AIG: When is a Contract Not a Contract?

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AIG (hold your nose) committed to pay a total of $450 million in retention incentives to hundreds of employees in its Financial Products unit that sold the credit default swaps that brought the firm to the brink of collapse. Now a public firestorm that followed disclosure of those pay arrangements threatens to torpedo the Obama administration's honeymoon - not to mention any further efforts to extend government aid to any financial institution.

In response, the administration and various lawmakers are separately devising tactics to claw back some or all of those payments, and ban or drastically reduce future retention pay or other awards to AIG employees.

Who (if anyone) dropped the ball here? The Bush Treasury Department and Federal Reserve, when undertaking the initial bailout of AIG last September? The Obama Treasury Department, when approving the latest of AIG's four bailouts early this month? The Congress, for not stepping in sooner? AIG's regulators, from state insurance commissioners to the Fed to the Securities and Exchange Commission?

Or, is it possible that no one dropped the ball - that the best way of unwinding AIG's troubled derivatives business is to keep in place many of the pros in the trenches who assembled those deals in the first place?

Finally, will an actual clawback of contractually agreed compensation that's been paid or is slated to be paid to more than a handful of top AIG executives (such as via the 98 percent tax surcharge Congress is mulling), send a signal that anyone with real chops in this industry would be stupid to go work for, not just AIG, but any TARP institution that's subject to politicians' whims about whether any particular employee's compensation agreement is "deserved"?

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