I think the recent AIG kerfuffle has been an unserious distraction, with serious consequences. Members of Congress are falling all over themselves to prove their level of outrage. It doesn't seem contradictory to me, however, to find something offensive in the bonuses and still think it bad policy to try to recoup them.
1. the bonuses amount to less than 0.01% of total funds received by AIG.
2. the argument seems to be: "if you took our money, you play by our rules." But shouldn't, as a matter of prudence, the rule be: "if you took our money, you do whatever is necessary to make yourself healthy again?" So it behooves Congress to show the bonuses are bad policy, which is separate from showing they are distasteful.
3. Its not clear AIG ever "held its hands out," but rather their arms were twisted. The whole categorization of TARP recipients as greedy supplicants is incomplete at best. The original nine recipients agreed to the money after Paulsen strong-armed them in a private WH meeting. Goldman Sachs was vociferously opposed. AIG was seen as a TBTF institution and thus their quasi-nationalization was something of a forgone conclusion. Nevertheless, is someone any more beholden to you because they asked for money as opposed to took it because you saw they were in need? Maybe.
4. This is the bed the Fed made for itself. Capital infusions could have taken place by buying toxic assets, or putting companies through FDIC receivership, using a speed bankruptcy procedure or something similar. But somewhere along the line Paulsen decided taking equity stakes was the way to go. Many of us saw that something like this was bound to happen. Maybe not bonuses. But the politicization of corporate governance was inevitable. My guess was it was going to be a clause in some executive employment contract that guaranteed 45 days of vacation, but the point's the same.
5. What does this do to contracts? Unlike some, I'm not all that concerned about the "sanctity of contract" writ large. But I am concerned about the willingness of other companies to do business with TARP recipients. Who wants to enter M&A talks when everything is now subject to Congressional review and populist backlash? Isn't it indisputable that this adds another layer of uncertainty to companies already shorouded by fear?
6. It's possible, though I dont suppose to know, that many of the "bad people" at AIG were already cleared out in early 2008. Thus bonuses, which are often up to 90% of compensation packages on Wall Street, were a suitable incentive for appropriate talent who were understandably looking to jump ship. Also, even if these are some of the same people who "got us into this mess," should we reject paying them out of hand? Derivative contracts (especially credit-default swaps based on asset backed securities) are very complex and only a small handful of people really understand them. If AIG (and firms in similar situations) are to unwind their positions without taking down everyone else, we need the people who at least understand the problem, even if they are culpable for creating it. As my friend Garett Jones puts it, sometimes you have to bribe the bombmaker to defuse the bomb.