AIG, the giant insurance firm we taxpayers have given $173 billion to keep from collapsing, has lately got itself in the news for paying out a "contractually obligated" $165 million to the key employees of its "Financial Products Division."

Financial Products are the derivatives guys. They're the geniuses who sank the company. President Obama is reportedly


by this turn of events.

Today, New York Attorney General Andrew Cuomo sent a letter to Congressman Barney Frank, who chairs the House Banking Committee, outlining his latest findings about this payout (see below).

The key problems, according to Cuomo's letter:

  • 73 key employees got at least $1 million
  • 11 of these key employees got millions but are no longer with AIG--one got a $4.6 million "retention" bonus
  • AIG's contract guaranteed 2008 key-employee "retention bonuses" at a minimum of their 2007 bonuses--despite clear signs in 2007 that things were sliding down hill.

All of this is not surprising. What is surprising is the tendency of some to defend these bonuses as somehow "legal," even immutable. The

New York Times

' Andrew Ross Sorkin did so

asserting that AIG's best and brightest are necessary for the unwinding of the credit-default swaps and other bullshit contracts that have resulted in AIG's $60 billion quarterly loss, its bankruptcy in all-but-name, etc.

Sorkin's argument rests on two fallacious points.

First, the sanctity of contracts:

This argument is nonsense. Government actions nullify contracts all the time, and corporations do as well. The difference this time is that the contracts in question are not union pension or health care contracts--the kind ordinary idiots depend on in order to get food and medical care.

Sorkin's second argument is more irritating, because it relies on the specious but unquestioned claim that the contracts to be unwound were created by a race of supermen, geeks of such genius that ordinary mortals could not hope to understand them.

The obvious rejoinder to that, of course, is that at least 11 of these geniuses have already left AIG. If there is concern that they will "trade against" AIG, the remedy is to arrest them for fraud, and jail them, to prevent more mischief.

But I think it's more important to challenge this notion--repeated here by the

Washington Post



, that derivatives are somehow inscrutable:

No, they're not. I say this as a person who has actually read credit-default swaps--Enron-made CDS, no less--back in 2001. I plowed through six bank boxes of Enron paper related to a quarter-billion dollar deal the company made with a quasi-public trash company in Connecticut. They were written in English, just like a home mortgage. There were lots of funny acronyms, like "LIBOR." But everything in them was defined at the top, and it wasn't hard to figure out that these were nothing more than low-grade, unregulated insurance contracts backed by the full faith and credit of, in that case, Enron.

All such derivatives, now and always, are bets that the company writing the contract will remain solvent and able to pay up, if you win. The contracts all have the same boilerplate language, explaining that in the event of bankruptcy, all bets are off.

So it's not hard to understand, once one realizes that all of this paper is, quite simply, not guaranteed by anyone.

The complicating factor: when the U.S. government decides to guarantee it.

In the case of AIG, the money pumped in by U.S. taxpayers

--to Goldman Sachs, to Societe Generale of France. To other European banks.

None of these

, it seems, read their contracts, which said (as all do) that if AIG goes bust, all bets are off.

So this question remains at the center of the financial scandal: Why is it that union contracts and pension benefits can be, and have been, arbitrarily abrogated and nullified whenever industrial businesses go bankrupt, and yet contracts made by and for wealthy investors cannot be?