Cuomo Blasts Big AIG Payouts –

New York Attorney General Andrew Cuomo said Tuesday that American International Group Inc. granted retention bonuses of $1 million or more to 73 people in its AIG Financial Products subsidiary, including 11 persons who no longer work at the company.

In a letter to House Financial Services Committee Chairman Barney Frank on Tuesday, Mr. Cuomo said the top 10 bonus recipients combined received $42 million, with the top recipient getting more than $6.4 million.

Meanwhile, House and Senate Democrats were crafting separate bills to tax all or most of the big bonuses awarded by companies that were rescued by taxpayer money. “Recipients of these bonuses will not be able to keep all of their money,” declared Senate Majority Leader Harry Reid of Nevada.

“If you don’t return it on your own, we will do it for you,” added Sen. Charles Schumer (D., N.Y.).

Rep. Frank told reporters in Washington that the U.S. government, which now controls an 80% equity stake in AIG, should assert its ownership of the insurer in order to block the retention payments. He said the government had a better chance of prevailing in court if it acted as an owner, rather than as a regulator intervening in the private sector.

Mr. Cuomo has blamed the unit for the insurer’s near collapse last year. The attorney general said 11 persons who have left the company received retention bonuses of $1 million or more, with one person getting more than $4.6 million. Mr. Cuomo didn’t release the names of the recipients.

AIG has said it is contractually obligated to pay the bonuses and will make efforts to reduce the retention payments by at least 30% in 2009. In his letter Tuesday, Mr. Cuomo said AIG was able to bargain with some of its financial-products employees, with those employees taking salaries of $1 in 2009 in exchange for their retention bonus packages.

Yes, the mess that AIG has gotten itself into, involving over $170 billion in taxpayer money is outrageous. Yes, the fact that any of the people lined up to receive these bonuses are not voluntarily turning down the money is outrageous.

But the fact does remain that AIG is following through on legally binding contracts; and personally, I think it would be more outrageous for the US government to force a company to renege on its contracts, and the lawsuits that the contractees would bring against AIG and the US government in turn would likely cost the taxpayers much more in the long run.

I like the idea of taxing the recipients to clawback the bonuses (a 90% excise tax rate is one of the numbers being bandied about), but I don’t know how a law can be formulated to retroactively make payments taxable to that extent.

The outrage that everyone is feeling is justifiable, but the reactions are misplaced. AIG should proactively be renegotiating its contracts with the employees involved, perhaps to exchange cash bonuses for equity-based bonuses, to vest on profitability after the Treasury has been repaid.

Congress and the Treasury should be proactively designing legislation to prevent these situations from arising again in the future, instead of punishing a company further for abiding by its contracts.

There are a lot of reasons why people should be mad at AIG and its employees. Following though on contractual obligations should not be one of them.