The AIG bonus scandal has taken a strange twist, with a former vice-president of AIG’s notorious Financial Products Division resigning, and writing a letter to the New York Times strongly criticising AIG chief, Edward Liddy and the US Congress, which devised what appears to be an un-constitutional, retrospective bonus claw-back.

Jake DeSantis was, until recently, an executive in the commodity and equity division of AIG. DeSantis was not involved with, nor was he responsible for the credit default transactions which crippled the insurer. In a letter to the OpEd section of the New York Times, DeSantis stated that:

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

In a sense, DeSantis and other AIG executives seem to have a fair grievance. For instance, Congress did not devise a knee-law law after Merrill Lynch traders, who destroyed billions of dollars of wealth, received $4 billion in bonuses days before the firm was taken over by Bank of America, necessitating a further government bail-out. Nor did any elected officials call for Merrill Lynch executives to commit suicide.

Bloomberg columnist, Ann Woolner, noted AIG bonus payments, while in poor taste, were contractually agreed to well prior to their payment. Woolner opined:

If the contracts are as airtight as those who have read them say, breaking them would invite a series of lawsuits the government would surely lose. Why is that a good idea?

Yes, the government could pour taxpayer money into a bottomless pit of legal fees. But in the end it would still have to honor the bonuses. And you could expect the employees to come after the government for their legal fees, too.

That’s the tangible loss to the government. It would also signal that the government’s contracts, its very word, can’t be trusted.

Of course, it is also reasonable to argue that without a US$170 billion taxpayer funded bail-out, AIG wouldn’t be paying any bonuses as all. But that doesn’t change the fact that innocent, hard-working employees, who had as little to do with AIG’s missteps, are being punished for the deeds of others. As DeSantis observed, “many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.”

The total value of the controversial payments to Financial Product employees was around US$165 million. The vast majority of the taxpayer monies which were provided to AIG found their way into the hands of the insurer’s (largely foreign) counterparties, firms like Goldman Sachs, Deutsche Bank and Société Générale SA (who collected US$6 billion).

As Bill Bonner percipiently noted, the bonus issue was a mere sideshow to the main game — which was the dishing out of tens of billion of taxpayer funded dollars to banks. As Bonner noted, “under pressure from its new proprietor — the U.S. government — AIG released a list showing who had gotten more than $100 billion of its bailout money. At the top of the list of recipients was a familiar name — Goldman Sachs. In a truly astonishing co-incidence, Goldman is the firm that had been run by the very person who headed up the AIG rescue — former Treasury Secretary Hank Paulson. And what serendipity! Lloyd Blankfein — Goldman’s top man now — was actually in the room with the feds when the AIG rescue plan was put together.”

The payment of bonuses to employees in a taxpayer rescued enterprise is in bad taste — but it certainly isn’t the worst use of taxpayer dollars witnessed in the past year.