a Citi employee, wrote, "... by mid-October, I will hit $250,000 in total income -- and have no incentive to earn any more income in 2009. At that point, I plan to ask Citi for an unpaid sabbatical." He also argues that some individuals have already received and spent most of their bonuses and will not be able to afford the tax.The Bonus Tax Is Just Plain Stupid: Come October I'll have no incentive to work anymore, Wall St. Journal, March 22, 2009
A March 24, 2009 CNN article said that an objection to this proposal is that private companies wouldn't feel comfortable doing business with the U.S. government if they thought the government would change the rules after the contracts have already been signed.War over AIG bonuses dies down, CNN, March 24, 2009 A March 26, 2009 Associated Press article stated, "Obama then warned the public against vilifying investors and entrepreneurs who are needed to keep the economy alive."Zeal for battle over bonuses waning in Washington, Associated Press, March 26, 2009
In response to this criticism, Senate majority leader Harry Reid's spokesperson said that "in light of the significant concerns raised by President Obama and Senate Republicans, we've decided to take a step back and discuss any possible next steps." House majority leader Steny Hoyer argued that the tax "may not be necessary" because of the repayment of bonuses. He added "I think our bill apparently had the effect of focusing their attention on that issue.... Whether or not it becomes law is another question."
In the end, no tax on TARP bonuses was ever signed into law by President Obama. The following year, Obama raised the idea of taxing TARP bonuses while campaigning for the 2010 United States elections. However, there was little chance that Congress would be inclined to adopt such a tax at that time.
Restriction on base compensation Congressman Brad Sherman introduced a bill to restrict base salaries of employees of firms who have taken $5 billion or more in the Troubled Asset Relief Program by taxing all non-bonus compensation over $500,000. It is designed to tax all compensations, including all payments that may be "re-named" bonuses to ensure that individuals and firms will not escape the bonus tax. This bill also did not make it into law.
Media commentary