How to Not Pay the AIG Bonuses

Barack Obama is a lawyer -- and a very good one, too, by all accounts. Andrew Cuomo, too, is a lawyer, and is attorney general of New York. And neither of them seem remotely impressed by AIG's protestations that it's contractually obliged to pay out $165 million in bonuses to members of the very financial products group which brought the company to its knees.

Is there a legal way to stop these payments being made? I don't know. Cuomo's attempt to paint the bonuses as "fraudulent conveyance" seems like a bit of a stretch, while a legislation trying to retroactively claw the bonuses back would easily pass Congress, only to face certain appeal on the grounds of being unconstitutional.

But right now, even Cuomo hasn't seen the contracts which AIG is convinced are so ironclad. And it might just be the case that AIG's contractual obligation to make the bonus payments is a bit like an underwater homeowner's contractual obligation to make his mortgage payments. If AIG simply didn't pay the bonuses, would the employees of the financial products arm 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. Which is why AIG could probably have quite a persuasive conversation with the AIGFP employees, along these lines:

"We know we promised you this money, but it's clearly politically impossible for us to pay it to you. So you're not getting the bonus you were counting on. Sorry about that. At this point, you have three choices. You can continue to work for us, and keep your job. You can quit, and find a better-paying job elsewhere. Or you can quit, and sue us for the bonus that we promised you. Your call. But if you choose the third option, you'll probably want to hire a PR person at the same time as you hire a lawyer."

I suspect that most of the affected employees would not sue AIG, and that the bonus payments would therefore be saved. It's hardball, but it might well be effective.

Comments

[Carlos Slim:]

Great Suggestion!

Mar 16 03:11 PM

[Ricard:]

John Thain comes to mind when reading this article.

He asked for a $10 million bonus for effecting the merger between Merrill and BofA. He was promptly denied, and then fired in short order.

Mar 16 03:27 PM

[mark52:]

why did the government not insist that a condition to get the bailout is to oust the current executives that got the company in this mess to begin with, even with a layman like myself i could do better. when you give money to idiots and crooks this is what you get. i don't think Obama has the balls to take back the money, and put the exec in there place he's looking like just another spend happy democrat that says he's going to do somethin annouces it like he is going to do something and then let it go, besides when is anybody going to jail.

Mar 16 03:27 PM

[GEN X:]

Obviously there is a new 6 letter word that has execs at AIG cringing more than the worst 4 letter words you can think of - Ethics

Mar 16 03:31 PM

[docmarik:]

not bad but the problem here is that AIG's reputation would be destroyed and its customers will not continue business with a company that does not honor its obligations

Mar 16 03:33 PM

[rogersails:]

In the tech industry that I came from, when it was crunch time, people were laid off. Layoffs were a function of:

A. Contribution (or lack of)
B. Salary

Just fire em all. What do their contracts say about that ?

Mar 16 03:39 PM

[DrBenway:]

AIG reputation? -:)


On Mar 16 03:33 PM docmarik wrote:

> not bad but the problem here is that AIG's reputation would be destroyed
> and its customers will not continue business with a company that
> does not honor its obligations

Mar 16 03:51 PM

[Chris B:]

Just have Congress pass a law that sets a 99% retroactive tax on bonuses paid by companies that are dependent on taxpayer funds.

Obvious flaw: they would just increase the size of the bonuses 100X to get the same amount of cash in their pockets. These guys are clearly in free-for-all liquidate-the-taxpayer mode.

Mar 16 03:57 PM

[User 283977:]

Not one cent should be paid until the new "Owners" of AIG (The US Government) sees the contracts.

Are these "contractual" obligations actually "retention bonuses". If they are, don't pay them. Let these people go out and find another job. If those contracts are retention bonuses, Fire Liddy. If they are not, and the contracts are indeed iron clad, fire Liddy and everyone that signed off on the idea of providing bonus payments not linked to profitability. Now down size the payees.

Mar 16 03:58 PM

[silencedogo...:]

In the real world liquid assets compared liabilites tells the story...no profit no bonus how can this be so confusing?

Mar 16 04:03 PM

[nova:]

It had to be done a long time ago: force AIG into a bankruptcy and then sort it out.

As for bonuses, nobody have to force a bankrupt company to pay bonuses.

