That missed my point, which is that the bonus money in question was negotiated before the crash and should not be taxed back by politicians (especially ones simply out to pander to mob mentality). I didn’t argue anyone should feel good about the AIG payouts. I said legal contracts should be respected.

For the record, I think the company should have been put into bankruptcy. And while it is on public life support, I don’t think new contracts at the U.S. giant should be anything close to what was OK during the good ol’ days. Then again, as far as I can tell, AIG employees are not bold enough to publicly demand that no real sacrifices are made as the company moves forward. And that’s why I think the attitude at the Canadian Auto Workers union is actually worse than that at AIG.

You can read Ken Lewenza’s take on the matter in the current print issue of Canadian Business magazine, which also has an editorial that points out the ridiculous nature of maintaining CAW perks. In this blog, I’ll just note that a lot of taxpayers in this country see unionized autoworkers as the guys and gals with the pay and benefits to beat, and not just amongst the blue-collar crowd.

I have a lot of respect for unions, but I am no leftie. I respect some hedge fund managers, too. Let’s just say, I am right-handed, but my mind is wide open. Anyway, in this case, my argument is not political.

I have no problem with anyone taking what was negotiated with any corporation as a going concern. But the not-so-big-anymore Big Three are broke and the CAW still insists its members deserve perks and pensions that most Canadians can only dream about. And that includes workers who do exactly the same job at Toyota and Honda.

The latter automotive plants are not asking for handouts. But they are just as Canadian as any operations run by the Detroit trio. The jobs they create go to citizens who work just as hard as any CAW member—for less. These folks, of course, are being asked to support bailouts that put their jobs at risk by keeping overcapacity in the system.

You could argue that supporting the Big Three is required for the greater good in this economic climate. Still, tax dollars are being demanded by workers who think they deserve more than less demanding people on the hook for the bailout bill, which is why I think CAW members should think twice before blasting anyone at AIG.
DOUBLE TAKE: Aside from trying to promote myself while generating Web traffic that helps put bread and butter on my table, this blog aims to stir debate by taking a harder look at current news and events. I obviously enjoy voicing my own opinions, but I am a big boy and I welcome all comments that don’t require R ratings. So let me have it via this blog or send me an email at tom.watson@canadianbusiness.rogers.com. I reserve the right to post email comments without disclosing the sender’s name.

THOMAS WATSON is a Senior Writer and editorial board member at Canadian Business magazine. Since winning a community journalism award as a cub reporter with the Hamilton Spectator in the early ’90s, he has covered business, finance, politics and technology for various news outlets. Prior to joining CB in 2001, he reported on the steel and automotive sectors for the Financial Post. Watson received his first magazine award nomination for exposing a stock manipulation plot aimed at Waterloo, Ont.-based Open Text in 2000, when he was head of investor relations for an international venture capital outfit in the City of London. Watson holds graduate degrees in journalism, international relations and public finance and undergraduate degrees in history and politics.

But now, I actually respect the back peddling at the White House, where economic advisers acknowledged on March 22 that using tax law to get back US$165 million in AIG bonuses may be “a dangerous way to go.”

The guys and gals in question clearly didn’t do what average folks are expected to do for extra pay. That’s why, when I first heard the news, I wondered why U.S. tax authorities were targeting just 90%, which still puts US$400,000  into the hands of AIG executives slated to get a US$4-million reward. Pretty good for a job not so well done.

But then Barney Frank, the Massachusetts Democrat in charge of the powerful banking committee, said the tax might not be enough. He suggested suing AIG employees, noting the American government has an 80% stake that should be used “to assert our rights.” That’s when I asked myself how I’d feel working for a company with unhappy shareholders who decided I should return a signing bonus built into my contract. I also wondered how I would react if the general public started hating my employer (a cable company) and successfully lobbied government to tax me more out of spite.

Some AIG executives have now decided to “voluntarily” hand back the cash. But they are just trying to save themselves from being financially lynched. The bailout money sent to AIG is moot. These so-called bonuses were legally negotiated payouts at a private company and the contracts were inked before the crash. In today’s environment, the handouts might seem ridiculous. But they were not tied to performance.

I’d keep the money. George W. Bush kept his pay. So did Sir Allan. Why not AIG executives?

First, AIG International Group recently handed out more than $200 million in bonuses to executives even though it has received a $170-billion bailout from the U.S. Government and previously had a run-in with regulators over bonuses. The U.S. Senate wants to claw back AIG’s latest bonus extravaganza through taxation. But this doesn’t go far enough, in my opinion. Bonuses are a systemic problem that keeps popping up, again and again. Politicians and regulators should really be thinking about clawing back bonuses for all firms that contributed to the financial crisis and retroactively to 2007 at least — for reasons laid out in my Sept. 11 2008 column, Claw back the bankers’ bonuses.

Second, while bonus-driven bank executives were laying the groundwork for today’s financial implosion, legions of bank lawyers and accountants were busy exploiting loopholes to cut tax bills for the banks and their high net-worth clients. So while taxpayers are now being asked to pay for a trillion-dollar bailout of the banks, they also got the short end of the stick when times were good.

This week, a whistleblower released internal memos from Barclays Bank revealing “the process involved in structuring extremely complex and artificial tax avoidance schemes,” to quote the editor of the Guardian newspaper (which had posted the documents on its website until a court ordered them to be removed). One scheme, wrote Hugo Dixon in breakingviews.com, “aimed to save tax by shunting over $16bn of loans from a series of companies and partnerships in the Cayman Islands and Luxemburg.”

