Before joining the mob headed towards AIG headquarters, stop and think. The company is contractually obligated to pay these employees some $165 million in bonuses. Contractually obligated. So before applying the tar and feathers, ask these questions. First, do we want to be a society in which contracts mean nothing when the government decides they are inconvenient, imprudent, or impolitic? Probably not. Otherwise, we undercut American values, tearing up inconvenient contracts with foreign investors, and arranging for bad things to happen to people who object. Second, did the government do adequate due diligence when it set a price for the 80 percent of AIG that it bought? It will certainly argue that it did. In which case it knew about the potential liability created by these impending bonuses, and should have reflected that in the price it paid for the company. If that is so, it now wants to double dip — get the benefit of the lower price, and rescind the bonuses. Third, do we want to live in a country that would do what some Democrats are suggesting: retroactively tax away these bonuses? The possible abuses of such a policy are too many to list here. Finally, do we want all of this fuss to take our eyes off the main prize — the eventual long-term reform of a misshapen system of executive compensation — one that is opaque instead of transparent, unrelated to some even rough measure of performance, executed by directors whose interests are often not coincident with those of the shareholders who own the business? Yes, there is something obscene about the AIG bonuses. But one obscenity does not justify the larger obscenity of government abrogation of contracts that were legal at the time they were negotiated. Nor does it justify diverting energies from tackling the real question: How should executive compensation be set in an economy in which the owners of leading enterprises are not in control of the compensation-setting process, and in which shame is not as serious a constraint on executive behavior as it once was?