Lastly, a bankrupt company does not have to pay most of its obligations.

Summary
Sort it all out through bankruptcy process. it is time to stop all these special deals and special favors.

Mar 16 04:21 PM

[Larrysyr:]

The AIGFP folks are getting bonuses rather than jail time?

Mar 16 04:26 PM

[User 377486:]

I've had enough of the crap from AIG and the Feds talking about "contractual obligations". It seems the Feds don't mind breaking contractual obligations on mortgages (forcing banks to renegotiate contracts made years ago); or letting people off the hook from their credit card bills (which was a contractual obligation to pay).
Those guys at AIG can burn all I care. They have, and will continue, to rip the taxpayers of this country off - thanks to congress.

Mar 16 04:36 PM

[Jesse99:]

Why not just allow the bonuses to be paid out, take the subpoenaed list of people who received them, hand it over to the ISR and then let them play getback through audits. Put seven years of these people's stuff in the light of day and the crooked ones are sure to fall.

Mar 16 04:39 PM

[gladstone:]

Sorry executives, but when your company is losing money no sane person will give you a bonus, no matter what your "contract" says. At that point, the "contract" is abrogated. Either you stay at your present salary, go find another job, or hire a lawyer and try to collect. i dont think option 3 would work. NO ONE AND i MEAN no one who is working for a company losing money which has been bailed out by taxpayers should get a cent of bonus money. If anything, their salaries should be reduced.

Mar 16 04:46 PM

[Roger Knights:]

Felix, your suggestion exhibits good political feel and Machiavellian cleverness. Time to make room for you at the top!

Mar 16 05:00 PM

[Jackson Cash:]

This whole conversation is bull$hit. They ran their company and arguably many others into the ground. You don't get your bonus!

How many millions of people aren't getting their bonus because business is down, not because they scammed the world's financial stage??

AIG ROT IN HELL.

Mar 16 05:04 PM

[Phil Dewey:]

The thinking is they need these people to unravel the CDOs they created that caused this mess in the first place. So why not bonus them on doing that? The faster the do it the more they make.

Mar 16 05:13 PM

[AnonymousAlso:]

Some of the contacts are with non-US employees in other countries. Given how much other countries are unhappy with us it might be interesting to see how those courts rule if the AIG decides not to pay.

Mar 16 05:21 PM

[oldumbguy:]

I like it. I also think offering orange jump suits as a consolation prize might be cool.

Mar 16 05:34 PM

[mr freddo:]

I agree Mr. Salmon. Just don't pay the bonuses. Let the employees sue if they believe that they really deserve their day in court. That would be quite a spectacle. I can only imagine how much fun Jon Stewart would have with that.

Mar 16 05:34 PM

[mac.barron:]

The fault is with the Administration and the one before it. Back in time the whole Wall street "bonus" issue was raised and back then was the time to nip AIG's plan in the bud. You can be sure that the current Administration knew that this was going to happen well in advance and that they underestimated the political fallout. The saber rattling you now hear is empty posturing.

I expect a fake publicity "solution" be engineered. The bonuses will be voluntary "returned" (but not really).

Mar 16 06:29 PM

[mathgeek:]

What is going to have to happen is that someone is going to have to just say no and not pay the money. Someone will sue... and they will win. Congress might legislate, but the Supreme Court would inevitably uphold the contract.

The bottom line is, public outrage... even justified outrage... doesn't give anyone a license to walk away from contracts.

The real devil here is the nature of AIG's business. If AIG could be put into bankruptcy, all of those contracts would vanish. The problem is that because of the specific importance of ratings to AIGs products, bankruptcy hasn't been an option.

The FDIC can (and has) used its specific legal powers to accomplish this with banks. Perhaps the question we should really ask is why the government... both the outraged Congress and New York State... never chose to create a sensible legal regulatory structure for insurance companies.

Mar 16 06:58 PM

[john1940:]

I'm surprised with the comfort contributors have with not honoring contracts. What do the documents say??? If the traders are entitled to the money, pay them and fire them and the management that executed them. But it's still important to honor contracts. It's wrong for Congress, Presidents, corporate executives, or anyone else to deliberately abrogate or annul a contract without cause spelled out in the contract.

