Bonus Hysteria in Washington

The American International Group, a company propped up by the government since last September, announced last week it had paid out $165 million in bonuses.

The bonuses went to the financial products unit – those responsible for losing an estimated $40 billion in mortgage bond derivatives and thereby forcing the government to take measures to keep the company from going bankrupt in the first place.

Congressional condemnation on the matter has completely taken over the public discourse. Over break, everyone’s congressman seemed to be getting in on the action. Democratic Sen. Chris Dodd fumed while Republican Sen. Charles Grassley called for AIG representatives to “resign, or go commit suicide.”

Shakespeare himself couldn’t write better theater. And Houdini couldn’t better distract us from more important things.

Banks still aren’t lending, we haven’t slowed down home foreclosures, and financial houses like AIG still have toxic securities that we don’t know how to price. A G-20 summit is approaching, and we can’t even agree with European nations about which problems to address first.

CEO of AIG Edward Liddy recently asked all those whose bonuses were over $100,000 to give back at least half. Congress schemed to forcefully re-take the money; however, since the bonuses were contractually obligated, Treasury lawyers couldn’t find a legal way to do so.

Congress has moved on to another strategy: taxing the bonuses at rates of 90 percent. A bill already made its way through the House of Representatives and is in the Senate, but this still won’t totally resolve the bonus problem. AIG has offices in 130 countries. Many of its executives are overseas and not subject to United States taxes.

It’s frustrating that everyone would spend such a disproportionate amount of time discussing 0.1 percent of the total money AIG received. Most people still don’t understand why or how the whole $170 billion was loaned to AIG. These counterintuitive bonuses are easily understandable by laymen – there’s no technical jargon of complex financial instruments or economics involved.

It gives congressmen an invaluable opportunity to make clear to constituents that they represent “main street,” no matter how tired the euphemism.

The Treasury actually received a memo Feb. 28 that AIG planned to go through with the bonuses – in time to legally cancel them. It was not passed to Treasury Secretary Tim Geithner, supposedly because his office was understaffed.

So far the Department of the Treasury has struggled to meet the high expectations set for it. But here’s one memo Geithner probably won’t be able to miss: Citigroup is now planning on putting out big bonuses.