Washington has erupted in fury this week over the 73 AIG executives who have received bonuses this year in excess of $1 million per person. Portfolio's Felix Salmon suggests that since the U.S. government now owns 80 percent of AIG, it could simply decide not to pay the bonuses and wait for the employees to sue. "Would the employees of the financial products arm," he asks, "really fancy their chances in court were they to sue to receive them? It's possible that they would ‘win' such a court case--if by winning you mean having your picture splashed across every TV screen in the land as an exemplar of out-of-control greed and avarice." Because of this, he suspects most of the execs wouldn't sue AIG. Congressman Paul Kanjorski, who chaired Wednesday's hearing on bonuses with AIG's CEO, suggested the same thing.

It's a nice idea, but it's unlikely to work. Salmon presumes that most people would not risk temporary shame to secure a large fortune. But as John Coates, a banking law expert at the Harvard Law School, puts it, "If you had a few million dollars at stake, you wouldn't sue?" It's unlikely that "these guys care enough about public relations because obviously they did not care enough to avoid bonuses in the first place," says banking expert Lawrence Mitchell of the George Washington University Law School. "Embarrassment is unlikely to be terribly effective. ... There's a different ethic with these guys--they never make enough money." Additionally, the lawsuits would probably drag on for months on end, with the U.S. taxpayer likely paying for AIG's legal defense.

Another problem with Salmon's idea is that breaking these contracts might shatter the confidence of those who do business with AIG. If you are a company dealing with AIG and see that the firm is abrogating contracts with its employees, you'd likely be worried that AIG might default on its payments to you. "Every counter-party for AIG is going to reevaluate and count on its commitments," said Coates. Unless the employees did something illegal, "there's little meaningful distinction between employees and counter-parties," he said. Were enough counter-parties to renege on their commitments, the firm would require more working capital-- forcing the government to bail out AIG once again if they want it to stay afloat.

So what are the alternatives to the Salmon-Kanjorski plan? So far, Chris Dodd's plan, which calls for specially targeted legislation that taxes the bonuses at the rate of 90 to100 percent, is gaining the most traction. (It passed a vote in the House on Thursday evening.) But as AIG's bonuses begin to take on a symbolic importance in a nation rediscovering more aggressive ideas of social justice, the Obama administration may need to take a cue from one his presidential forbearers in laying down the law. "When Ronald Reagan went on strike against the air traffic controllers, the feeling was that he laid down a marker that was considered important," said Arthur Wilmarth, a commercial law expert at the GW Law School. "If these people won't reconsider bonuses, [ensuring they do so] is like laying down markers. It's gotten to the point where we're not going to blink on this one."

--Sahil Mahtani

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