AIG Bonus Tax Passed

OK now that we’ve managed to get the mob really riled up, maybe someone should take a look at the consequences of this tax. Set aside its constitutionality, I am assuming others will check that out, we should think through what its impact s likely to be on the traders whose bonuses are now being taxed.

Here’s the New York Times article with the background: House Passes Bill to Punish A.I.G. Bonus Recipients

These traders were being given retention, not performance, bonuses. These are not unusual, especially when a company is going to rely on people to help it shut down a department or a division. What the company does is to pay an employee who might otherwise leave – his or her job is about to be cut don’t forget – a bonus for staying around. The objective is to allow the people who know the business close it down in an orderly way.

So AIG was hoping to keep these employees long enough for the book of derivatives to be eliminated. Once the book was gone the employees’ jobs were eliminated also. In effect the traders were working themselves out of a job. And their temporary loyalty was being ‘bought’ by the retention bonus.

Now along comes the mob.

The notion of paying ‘bonuses’ to these idiots who had ruined the company and cost us a ton of money, didn’t sit well. So apenal tax was passed to confiscate the money.

That’s good as a public relations ploy. But not so good if your objective is still the orderly winding down of the business.

If you were one of these traders would you now stay? Why would you sit around and work yourself out of a job and not get the bonus you were promised for the work? I think you’d quit. Quickly.

That might be fine. AIG might be able to fill your shoes long enough to make sure nothing fell apart.

But what if a group left? What if most left?

Remember the problem that got AIG into trouble was its maze of derivatives contracts. They were relying on the people who created the mess to clean it up because they were the ones who knew the details. Some of these contracts have daily balances and adjustments. Who’s going to check or make those if the staff just quit?

There are a lot of ifs in this commentary. But clearly someone thought it wise to hold the old team together long enough to clean up its own mess. Now we just might have blown that plan up. Given the risks involved and the amount of money at stake I hope we have a back up plan.

Somehow I doubt it.