Backlash against bonus backlash

Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective.

In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government -- even when that is in the national interest. This is similarly counterproductive.

Remember, the contracts were negotiated long before the government put a cent into AIG. "The plan was implemented because there was a significant risk of departures among employees at [the company]," AIG wrote in a paper explaining the plan, "and given the $2.7 trillion of derivative positions at [the company] at that time, retention incentives appeared to be in the best interest of all of AIG's stakeholders."

And federal legislation explicitly states that compensation limits for companies receiving bailout funds do not apply to preexisting contracts. Not to mention that the existence of the retention bonuses has been known for more than a year.

All true but lost in the race to be more outraged, more shocked, than the next fellow - especially in Congress.

The point about some of these AIG employees who may be the only people alive who can untangle the credit derivative mess is a double edged sword. On the one hand, Marcus is absolutely correct as many experts say it would take too long for anyone new coming aboard to familiarize themselves with what the traders did. On the other hand, some on the left have pointed out that this amounts to AIG putting a gun to the head of government; "give us our bonuses or we blow up the world by leaving the company thus making it impossible to unravel what we have done."

No one at AIG has said that but the threat is implied anyway. But the Obama administration is panicking, seeing popular anger explode at AIG and wanting to get on the right side of the argument before people realize it was they who allowed the bonuses in the first place.

Nice trick if you can swing it.

Hat Tip: Ed Lasky