Mixing politics and bonuses doesn’t pay

Hats off to Larry Summers. The president’s chief economic advisor told ABC News’ George Stephanopoulos on Sunday that there’s nothing to be done about the fact that American International Group is contractually obliged to pay millions of dollars in bonuses to thousands of employees, some of whom helped ruin their company -- and, to some extent, the national economy. “We are a country of law; there are contracts. The government cannot just abrogate contracts.”

From what I can tell, the bonuses do stink -- although some are as small as $1,000 and presumably go to people who had no significant part in the credit-default-swap-derivative mania of recent years. But let’s assume that they’re all gratuitous. Summers was still right.

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

And here’s a general rule of life: When you buy an elephant, you can’t refuse to buy the manure that comes with it. You can try, but, soon enough, you’ll be knee-deep in problems anyway. And they’ll continue to pile up no matter how loudly you complain that “this isn’t what I paid for.”

Unfortunately, it looks like Summers is fighting a losing battle.

New York Atty. Gen. Andrew Cuomo is getting set to churn out subpoenas to investigate the bonuses. Rep. Elijah E. Cummings (D-Md.) demanded that AIG Chief Executive Edward Liddy, who came onboard after these contracts were signed and the company imploded, resign. Somehow I doubt that would make hiring a new caretaker any easier.

Meanwhile, Rep. Barney Frank (D-Mass.) wants to fire anyone who takes the bonuses. “These people may have a right to their bonuses. They don’t have a right to their jobs forever,” Frank said on NBC’s “Today” show Monday. “Forget about the legal matter here for a second. These bonuses are going to people who screwed this thing up enormously, who made terrible decisions.”

One wonders, given that logic, why Frank is accepting a congressional pay raise considering his role in the Fannie Mae and Freddie Mac debacle.

Later in the day, President Obama caved to the populist chorus. He said he asked Treasury Secretary Timothy F. 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 when he says 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. 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 hold on to talented staff.

But the unintended consequences surely won’t end there. What signal does it send when the president and Congress make it very 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?”

The New York Times reports that the administration is worried about a coming “populist backlash.” It’s right to be worried. But further blurring the lines between politics and the market isn’t the answer. That’s how we got in this mess in the first place.

jgoldberg@latimescolumnists.com