Last month, tax avoidance by other financial institutions made the headlines. Swiss bank UBS AG, which was under investigation for allegedly helping 17,000 American citizens to evade taxes, agreed on Feb. 18 (thanks to an order from Swiss regulators) to provide the U.S. government with the identities of over 200 American clients and to pay $780 million in fines and restitution.

Another step toward reining in the financial sector is to address tax avoidance. Cleaning up the mess they left behind is going to cost a lot and every source of revenue needs to be tapped. Why should the banks be allowed to conitnue dodging taxes for themselves and their clients when trillions of dollars are needed to stabilize the system?

So close the tax loopholes. Make it unlawful for the banks to have subsidiaries or affiliates in tax havens. And, as Dixon said, adopt globally the U.S. doctrine of “economic substance,” under which transactions need to have some genuine purpose other than to avoid taxes.

Lastly, as Dixon also suggested, recruit better tax inspectors. So far, they have been no match for executives motivated by million-dollar bonuses. What, then, if we give the tax inspectors bonuses too? Make the reward a percentage of the taxes recovered. That’ll work for sure.

Bank executives “really don’t live on the same planet as the rest of us,” said one person in the comments section to an online article. Another said: “If the banking meltdown had happened in China, people would have been shot. In Japan, they would have resigned in disgrace. But here the bankers whine about no bonuses and redecorate. It’s a disgrace.”

One has to also look, I believe, at the environment that allows banking and other executives to behave like Marie Antoinettes. Specifically, it should be asked: where are all the institutional shareholders — pension funds, endowment funds, mutual funds, and all the others who are investing billions in these companies? Shouldn’t they be doing a better job looking after the interests of the people whose pensions and savings they have invested? Where is their fiduciary duty? Why aren’t they more active in the boardrooms, watching over how invested monies are being used? Why not, for example, get out and campaign for bonuses to be clawed back (to bring up one of my pet peeves) — or at least just to have them stopped?
 

Last week, as the New York Times reported, New York Attorney General Andrew Cuomo told the American International Group (AIG) board of directors to recover executive bonuses or face legal action. Specifically, they were asked to take back the $5-million cash bonus and $15-million golden parachute given to ex-CEO Martin Sullivan and $34 million in bonuses given to Joseph Cassano, the executive who headed the unit that pushed the company to the brink.

It seems to me the perpetrators of the financial mess shouldn’t be able to keep their billions of dollars in bonuses while taxpayers fork over several hundred billions of dollars to clean up the mess they left behind. We can only hope, in the interests of restoring some semblance of justice, that more bonuses are clawed back across the financial sector. If you want the American public to buy into the bailout (and, indeed, the idea the system works), it helps to show those at the top are sacrificing too.

But there is more to it than sending a message to the public. Taking back the bonuses is also one way to address the moral hazard problem that has plagued U.S. economic policy for decades and contributed to, if not caused, crises like the present. If executives know their reckless behavior is more certain not to not to be rewarded, they might be less inclined to let it run lose. For more on this, see the Clawback the bankers’ bonuses.

We might also add, it’s about time to tackle the built-in incentive within Corporate America for senior executives to take aggressive risks because boards hand out bonuses to executives regardless of their performance. There is no downside to being a CEO in the U.S – they still get nice bonuses and parachutes no matter how much they messed up. Isn’t it odd, for example, Lehman Bros. handed out $5.7 billion in bonuses the year before going under?

Douglas McIntyre of the 24/7 Wall Street blog disagrees with taking back bonuses. He thinks “when an executive gets a bonus, he should be able to keep it, no matter what happened to the company later.” Cuomo is undermining, he says, “the rights of public company boards to use their own judgments on how to handle pay packages for their own senior managers.”

Huh? Aren’t boards of directors supposed to represent the interest of shareholders? What signal are they sending if they let the incompetent and high-rolling executives keep multimillion-dollar bonuses and golden parachutes? Isn’t it: “Hey, executives, it’s OK to be incompetent/riverboat gamblers and decimate shareholder equity?”

Actually, if the AIG board was truly independent, what was it doing sanctioning bonuses unconnected to an executive’s performance – the kind, as McIntyre says, they “should be able to keep, no matter what happened to the company later.” Of course, AIG is not unique in this way: it’s systemic within Corporate America. And now is a good time to put a stop to it

The directors at AIG appear not to have been true representatives of shareholders. That’s why Cuomo is right to intervene. How can the board at AIG be doing their job? They were still letting the “old boys” club have free reign even after AIG’s near-death experience: the NY Times reported that in the days after receiving a government bailout package of close to $100 billion, AIG staff: went on a $442,000 weeklong resort retreat and another group o AIG officials flew to England on a private jet for a partridge hunt — at a estimated cost of $90,000. ““AIG’s belief is that they had the party, and the taxpayers will have the hangover,” Mr. Cuomo said.

An article recently proposed clawing back the bonuses that imprudent Wall Street executives awarded themselves during the era of frenzied growth. After all, it would be one step toward addressing the moral-hazard problem. And it would seem rather unfair to expect taxpayers to foot a multibillion-dollar bill for cleaning up the mess while the executives got to keep the spoils from creating it. It seems only fitting that a first stop in collecting funds should be at the doorsteps of those who helped perpetuate it – the amounts can be rather significant as Lehman’s example illustrates.

I was thinking the return of the bonuses could be compelled through legislation — but creditors might beat the government to it, at least in the case of Lehman. Adam Levitin, an associate professor of law at Harvard University, notes that the bonuses might be recoverable as fraudulent transfers if a creditor succeeds in demonstrating the firm was already insolvent in 2007.

However, the actual amount recoverable would be less than $5.7 billion. A substantial portion of that figure represents stock grants that vest over time (and those vesting after Sept. 15 are now worthless).