Can those AIG bonuses be stopped?

President Obama announces that he asked Treasury Secretary Timothy Geithner to use all legal tools to block executives at AIG from receiving bonuses after the company received federal bailout funds.

TEXT OF STORY

Kai Ryssdal: Alrighty, so back to the bonuses. Even though, as I said earlier, the government owns most of AIG, President Obama and Treasury Secretary Geithner are going to have deal with the lawyers before they can stop any checks from being cut. Marketplace's Steve Henn explains that executives at AIG argue the payments are required by legally-binding contracts and so, they can't be changed.


STEVE HENN: When the auto industry asked for a bailout, the federal government demanded that auto workers give up some benefits first. But before they bailed out AIG, federal officials didn't insist executives there give up the bonuses in their employment contracts. So now that AIG has its money, what kind of leverage does Treasury Secretary Tim Geithner have?

ADAM J. Levitin: Very little.

Adam J. Levitin is a commercial law expert at Georgetown University. He says Geithner could probably fire these people.

Levitin: I think so, but I'm not sure that would mean we wouldn't have to pay them the bonus.

Legally enforceable contracts generally can't be altered by the government, except in bankruptcy. And the entire point of the AIG bailout is to keep the company out of bankruptcy because if it went under, it could bring down the financial system.

Levitin: Sometimes with bailouts, we have to, for the good of the entire system, reward ahhh...jerks.

But Bill Black, a law professor and former bank regulator, believes the government still has some cards to play.

Bill Black: These bonuses are based on phony accounting income. And so they need to bring actions against the security fraud. That should establish that these contracts should never have been paid.

AIG signed these bonus agreements in 2007, long before its problems were widely understood. But several outside accountants believe by that time executives inside the AIG should have known they were headed for disaster.

In Washington, I'm Steve Henn for Marketplace.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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