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Sen. Chris Dodd, facing the lowest approval ratings of any Senate Democratic incumbent,is in political purgatory. But on the subject of AIG's bonuses, he doesn't deserve the bad rap.  Dodd is being blamed for OKing a proviso in the American Recovery and Reinvestment Act guaranteeing previously sanctioned employment contracts. He faces intense political pressure because of his long-standing friendship with bankers and lenders, which has made him a key player in the negotiations between financial institutions and the government. In a statement yesterday, Dodd called on AIG executives to voluntarily refuse their bonuses. The truth is that the codicil was added in conference by mutual agreement of House and Senate Democrats and the White House. At the time, the administration worried about both the perception and the reality of government's interfering in the decisions and internal operations of the banks. Backstopping employment contracts was controversial to critics, but to an administration that was trying to work with the banks, it was an easy call. The worry was that the banks would suffer immediate and disasterous brain drain if the govenment could abrogate (the world of the week!) employment contracts willy-nilly.  Apparently, no one at the Treasury Department or the New York Federal Reserve Board bothered to check on what those contracts actually contained - therein was the sin of omission, if you can call it that. How many tens of thousands of employees does AIG have? And didn't Geithner recuse himself from dealing with AIG?

As Conor Clarke noted below, title VII Sec. 111 of the American Recovery and Reinvestment Act permits the Secretary of the Treasury to recoup any bonuses or excess compensation from corporations accepting a threshold amount of TARP money.

 In conference -- Dodd was not a conferee -- the following clause was added to reconcile differences between the Senate and House bills:

 iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

Dodd, the chair of the banking committee, agreed to this language because most all of the stakeholders - including the administration - wanted it. But the original bill passed by the Senate contains Dodd's compensation limits without the carve out the exemption for bonuses. So there is no evidence that Dodd bowed to pressure from his contributors or that he was the author, the force of nature, behind it.

A few other points: the language seems to create a loophole for ameliorate action -- "as such valid employment contracts are determined by the Secretary" -- seems to give the Treasury Secretary the power to judge whether a contract is valid. But clearly, the intent of the clause is to give the Treasury discretion over cases where the contracts aren't obviously valid, like, an instance of a trader given the oral guarantee for a bonus.

I am told that the Treasury does NOT consider the clause to be operative here; the contracts are valid. Here's another loophole: the language does NOT prohibit TARP-taking companies from doing other things to increase the pay of top executives, like, for example, increasing base salaries. (Moments after writing this sentence, a correspondent e-mailed me a link to a Wall Street Journal story suggesting just this scenario.)