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ImageFar be it from me to help Democrats while they are in the process of destroying themselves. Like many other conservatives, I have been enjoying the spectacle of Democrats frantically trying to flee from a mess of their own making - namely, the AIG bonus uproar.

Congressional Democrats who lent $150 billion of taxpayer-funds to insurance giant AIG - i.e., The American International Group - reacted with outrage (and looked a little foolish) when the company promptly awarded $165 million in bonuses to hundreds of managers and executives. AIG officials explained that legal contracts obligated payment of the bonuses. Recent disclosures also reveal that pressure to allow the bonuses came from the Obama administration. [1] Congressmen and senators had egg on their faces for not realizing they had passed a bank-rescue bill that contained provisions for the bonuses.

Even liberal Congresswoman Maxine Waters (D-CA) - one of Mr. Obama's staunchest allies -publicly suggested that perhaps the president wasn't "up to speed" on the AIG bonus situation. ("Damned with faint praise," in other words.) I am not the first observer to point out that if Mr. Obama knew about the bonuses, then his "surprised" act is a lie. If he really didn't know, then he is uninformed and out of touch, and his close advisors and cabinet officers let him down.

Reacting to public indignation, senators and representatives have been in high dudgeon for the past week, denouncing AIG managers as "irresponsible," "greedy," and even "criminal." Despite his apparent complicity in allowing the bonuses, President Obama has joined the chorus of those calling for awardees to return the money. "Why should people who ran the company into the ground be rewarded?" was a question heard frequently.

On March 19, the House of Representatives voted 328-93 to tax away most of the bonuses, after the fact. (Note to students: this is called a "bill of attainder" [2] - a kind of law specifically prohibited by the Constitution.)

Some Republicans have tried to reach the rarified levels of high dudgeon, but most have achieved only medium dudgeon, at best - probably because they saw no reason to let Democrats off the hook. The week has been bracing for pundits, commentators and reporters, too, with much head-shaking and faux-amazement among the fetching info-babes and guys who gab on cable TV. There were a few faint attempts to drag George W. Bush in, but the efforts died aborning. "How could AIG executives have been so dumb?" was a question I happened to hear in passing.

Well, yes, that is a question, but it's not the only question. Although tempted to remain quiet while Democrats monster-mash each other in their mad pursuit of the "fools" who let AIG do this, I decided it would be unethical to keep mum on a matter I know something about. Perhaps this small journalistic effort will contribute a little knowledge - even among Democrats.

Few government employees have worked in a business environment where performance bonuses or commissions framed their compensation packages. Some schools have tried it, but setting objective performance standards - the foundation of a real bonus system - for teachers is hard. Education-bonuses often are simply spread around to all teachers, defeating their purpose.

The fraction of the work force in the employ of government - federal, state, county, local, military, teachers, etc. - was about 17% when I last saw any data. It might be 20% now, perhaps more. Younger private sector workers also tend to hold jobs where their compensation consists entirely of salary - unless they are salesmen. Thus, sizable numbers of American workers are unfamiliar with the bonus system used by many companies.

Competitive companies pay bonuses to their top executives, as well as to mid- and upper-level managers, for reaching defined objectives. Above a certain level, managers of many firms are responsible for building the business. Some companies have sales departments, but in others, responsibility for business-generation is spread across the management ranks.

I spent a long career in a technical company whose managers of at least 30 people were also business developers. Each manager's annual bonus was pegged to the amount of business he had brought in that year and the profit it generated for the company. Bonus could be as much as 40% of annual compensation at lower management levels. For higher-level executives, the bonus-fraction of compensation was even larger. This was not "extra" compensation, but planned compensation made conditional on reaching performance goals. If a manager didn't meet his goals, his bonus suffered - sometimes grievously.

"Attaboy" bonuses were also given to lower-level employees - usually subjectively. These were a nice surprise when given, and were not really missed when not given. But performance bonuses, being planned compensation, were a different matter. Top executives didn't mess around with them, for fear of losing valuable generators of the company's business.

I say all that by way of pointing out that we have not been given an accurate picture of the AIG bonuses. The public has been left with an impression that these were subjectively awarded "retention" bonuses. (Retaining valuable people by rewarding their good work is why any bonus is paid.) Reporters and government officials seem ignorant of the possibility that performance objectives might be involved in the AIG bonuses. If AIG managers who received bonuses met their annual objectives, they were contractually entitled to those parts of their compensation.

Even the company's overall profitability or unprofitability might not affect bonus awards. In the company I worked for, bonuses were reserved in a fund distinct from the company's annual profit. If the company had a bad year, bonuses were still protected because top management considered them critical to the company's future success. Lower-tier managers got their bonuses if they had fairly met their objectives. Typically, only top-tier executive-compensation was directly linked to the company's overall performance.

