Steve Pearlstein, The Washington Post's financial columnist, suggests the AIG bonus contracts could have easily been renegotiated prior to the big train wreck this weekend. (His argument is pretty similar to my own renegotiation proposal, though he talks about it as something that should have happened already rather than something that could still happen):
The legal argument for honoring these ill-considered contracts is that a deal is a deal and that trying to abrogate them will only wind up costing the government even more in legal fees and punitive damages. But that doesn't mean the government and its handpicked new management team at AIG were powerless to renegotiate those contracts long before last weekend's deadline. ...
Call me a cockeyed optimist, but I suspect that when confronted with the prospect of a bankruptcy and a prolonged and public investigation, the sharpies in London and Connecticut might have been receptive to the idea of renegotiating those bonuses in favor of new contracts -- contracts that increased their base pay but tied their bonuses to success in reducing future taxpayer liabilities at AIG.
--Noam Scheiber