Ed Driscoll

Of Bailouts And Bonuses

Jonah Goldberg writes, “Mixing politics and business management doesn’t pay”:

When the federal government, on behalf of taxpayers, opted to essentially nationalize AIG — we now own 80 percent of the company — we made a choice to keep it alive. If the firm had gone out of business through bankruptcy — what the gods wanted in the first place — there would be no bonuses. But we chose not to do that. Which means those bonuses are just one more toxic debt for which we are on the hook. For good or ill, we chose to defy the natural order. And now we own this monstrous white elephant.

Jonah adds:

Later on Monday, President Obama caved to the populist chorus. He said he asked Treasury Secretary Timothy Geithner, who also helped oversee the mess we’re in, to “pursue every single legal avenue to block these bonuses and make the American taxpayers whole.” Obama said all Americans ask “is that everyone, from Main Street to Wall Street to Washington, play by the same rules. That is an ethic that we have to demand.”

Again, an interesting standard given how many tax cheats Obama has invited into his administration, starting with our supposedly indispensable Treasury secretary.

Still, hypocrisy aside, Obama is right that everyone should play by the same rules, and that’s called the rule of law, as Summers suggested.

We should have learned from the government takeover of Fannie Mae and Freddie Mac what dangers lie ahead: The rule of law and political manipulation of the economy don’t mix well (Indeed, AIG’s toxic loans were made with considerable regulatory and political oversight). Liddy — the front-line sweeper behind the AIG elephant — has already warned the administration that letting politics dictate salaries and bonuses will make it difficult for the firm to retain talented staff.

But the unintended consequences surely won’t end there. What signal does it send when the president and Congress make it clear that they will revisit legal contracts that run afoul of populist outrage? Already, many banks that have received bailout money are returning it — or trying to — because the political strings attached hinder them against competitors. Worse, the highly politicized climate requires financial firms to become dependent on the whims of Washington, which can’t help thaw out frozen credit markets, particularly when Geithner has yet to explain what his actual policy will be.

Wells Fargo Chairman Richard Kovacevich, who was forced against his better judgment to take TARP funds, is livid with the Treasury secretary. “Is this America,” he asks, “when you do what your government asks you to do and then retroactively you also have additional conditions?”

At the moment, it’s Pelosi, Obama and Reid’s America (AKA, the “POR Economy”, as Bizzy Blog’s Tom Blumer has dubbed it)–where In Dodd We Trust:

Update: Jim Geraghty notes that “The Stimulus Bill Explicitly Guarantees Contractual Bonuses Executed Before February 11″; Glenn Reynolds adds, “I guess it’s too bad nobody read it before it passed, then.” Heh, Indeed.™

More: Related thoughts on “Government and Moral Hazards” from Shannon Love.