Tuesday, March 17, 2009

The Case For Bonuses?

The other side of the story, from Andrew Sorkin in today's Times Business section. Pretty much everyone seems to be outraged at the AIG bonuses that were announced recently and intuitively that outrage is well placed: why should taxpayers be funding huge bonuses for companies that got bailout money. Sorkin suggests that abrogating these bonus contracts might do more damage to the fundamentals of the economy than we can imagine because it will lead to a fear that the government can step in and cancel any existing contracts. Further, he argues that there could be a strong incentive to keep current AIG staff in place because they are the ones that got us into this mess and are therefore best equipped to find a way out. Plus, if they were to depart AIG they would be in the best position to figure out a way to make money off AIG's failure and the notion of a bunch of smart, talented finance-types out there who have an insider understanding of AIG's underpinnings and a financial desire to see it fail is a frightening prospect. Finally, he questions the notion that the current recession and poor job market means that these people have nowhere to go and therefore there is no need to give them extra financial incentive to stay. He correctly observes that in all times, good or bad, there is always a demand for talent and the most talented among them will be picked up elsewhere even now if they are let go.

That being said, there needs to be some sort of reasonable limit on what types and the amount of bonuses that can be given, a condition that was wrongly ommitted from the bailout rules. Since it appears like it might be too late to legally get money back now, Ambinder's idea from yesterday that was co-opted by Christopher Dodd today, to heavily tax bonuses that are taken from TARP dollars might be an efficient way to regulate the size of these bonuses after the fact. My intuition tells me that it will be extremely difficult to get this money back and that taxes might be the only way to make this work.

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