Summary
There is a problem. It is the accounting of bailout money on the balance sheet. Most contracts are performance based and a contract does not guarantee a bonus to its employees. Unless the bailout money is accounted as an offset on the balance sheet allowing the company to show a profit.
Analysis
The government in its effort to protect the economy by providing bailout money, was short-sighted as to the accounting of this money. The lump sum payout allowed corporations like AIG to have their balance sheet appear as a profit was made. The bailout money is being used as an offset to costs.
There is outrage that bonuses are being paid. But, the normal employment contracts for executives are based on a bonus plan to profit. Many executives receive up to 100 percent of their salary. AIG is correct in saying it legally must pay out these bonuses, due to the way the bailout out money is being accounted for.
But, AIG is incorrect in allowing the bailout money to be used as an offset to the balance sheet. There are other ways to account for this money, but AIG would rather pay the bonuses because it looks better to AIG's balance sheet. In five years from now, it is about the balance sheet. Everyone will have short term memory of the bailout money. But AIG will have a positive profitability track record.
AIG should be responsible and account for the money in another way, so they do not pay executives bonuses for failure. Retention bonuses is hogwash. AIG would have been in bankruptcy, had the government not issued the bailout money. The executives of all large corporations should remember this.