Did the bonus-system used by AIG resemble the one I have described? We don't know. If so, hundreds of managers across a company of 116,000 employees might be eligible for performance bonuses, even if the company had a bad year. I doubt if Mr. Obama or very many Congressmen would insist that AIG employees should forego their salaries because AIG got federal "bailout" funds. But denying performance bonuses could amount to the same thing. We really have no idea, because "journalists" who ought to be digging into this are having too much fun joining the media/congressional feeding frenzy.

But aren't bonus-recipients the same people who "ran the company into the ground?" Well...let's think about that a little. First of all, what is an "insurance company?" Silly question. Everyone knows an insurance company collects premiums and uses them to pay benefits to people who bought surety against certain untoward events - e.g., accidents, storms, death, etc.

Do insurance companies have rooms (or bank accounts) full of money from the premiums people have paid? No, because if they did, they would eventually run short. If you've ever added up the premiums in a whole-life insurance policy, you'll see that the total is nowhere near the promised death-benefit. I bought a $10,000 policy when I was 20. The premiums were originally $180 a year, but they gradually shrank to zero some time ago. I doubt if I have paid $5,000 in premiums over the policy's life. Yet the benefit has increased to $13,000. How do they do that?

The non-secret answer is investment. The insurance company immediately invested my premiums - well enough that it could gradually eliminate them and raise the promised benefit. All this was done according to regulations. Insurance companies are really gigantic investment houses. They make their money by growing premiums into enough money to pay the promised benefits, plus a profit. "Actuarial" mathematics helps them estimate life expectancies and other risks accurately, so they can charge correct premiums.

The fly in the insurance ointment can be any of the following:

(1)   Unexpectedly high incidence of storms, accidents, deaths, etc.;

(2)   Poor actuarial calculations that set premiums improperly;

(3)   Staff incompetence, poor investing;

(4)   Unexpected behavior of financial markets;

(5)   Corrupted financial instruments.

Congress and the media have focused primarily on reason #3. Incompetence might have played a part in AIG's difficulties, but there has to be more to it than that. Given the current market environment, #4 and #5 are probably primary reasons why AIG and other investment houses are teetering today. The financial paper of even solid businesses collapsed in the crash of 2008-‘09. Those companies might still be OK, but their stocks and bonds have tanked, eroding the market stability on which AIG's investment managers based their decisions. The wealth of AIG and other investment firms evaporated. Much of this was not their doing. (As an investor myself, I know this is true.) We are all victims of the market's 50% crash since late 2007: i.e., reason #4.

Theories abound on what caused the great crash of 2008, but the primary culprit is known: too many "non-performing" mortgages, which were then "bundled" into marketable securities whose internal rottenness was not suspected by investors like AIG. This is essentially reason #5.

Non-investors find it easy to hammer executives of companies like AIG for not seeing that there was a problem with these instruments. I managed to avoid these flawed securities, myself, but I'm not inclined to criticize any who got burned. Investors have a right to expect that the financial instruments they invest in are sound. Investing should not resemble a race where you don't know if the horses have been drugged. We have government regulators who are supposed to assure that things are straight. Investors - even giants like AIG - can't be expected to know that unseen government intervention has caused a structural weakness in certain securities. Had that intervention come from a private individual, he would be headed for jail. Yet government "regulators" who countenanced millions of "soft" mortgages that ultimately crashed the market are skating by with little notice. There's something rotten, but it's not in Denmark.

A well-known radio talk-show host says the uproar over the AIG bonuses is a "diversion," which Democrats are exploiting in order to draw attention from the more important matters of the rotten mortgages and the riotous misapplication of "stimulus" funds. I concur with that assessment. I'm not the only person in the country who knows about performance-based bonuses, but I have seen very little substantive reporting about them. The lack of information suggests a deliberate effort to keep the public's attention off the real issues. More facts are needed before we hang any more AIG executives or strong-arm them into returning their bonuses. I never made their kind of money, but I can recognize unfair persecution when I see it. I don't like the smell of it.

Those of my fellow citizens who are seated at the guillotine, howling for the heads of AIG bonus-recipients, also need to reflect on the wisdom of granting Congress the power to punitively retro-tax legal compensation. Once the highly political Congress gets into that mode, where would it end? Your salary or bonus might be next. I urge readers to consider whether this is a good idea.

"They came first for the Communists, and I didn't speak up because I wasn't a Communist; then they came for the trade unionists, and I didn't speak up because I wasn't a trade unionist; then they came for the Jews, and I didn't speak up because I wasn't a Jew; and then . . . they came for me . . . And by that time there was no one left to speak up." (Pastor Martin Niemöller)


[1] "The Obama administration and one of its key allies in Congress belatedly acknowledged Wednesday [3/18/09] that they were responsible more than a month ago for clearing the way for large bonuses to be paid inside taxpayer-supported companies such as AIG..." (The Washington Times, 3/19/09)

[2] A bill of attainder (a.k.a. a writ of attainder) is a legislative act declaring a person or group of persons guilty of some crime and punishing them without benefit of a trial.