Ethics

The Ethical Bankruptcy of AIG Bonuses

a case is made for the idea that money owed should be money paid. It's a superficially plausible argument, but I'm not buying it.

Just to start with, let's note that these companies were not forced to declare bankruptcy before being allowed to take the bailout payments. They were, of course, bankrupt. That's what we mean when we said they were going to fail.

These companies were not forced to formally declare bankruptcy, presumably, because it would have injured the public confidence. Some in the public might not have understood the difference between Chapter 11 reorganization and Chapter 7 liquidation, and there could have been a panic resulting in a run on the banks. The government wanted to avoid this, so it moved directly to action, bypassing the time-tested ritual acknowledging corporate failure.

The irony is that because of the extreme nature of the failure, the banks were not asked to take legal, ethical, moral, and social notice of the obvious truth: They had failed. No trustee was appointed to manage these businesses. Instead, it was business as usual to be conducted by the people who brought us this problem.

But in the true spirit of “no good deed goes unpunished,” the banks seem to have not taken any kind of observable notice of the fact that they were, de facto, bankrupt. So they paid what they felt were bonuses owed.

Now I haven't read the contract, but when I've been in the lucky position of being eligible for bonuses, those bonuses have been contingent on performance—both mine and that of the company. So you'd think the same would be true of these executives, too. If it's not true, then that would make me want to check more carefully whether there was a breach of fiduciary duty on the part of whoever wrote the contract, since unconditionally promising payment even when there was no performance sounds like a marginal practice to me. It would also call into question the use of the term “bonus.”...