The Danger with AIG

The first mistake was using public—taxpayer—money to prop up a failing business. This by itself is a reward for incompetence. The system already has a solution--Chapter 11 bankruptcy. Under protection of the courts, contracts large and small get reexamined and rewritten.

What is silly is this flap over $165 million in bonuses when the government has written checks to AIG for $165 billion. It seems the world has caught fire over 0.1% of the bailout money. The federal government has known about this payment structure and schedule since last year.

Now the fight is on to take the bonuses back. Politicians have threatened to do it by breaking the compensation contracts or narrowly taxing AIG employees. Their outrage holds no credibility. It is a political stunt to prop up falling poll numbers with populist indignation. Survey numbers released this week by Quinnipiac University shows Senator Christopher Dodd (D-Conn.) falling into a virtual dead heat with a challenger that 53% of respondents haven’t really heard of. Congress gave implicit approval for these bonuses in the language of the stimulus bill. No one seems to remember how that line got in there, but then again, not one of them read the bill before they voted on it.

What I fear we are seeing is smoke and mirrors in an attempt to distract us from more important issues and to redirect public outrage. We have unprincipled people in positions of leadership. No, they have one principle, and that is to maintain and consolidate power. The electorate is being disenfranchised by those that claim to represent them.

Any “solution” sets a dangerous precedent for contract law, taxation, or both. I do not like the idea of the employees of AIG’s financial products division getting any reward for failure, but it is far better than a government that can break promises on a whim or demand punitive tax payments. You should be rightly cynical of anyone now calling for action that undermines the rule of law—be they from the left, right, or center. If it can happen to an AIG employee—it can happen to you.