That Pound of AIG Executive Flesh Won’t Pay Your Tax Bill

Grab your pitch fork!  Light your torch!  There’s a battle to be waged in the name of egalitarianism.  There are wrongs to be righted on behalf of the aggrieved proletariat.

No weapon is off limits to this populist mob of angry legislators, outraged officials, indignant journalists and seething private citizens. Punitive taxation, public shaming, intimidation, and even threats of physical violence are all fair play if the greedy rich at AIG are to get their just deserts.

Among the recent threats against AIG executives and their families:

Get the bonus, we will get your children.”

“I would be very careful when I went out side. This is just a warning. If I were ya’ll I would be real afraid.”

“Publish the list of those yankee scumbags so some good old southern boys can take care of them.”

“We will hunt you down. Every last penny. We will hunt your children and we will hunt your conscience. We will do whatever we can to get those people getting the bonuses.  Give back the money or kill yourselves.”

“The Revolution is coming. The family members of your executives are not safe. Your blood will run through the streets in the coming months.”

New York Attorney General Andrew Cuomo attempted to satisfy an increasingly bloodthirsty public by threatening to disclose the names of AIG bonus recipients if they did not return the payments.  And back in Washington, Rep. Barney Frank demanded the names of recipients and refused to keep them confidential in response to safety concerns.

To further address public cries for the heads of AIG executives, the House easily passed a bill to impose a 90 percent tax on executive bonuses at bailed out companies.  The legislation garnered support from most House Democrats and nearly half of Republicans, though it appears to be dead in the Senate.

Even President Obama wondered how AIG executives could “justify this outrage to the taxpayers” and with utter disregard for the sanctity of private contracts, asked Treasury Secretary Timothy Geithner to “pursue every legal avenue to block these bonuses and make the American taxpayers whole.”

One problem: block the bonuses and you lose the talent.

Why should you care if AIG suffers a blow to its executive workforce?

Forget your outrage that taxpayers are underwriting these bonuses and think for a minute.  Panicky legislators tossed barrels of cash at AIG many months ago and our only hope of getting those billions back is to ensure the company is skillfully dismantled by knowledgeable executives. If AIG assets aren’t sold off in an orderly, uninterrupted manner, your government’s investment will become your tax liability.

I know it hurts to say it, but keeping the remaining AIG executives at the company is in your best interest.

Many AIG executives worked for $1 salaries last year with the expectation that they would be compensated with bonuses if they remained at the beleaguered company.  This manner of structuring compensation helped AIG retain qualified employees to dismantle the company.  What we’re calling retention bonuses are essentially deferred salary payments postponed to ensure talent sticks around.

Even if you had the specialized knowledge, would you work for just a dollar a year?  Would you pass up a stable, high paying job at a solvent company out of sheer loyalty to AIG?  And where else should AIG management have looked to find expertise on dissolving these complex financial instruments and assets?  Could we spare the time for training and learning curves?

Unfortunately, the threats have worked and the strong-arming has paid off.   Jake DeSantis, an executive Vice President at AIG Financial Products, published his letter of resignation in the New York Times this week:

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

Like most current AIG executives, DeSantis was not responsible for the company’s massive credit default swap losses, but that hasn’t insulated him from the witch hunt conducted by Barney Frank, Andrew Cuomo, and others.  Rather than remain at AIG out of fear, he has elected to leave on his own terms.

News of two more AIG resignations was announced Thursday.   Mauro Gabriel, president and CEO of Banque AIG, and Jim Shephard, deputy CEO are leaving due to the hostile business environment at AIG.  There is some concern that a failure to find replacements could result in hundreds of billions of dollars in derivative contract defaults.

If that happens, good luck attracting qualified talent to help wrap up this AIG mess.

Will the rabble-rousing have been worth it then?  Will that pound of executive flesh fill the coffers at Treasury?  No, but that won’t stop the public hunger for class warfare from continuing to eclipse law, ethics, and even self-interest.


