Should AIG Be Forced To Withhold Bonuses?

With its insistence that $165 million in retention bonuses must be paid, American International Group, while trying to conduct business as usual, is seemingly oblivious to the fact that as the poster child for the corporate bailout generation, every step it takes to reward those who got the company into trouble in the first place undermines public support for its federal rescue and puts its long-term future in grave risk.

I realize that AIG–as well as the federal officials supervising its bailout–are being crushed between a rock and a hard place.

Legally, indications are that AIG must pay up on whatever retention bonuses it owes to members of its Financial Products unit, even though this was the division whose credit default swapping brought the company to its knees and forced Uncle Sam to come to the rescue.

But politically, this is the worst possible publicity AIG–and its federal benefactors–could receive.

With millions losing their jobs thanks in part to the financial tsunami spurred by reckless AIG derivative trading to cover those betting on securitization of subprime mortgages, the idea that the company must pay anything to retain anyone from that notorious division is truly outrageous, as federal officials from President Barack Obama on down have charged.

What if AIG needs more federal funds to stay afloat? Will the public stand for it after payment of such bonuses? What if more bailout money is needed for the broader financial sector, or the sinking auto industry? Will Congress be able to authorize more funds, given the public outcry?

Of course, everyone insists, what choice does AIG have but to pay off on its contractual obligations?

In a letter to Treasury Secretary Tim Geithner, AIG Chairman and Chief Executive Officer Edward Liddy said he finds it “distasteful and difficult to recommend to you that we must proceed” with these bonus payments, adding that outside counsel has advised these are legal, binding obligations of AIG, and there are serious legal as well as business consequences for not paying.

There has got to be a better way of handling this. Might the individuals involved agree to have these bonus funds placed in escrow, payable once the company rights itself, and frees itself from government control? That would send a powerful signal of good faith, and convey a sense that we are indeed all in this mess together. Instead, all the public perceives is greed, greed and more greed.

On a broader issue, the deeper the government gets involved in the AIG debacle, the more one wonders whether we all might have been better off had Uncle Sam just let AIG declare bankruptcy.

Is government aid (in return for an ownership interest) a lifejacket or a straightjacket? I'm starting to lean towards the latter conclusion.

What do you folks think?