PRESIDENT OBAMA on Monday instructed the Treasury Department to “pursue every single legal avenue” to recover $165 million in bonus payments the insurance giant A.I.G. recently made to nearly 400 employees in its financial products unit. A.I.G. has, of course, received $170 billion in bailout funds and yet continues to incur extraordinary losses — some $62 billion last quarter alone.
By LAWRENCE A. CUNNINGHAM
New York Times Op-Ed
A.I.G. insisted it was legally obligated to make the bonus payments and that failure to pay would breach its contracts with employees and expose it to penalties under state employee protection laws. The company also warned that breaching the agreements would amount to defaulting on numerous other business contracts, at staggering cost.
Amid this standoff, there has been an explosion of outrage against perceived excessive compensation to those who precipitated the financial crisis. Some lawmakers have threatened to impose a 100 percent tax on the A.I.G. bonuses and Senator Chuck Grassley, Republican of Iowa, even wildly suggested that the company’s executives consider suicide for their culpability. But moral outrage and public rebuke do not provide legal grounds for backing out of a contract.
If the government is serious about finding a legitimate basis for abrogating these payments, officials must look to basic legal principles. And if A.I.G. is serious that it is legally bound to pay these bonuses, it must do more than say nonpayment would expose it to damages or penalties. Nor is it enough to invoke the sanctity of contracts, because our legal and business system recognizes plenty of valid excuses from contractual duty and even justification for breaching.
There are numerous issues both sides must contend with to evaluate whether A.I.G. was bound to or excused from its payment duties. First, the specific promises that employees made or conditions stated in their agreements must be examined. Determining what promises exist requires only reading the contracts; identifying conditions (which will likely offer more wiggle room in A.I.G.’s duty to pay) requires both reading the contracts and understanding any negotiations that preceded them.
Subpoenas issued by Andrew Cuomo, the New York attorney general, have put much of this vital information into the hands of government officials. Those officials would do well to compare the provisions in these contracts to the job performance of the employees who received bonuses. If employees did not meet stated performance goals, they would be in breach of contract and A.I.G. would not have to pay.
Likewise, A.I.G. has stated that these agreements expressly state that if employees are terminated for cause, they are not entitled to any bonus payments. It follows then that the contracts may preserve the company’s power to deny bonuses to employees who could be terminated for cause but have not yet been.
Apart from specific contractual terms, there are other reasons A.I.G. might rescind these bonuses. They include the nondisclosure of important material information — for instance, if an employee failed to be absolutely candid about the size and risk of trading positions taken on the company’s behalf.
Findings of fraud on the part of an employee would certainly also excuse A.I.G.’s duty to pay.
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