The Beginnings of American Economic Fascism

Americans continue to be outraged by AIG’s $150 million of contractually obligated bonuses and retention compensation. How is it possible for such volatile populism to be misdirected at such a trivial matter while ignoring that AIG exists solely because the Government wasted $150 billion propping it up? AIG employees would not have jobs, much less be paid bonuses, but for the Federal Government wasting extraordinary amounts of money to bail-out the failed business.

The outrage further flies in the face of the facts. Congress and the Treasury initiated and were solely responsible for the AIG bailout. The Federal Government wrote the terms and conditions of the agreement. Senator Chris Dodd and Treasury Secretary Geithner understood exactly what conditions were placed on AIG. To paraphrase the Senator on the subject the “Treasury forced him to add language to the stimulus bill last month that specifically excluded executive bonuses included in contracts signed before the bill's passage". The Obama administration read every single word of the stimulus bill before the President signed it. Furthermore, every member of the House or Senate who voted for or against the stimulus bill had an obligation to have read, or at least understood, what was in the legislation. In effect, all of the parties presently in an uproar knew, or should have known, that existing contracts would be honored and that AIG would be acting in its perceived best interest in an attempt to turn the business around.

Given the circumstances, the prospect of our Government arbitrarily confiscating the contractually specified compensation of AIG executives and employees represents an unconscionable abuse of power, a frightening attack on private citizens and a new salvo in the war against capitalism. Anyone who is of the opinion that it is a good idea for the Government to arbitrarily tax a small group of American citizens at a confiscatory rate simply because a political lynch mob has deemed the practices of that group to be immoral should consider the prospect of having this abusive, unconstitutional power directed at them.

Do you really think that once the witch-hunting, profit-hating members of Congress get a taste for confiscating the “immoral” bonuses of the undeserving rich that they will just stop with AIG? The Government has proposed to change the tax code specifically to target and punish a group of private citizens. If Congress can use this power to punish one group, they can do it to any as long as there is political support.

Imagine the implications? Since we are in the business of breaking contract law and retroactively confiscating immoral compensation, lets tax the gun, alcohol, fast food, oil, gambling and pornography industries at 95%. Their actions are obviously immoral and each should be punished for earning a profit. Why not retroactively confiscate the profits of successful hedge fund managers like John Paulson. They made billions off of the decline of the housing industry and the collapsing economy. These profiteers should be punished. So what, that they worked hard, risked their personal capital, and only succeeded because they were smarter, more creative and dynamic than their competition.

Why not retroactively tax into oblivion all “windfall profits”? Of course there is no such thing as a windfall profit. Profit is profit and serves a vital role in our free market economy as capital is attracted to investment opportunities where risk adjusted returns may be earned.

The implications of this misguided proposal are staggering. Would you accept a job offer from AIG today contingent upon you receiving a contractually obligated bonus? If you are a current employee of AIG in a job that typically earns a material annual bonus, why would you stay with the firm? Any bonus you earn will be vilified by the media and potentially confiscated by the Government. Rational people will conclude that there will be no bonuses for employees, regardless of individual performance, while AIG as a whole is underperforming and a ward of the Government.

If we are going to eviscerate AIG, shouldn’t we do the same to Fannie Mae and Freddie Mac who have their own retention pay and executive bonus obligations? Shouldn’t we demonize all company’s that received bail-out funds? Handcuffing the attempts of managers to turn these businesses around, retain or attract talent and become profitable is a disastrous policy mistake. These entities have no chance of survival other than as government owned, money losing, zombies unless they can behave like independent, profit-seeking entities. Political hacks are in the process of destroying the very entities they argued were too important to our financial system to allow to fail. Either put a bullet in these institutions, nationalize them or get the hell out of their way.

On the positive side, the Government’s irresponsible and abusive behavior towards AIG should serve as a stark example to any company that might consider taking bail-out assistance going forward. Once again, the government has manufactured a solution that is worse than the original problem.