13 Responses to “That Pound of AIG Executive Flesh Won’t Pay Your Tax Bill”

  1. Eclectic Radical on March 27th, 2009 1:42 pm

    Despite the fact that I agree with you about the current legislative attempt to take the bonuses, I’m not sure I agree with your argument. I don’t have a lot of sympathy for the executives at AIG and I’m not concerned about the ‘retention of talent’ at all. If the talent was worth retaining the company would not have failed. I suppose that is harshly capitalist for someone as lefty as me, but I believe the logic is sound. If the talent were worth retaining, the company would not have failed.

    My concern is the tax bill currently being discusses in Congress is unconstitutional. Unless the Paulson bailout was written a lot more strictly than I believe it to have been written, in a manner allowing for the money to have been taken back, taking the bonus money from executives just at AIG is a bill of attainder. It’s also a retroactive law, also unconstitutional.

    Because I am a lefty, I’m all in favor of rewriting the tax code to increase the marginal rates on corporate executive bonuses… but that would be all executive bonuses at all companies, not one company we happen to be angry at.

  2. Jenn Q. Public on March 27th, 2009 3:04 pm

    I kind of figured you wouldn’t have sympathy for the executives, but I’m with you 100 percent on the bill of attainder. Unfortunately, respect for the Constitution is hard to come by in Washington. I chose a different angle for this post because 1)the retroactive taxation bill seems to be dead, 2)the mafia-style threats have coerced the return of many bonuses, and 3)the constitutional arguments have been made ad nauseum elsewhere and I have nothing substantial to add.

    However, I disagree with your assessment that if execs were worth retaining, they would have kept the company from failing. Take Jake DeSantis for example. He wasn’t involved with the credit default swap transactions that sunk AIG – those people are long gone – but he has enough familiarity with the company to help sell off the assets to pay back Treasury. If AIG had to go out and hire new executive employees, not only would there be a costly learning curve, but the new talent would probably demand even more compensation.

    I opposed the bailout, but now that we have billions of dollars riding on it, I want it to succeed. My argument is that the likelihood of success diminishes each time AIG loses another employee who understands the mechanics, organization, and assets of the company.

    A lot of Americans would argue that the work being done doesn’t warrant seven figure bonuses, and that may be true. But allowing class envy or hatred of the rich or bailout bitterness to interfere with dismantling AIG is petty and self-defeating. Everyone will pay higher taxes if the bailout fails.

    Regarding the tax code, because I’m not a lefty, the only benefit I see in increasing marginal tax rates on executive compensation is that maybe government jobs would start to look more attractive and we could actually get the vacant slots at Treasury filled.

  3. Eclectic Radical on March 27th, 2009 3:39 pm

    Well, I didn’t expect you to agree with me on the tax code and I did expect you to agree with me on the bill of attainder, so we’re decent so far. I mentioned it despite the retroactive tax bill being dead because any bill to recover bonuses (which would be required to enforce any threats) would be both retroactive and a bill of attainder unless the Paulson bailout is written a lot more strictly than I think both you and I suspect it is actually written.

    ‘Not being involved’ with the credit swap deals, however, does not mean that executives were not part of the problem. The problem we have in the financial markets is a total breakdown of rational thinking throughout the culture. The people making these decisions have too great a sense of the importance of what they are doing, and not enough sense of the purpose of what they are doing. The job of the financial markets is to redistribute capital to purchase tangible assets or to finance business operations. Risky speculation that does not serve this role is only a threat to the economy, and the bubbles they cause are not genuine economic growth. They do not create new wealth or jobs, and the risk they create is not equal to the tax income the government receives from the brokers.

    Frankly, I think AIG should be allowed to fail. The reason it was being bailed out was that it was committed to insuring so many loans and doing business with so many different banks, that it couldn’t be allowed to fail. Except we are bailing the banks out. So if we’re bailing the banks out, what reason is there to save AIG?

    I would not have been against a smarter bailout, but I was very much in agreement with the idea that any Wall Street bailout needed to have strict controls to make the people getting money accountable to the tax payers for the money. It bothers me that Geithner’s economics does not seem to be very far from Paulson’s economics.

