Andrew Ross Sorkin’s Case for Paying the A.I.G. Bonuses

Andrew Ross Sorkin wrote the following in today’s NY Times with regard to why the A.I.G. bonuses should be paid:

via Dealbook – The Case for Paying the A.I.G. Bonuses – NYTimes.com.

â??This isnâ??t just a matter of dollars and cents,â? he said. â??Itâ??s about our fundamental values.â?

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the â??fundamental valueâ? in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be â??breaking a bond,â? Ms. Meyer says. â??They are raising a whole new question about the trust and commitment organizations have to their employees.â? The auto industry unions are facing a similar issue â?? but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.”

One word comes to mind: FRAUD.

A.I.G. committed fraud in the worst way and the bonuses are based on fraud. Accounting fraud, insurance fraud, whatever you name it, fraud took down A.I.G. As an insurance company, A.I.G. is obligated to retain a certain level of capital reserves from which to pay its obligations. Instead, it appears A.I.G. kept little to no capital reserves for insurance contracts it wrote for securities. The money it received from those insurance contracts was looted by its executives through excessive compensation and bonuses. As a result, A.I.G. lacked necessary funds to pay the beneficiaries of those insurance contracts when the insurance notes came due.

A basic tenet of contract law says that contracts based on fraud are not enforceable. Those bonus contracts should be presumed unenforceable until it is clear the recipients were not party to the fraud and actually earned the bonuses received.

I would like to see a real investigation led by William K. Black to determine what exactly went on at A.I.G. and when the executives and other employees knew or should have known they were committing fraud. I find it shocking the Feds have not already begun a thorough investigation into A.I.G. and other financial institutions to get to the bottom of the economic fiasco they caused. Until an investigation is completed, we should all presume fraud is involved.

Then again, I’m surprised A.I.G. wasn’t immediately placed into receivership, executive ranks fired, its counter-party contracts renegotiated through the receiver, and its assets sold off to the highest bidder to pay its obligations.