First of all, let me say this; I can see both sides of this argument, debate, whatever you want to call it.  With that being said, here are some facts:

• I (we) have no idea what is happening day to day within the firm AIG.  From what you hear on Fox News, CNBC, and every other news organization out there, you would think that they have reporters embedded  in the board room and intimately familiar with the day to day operations of the firm.  I hardly believe that is the case, but just listen to them.

• I have not seen the alleged contracts that the traders and management within AIG allegedly have that stipulate the terms and conditions for the incentive pay.  Again,I assume most of us haven’t, or a simple Google Search would turn up such document.  If you are reading this post and have knowledge of these contracts, do tell.  Inquiring minds want to know.

• As for the payments that AIG is making to their customers, so of which are foreign banks and financial institutions, they are obligated to do so.  They are / were an insurance company.  They insured against risk.  Those firms paid premiums, heavy premiums in some cases, to insure that risk, and they want their money based on the policy they have.  It is like you and I would do when our house is blown away by a hurricane, or is destroyed by fire; we would expect to be compensated for that, because we hold and insurance policy to insure us (and our lien holders) against that risk.  Same principle; really it is.

Assuming that the recipients of these bonuses had an employment contract in place, that was enforceable in a New York Court of law, then the employees have a pretty good leg to stand on LEGALLY, not politically, but legally.  They did a job and were paid a bonus for doing that job, no matter how bad it looks on the outside to all of us.

Ask yourself; if you were one of these individuals who had one of these alleged contracts, wouldn’t you want your money too?  Can you honestly sit there and say that you would not take your bonus money, that you worked hard to earn?  We live in an extremely litigious society, so wouldn’t you most likely sue for payment of the money, especially if it was several hundred thousand or millions of dollars?

I can remember just last year, when Citibank was trying to sue for tortuous interference of contract, there were a lot of people who didn’t oppose that action.  It was fair and just; they had a contract, right?  Well, that is the same case here.  These individuals have a contract, and they most likely did not sign that contract under duress, so it is enforceable.  To throw these contracts out now, would completely invalidate contract law in the State of New York (or wherever state / court has jurisdiction over these alleged contracts).  You can’t just go and change laws because it suits ones particular situation (I wish we could sometimes).

Edward Liddy, AIG’s CEO, has stated that the firm is also paying the bonuses to retain “the best and the brightest” (Time.com, March 16).  Many I have heard around the water cooler are aghast as to what this means.  I translate this to mean, AIG as a firm is so leveraged, the only hope we have of de-leveraging and exposing all the counterparties involved is to retain the individuals that got us there in the first place.  If they leave, a lot of that knowledge will leave with them, thereby exposing the US Taxpayer to additional risk; the unknown.  Many of them could probably find gainful employment in other firms on Wall Street, not all, but some.

There is plenty of blame to go around on this one, plenty.  I do see both sides of the story, but here is where I stand on the issue:

Shame on…..

• AIG board members, executives, managers, and others who actually allowed a contract to be drafted, approved, and ultimately executed that did not protect the firm from paying bonuses in this sort of circumstance.  They just didn’t allow it, they actually wrote the language into the contracts.  no matter their performance of the individual, they would get the bonus.  Now, granted, these contracts are written assuming the happy path, wealth and prosperity for all, but come on, so protections would have been nice.  Maybe they were there, but we have not heard about those protections in the press.  These contracts are typically not written with the intention that their stock price would go from $80 a share to $0.33 a share in a matter of months, and that the US taxpayer would foot the bill to the tune of $180+ billion dollars to keep the firm afloat (and that won’t be all), but that’s what happened.  There very well could be an argument here for fiduciary responsibility, and the lack thereof towards the shareholders, but I would not want to be the lawyer arguing this.  Considering that 47% of the shareholders at this point are institutions, they are happy  that the stock is trading at $0.93 and the firm is not bankrupt.

• The US Government, and those involved with the rescue of AIG, for not attaching very specific conditions to the bailout of AIG and the firm.  All bonuses and compensation packages should have been frozen indefinitely, until the government and the Fed had more time to due proper due diligence.  If AIG didn’t agree to the terms back last year, then let the fail in bankruptcy court, and then the government could have stepped in and backstopped the firm while the pieces were picked up.  A lot easier said than done, granted.

• Shame on AIG for not providing additional transparency into the operations of the firm and the extent of their leverage.  Just yesterday they finally released a list of counterparties (Forbes.com, March 16) that they have dealings with.  The firm is 80% owned by the US taxpayer, so start coming forward with the data.  I know it is going to be ugly, real ugly, but the taxpayers have a stake in the viability of your firm, a large one.

Some argue the Gramm-Leach-Bliley act , and one of its cosponsors Phil Gramm, is what has allowed the US financial system to get to the point that it has.  The language of the act is conspicuously vague in many areas, including the regulation of certain form of financial products, know generally as derivatives.  The specific derivatives that are to blame for most of AIGs issues are known as Credit Default Swaps.  They were largely unregulated and used by many different financial firms, to transfer risk to other parties.  Many of these instruments were backed by mortgage backed securities, which have declined substantially in value.  This act specifically allowed financial institutions to create these complex, highly risky instruments.  Some firms traded them and some didn’t.  AIG is one of the firms that DID, and lots of them.

There is, of course, is a lot of discussion with regards to the AIG bonus payments. Check out the blog, Agonist.com, for a great post  on an additional information behind these payments and the ramifications of not making them to their recipients.  At this very moment, the US Senate and the US House are both attempting to introduce some sort of legislation (Yahoo Finance, March 17) to be able to tax the recipients of these bonuses, in some cases up to 91%.  I am sure legal and constitutional scholars will have a field day with this one.  Personally I think they are pandering to the constituents back home, and a bill of this sort does not have a very good chance of passing, to curtail the current issue.  These same legislators in the House and Senate should have put this language in the TARP legislation, and they didn’t.  AIG falls outside of the TARP, but they could have had the same terms and conditions levied on them as well, and they weren’t.

Another point to ponder is that our 401(k)s, or 201(k)s as some are calling them, are, or were, heavily invested in AIG.  AIG was an $70 stock and paying a great dividend back in October of 2007, and still a $20 stock right before their collapse in September of 2008.  Not to mention that they insure many of the firms that are most likely bundled into the Mutual Funds that your 401(k) is invested in.  To simply let them fail would most likely have some dire consequences for all of us in this country that have any sort of cash invested in these vehicles.  As we have seen as of late, that would have a ripple effect on the rest of the world, that I am hoping I don’t ever see, cause it won’t be pretty.

I am not so sure there is anything that can be done about the payments that have already been made, but the government definately has leverage moving forward when AIG asks for more money to keep them afloat.  Holding back payments in the amount of the bonuses is just one way to make the tax payer somewhat whole.  The US is a participant in a global financial crisis, so at this point we need stability in the financial and captial markets in this country and the rest of the world.  Ultimately without that stability, all of these discussions about bonuses are a moot issue.  What I can atest to is that it is facinating to be a Graduate student in finance these days; I have a huge petri dish to study from and learn from at the same time.  I would love to hear your thoughts on the subject.