    I agree with you that letting emotions interfere with the logical process of fixing the mess that exists right now is totally counterproductive. I am in favor of higher marginal rates across the board because I believe they have been cut far too much since Reagan started doing it in the 1980s. I believe bonuses should be treated like any other income, that loopholes create even higher rates down the road. One has to build the economy from the foundation to the roof, building from the roof down has failed us.

    I would be strongly against putting anyone from Wall Street in Treasury. At all. We need actual economists, not businesspeople. If anything has been proven by the bubbles and busts leading up to this crisis it is that corporate executives are not economists and do not actually understand what they do to the degree necessary to regulate it.

  4. Jenn Q. Public on March 29th, 2009 12:24 am

    Of course AIG should be allowed to fail – no argument there – and you and I both knew it was a load of crap when Treasury first put AIG on the dole without reasonable oversight. I’m happy to see them go down (though not in a crazed populist kind of way), I just don’t want them to take billions in bailout money with them when they go.

    If extreme care isn’t taken in terminating outstanding trades, the risk to taxpayers would be even more mind boggling than it is right now, and that’s untenable. If there are people other than current AIG execs able to handle these transactions and willing to work for peanuts, let them step forward. If not, as distasteful as it might be, let’s pay these people their contractually obligated bonuses and stop threatening and harassing them so they can finish disassembling the Financial Products unit.

    I’ve got a lot on my plate, so I’ll leave the marginal tax debate for another day, but as I’m sure you’ve guessed, I’m more of a roof to foundation girl when it comes to economics.

    Re: Wall Street types ending up in Treasury, that’s not my preference either, but I do think it would be nice if the government could attract more candidates from the same pool as Wall Street, and that includes economists and businesspeople. There are, of course, other measures the government can and should take to attract qualified candidates, not the least of which is repealing the DOMA so government agencies can compete with corporate America for all available talent.

  5. Eclectic Radical on March 29th, 2009 4:15 pm

    Repealing DOMA is something we can both agree on too. :)

    If one were dumping the old people and hiring new people, I should point out that it would not be difficult to make sure people were hired for actual salaries instead of ridiculous non-salary/all-bonus payment schemes. So they would not, logically, HAVE to work for peanuts. In my view, though I am certainly not trying to say such a law should be invoked retroactively if passed, we need to make that illegal. If it were a straight commission system, that would be one thing. But a one dollar a year salary and a high six figure bonus is a tax dodge that drives everyone’s rates up over time. It’s only possible because of the Bush administration’s tax exemptions for bonus pay and it is part of the cycle of stupidity (a cycle that includes Reagan and Clinton as much as it includes W. Bush) that led to this problem. Another reason for my lack of sympathy. They willingly entered into a tax dodge, which weakens their claims of ‘innocence.’ I’m sure one could find qualified people for a legitimate, generous pay-scale not incorporating such a tax dodge and not including non-incentive based bonuses. Particularly if the ridiculous loophole that encourages such a ridiculous payment system were closed.

    I will just say that if you try to build a house from the roof to the foundation, you fall down. Repeatedly. :)

  6. Jenn Q. Public on March 29th, 2009 9:40 pm

    Chris, what’s the tax dodge here? I was under the impression that bonus pay is taxed as ordinary income, meaning it is subject to the same payroll and income taxes as regular wages. I know that withholding is not always done at the correct marginal rate, but the recipient is still responsible for settling up with the IRS. I’m no accountant, so if you have a source explaining the dodge I’d appreciate it.

    Oh, and my use of your construction metaphor was a matter of convenience, and not an endorsement of the utility of said metaphor. :b

  7. Eclectic Radical on March 30th, 2009 4:41 am

    Said metaphor is accurate, whether convenient or not, even if you were using it for the latter and not the former. ;)

    IRC 162(m)limits a corporation’s ability to claim deductions for executive pay over a set ceiling. However, ‘performance based bonuses’ are entirely exempt. So when a corporation pays an executive a nominal salary (in this case one dollar) and gives said executive the bulk of their wages as a ‘bonus’ based on the ‘performance’ of the executive or department, the corporation can write the entire paycheck off its taxes and still pay its executives whatever it pleases. While these bonuses have to meet ‘set standards’, the law allows the company shareholders to approve those standards. Since most corporate boards either control the majority of a company’s voting stock, represent those who do, or control the proxies for the majority of a company’s voting stock, this means the standards a company’s bonuses have to meet is set by the company itself. Rather a large loophole.

    The point being that by paying their employees one dollar a year in wages and the real paycheck in bonuses, the corporation can write off the entire paycheck for every executive.

    Ergo, when someone agrees to such a payment scheme, they are willingly participating in a tax dodge.

  8. Jenn Q. Public on March 30th, 2009 4:36 pm

    Ah, I see. You’re referring to a corporate tax dodge, not a personal income tax dodge.

    At a glance, 162(m) looks like an insincere Clinton nod to the left that actually greased the wheels of the free market. The loopholes are so obvious I can’t believe his administration wasn’t aware of them.

    But I’m not a fan of using the tax code to curb executive compensation anyway. What’s next, Bruce Willis and Derek Jeter having their compensation capped? That’s too much government interference for the libertarian in me, and not enough demonstrable benefit to the public for my more centrist sensibilities.

  9. Eclectic Radical on March 30th, 2009 10:32 pm

    Yes, corporate tax, sorry for not being more clear. I wasn’t expecting you to agree with my point, I just wanted to make clear that I was making a real point and not making something up. :)

    I agree more than disagree with your evaluation of the code’s sloppiness in this area and likely with your verdict on the sincerity behind the bill. Of course, being on ‘the left’, I come to different final conclusions. :)

    I am not in favor of using the tax code to curb executive compensation either, honestly. I am simply against tax dodges by which corporations or individuals avoid paying their taxes. I believe the current system is broken and requires radical overhaul. Absent that, a marginal rate increase (which would affect corporate executives, among others) may be necessary. I am too much of a New Dealer to LIKE raising taxes in a recession/depression, but the current debt burden may be too high to avoid it.

    I would prefer to see a radical overhaul of the tax code ( but I don’t expect it to happen.

  10. Jenn Q. Public on March 31st, 2009 7:14 am

    Interesting piece on overhauling the tax code. I only had time to skim it this morning, but I agree with a lot of what you wrote, the main exception being your stance on the inheritance tax. I’d be happy to see the estate tax retired altogether, but if it remains in place, there should be safeguards against forcing the sale of property to satisfy the tax bill. I’ve seen it happen, and it’s just awful to put a family through that, especially when they’re grieving.

    I would love to see the tax code simplified, but with the unfortunate state of the economy, there’s no way Obama would support a move that would put half the IRS out of work. Not if he still hopes to “save or create” 3.5 million jobs.

  11. Eclectic Radical on March 31st, 2009 2:16 pm

    I don’t believe there is any way ANY president would support substantive (as opposed to the cosmetic hikes and cuts offered by politicians) reform of the tax system. There is too big an industry of accountants and lawyers invested in it, beyond the IRS. Not only do you have the IRS, which exists to make sure people pay their taxes, but you have a counterweight of lawyers and accountants who exist to make sure people who can afford their services don’t have to pay everything they owe. They don’t want to see tax reform that would put them out of a job either.

    This is why I stuck on ‘radical’ instead of ‘liberal.’ Because left or right, politics is a conservative business where people don’t want to rock the boat or upset the status quo. I don’t think one could get a sitting president to consider the tax reform I laid out even in the most flush time of economic prosperity.

  12. Jenn Q. Public on March 31st, 2009 4:17 pm

    I think your prediction is highly likely, but I remain hopeful that eventually (many, many years from now) voters will reach a point where they demand more from public officials.

  13. Eclectic Radical on March 31st, 2009 11:33 pm

    If I didn’t think there was a least a chance that you were right about THAT, I wouldn’t spend so much time on the internet churning out my ideas and sharing my thoughts trying to get people to think about them. :)

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