Mar 16 08:19 PM

[prudentinve...:]

I am not the lawyer, but am under the impression that an "unconscionable contract" is not enforceable.

Mar 16 08:33 PM

[john1940:]

Prudentinvestor:
Probably not, but I've never seen an unconscionable contract particularly in a corporate environment covering employment and compensation. Worse yet, I don't even know what unconscionable features could be negotiated and accepted between employer and employee these days. Educate me on what that means in a circumstance that actually happened.

Mar 16 08:45 PM

[nova:]

Just look at the list of companies AIG was paying billions of US Treasury dollars to. This list includes the majority of US major banks.

How convenient. AIG became "a fall guy" for the Wall-Street and the major banks. The former Goldman's chief Paulson, being the Treasury Secretary, devised a very good script to channel government (taxpayers) money to Goldman and other Wall-Street using a very elaborate scheme of conduits including AIG.

It is very important to find
- When were these insurance contrats signed?
- Who negotiated these insurance contract?
- What prices did Goldman and others paid for these contracts?

Summary
Taxpayers must know exactly where all the money are going. The Congress, presidential administration and FED frauds must be exposed.

Mar 16 08:57 PM

[Venetian Poker:]

I think everyone needs to know exactly what these bonuses are for before we can say what is right.

Some of these bonuses are for $1,000. I don't think anyone getting a $1,000 bonus had much of a hand in the downfall of AIG. And I'm betting that it's a lot of money to the recipient, perhaps enough to make mortgage payment.

And if someone is a top producer or earner for AIG and they're entitled to a $1 million bonus, then they should get that, too. (Won't the feds be taking 40% of it back, anyway?)

What's clear here is that bonuses should not be paid for poor performance, and if "contracts" allow such payments in the absence of a positive outcome, then we have even more insight as to why AIG is in the shape it's in today, don't we?

Mar 16 09:01 PM

[nair:]

Does anybody not understand what "contractual obligations" mean ?
If AIG decided not to pay and take the issue to the court, why would they pay Goldman, S.G., Barclays 100 Billions in CDS and other claims ? Those are contractual obligations too.

Mar 16 11:03 PM

[honestdevil:]

* GS=biggest pricks on wall street
* AIG=biggest pussies on wall street

There is nothing new about GS is f*c#% AIG! They just used Pauson as a condom!
Now the question are taxpayers lesbians that they get f*c#%ed by AIG?
Excuse my french ..

Mar 17 04:34 AM

[User 371080:]

Debating whether to pay the bonuses or not pay the bonuses gives those receiving bonuses time to spend or squirrel away the money.

The easiest way to solve this problem is for congress to pass emergency legislation placing a 95% tax on all bonuses paid to any employee of any entity that has received bailout funds.

Mar 17 06:44 AM

[User 371080:]

All contracts are unconscionable. They are instruments of oppression at best. If a contract is needed at least one party is up to no good.


On Mar 16 08:45 PM john1940 wrote:

> Prudentinvestor:
> Probably not, but I've never seen an unconscionable contract particularly
> in a corporate environment covering employment and compensation.
> Worse yet, I don't even know what unconscionable features could be
> negotiated and accepted between employer and employee these days.
> Educate me on what that means in a circumstance that actually happened.

Mar 17 06:55 AM

[tedstr:]

If these are bonuses paid to the soldiers who went out and did what they were told, they should be paid according to their contracts. If these are bonuses for managers who instructed the soldiers to run the business by overselling obligations that bankrupted the company, then they should not be paid and they should be getting sued by the shareholders.

Mar 17 07:38 AM

[User 371080:]

A guy with a desk, a stack of contacts and a telephone to his ear is a soldier?


On Mar 17 07:38 AM tedstr wrote:

> If these are bonuses paid to the soldiers who went out and did what
> they were told, they should be paid according to their contracts.
> If these are bonuses for managers who instructed the soldiers to
> run the business by overselling obligations that bankrupted the company,
> then they should not be paid and they should be getting sued by the
> shareholders.

Mar 17 07:48 AM

[Hari Seldon:]

I think Cuomo is taking the right tack here with trying to use fraudulent conveyance. I agree that in practice it may be difficult but, outside of criminal prosecution for fraud (which is what I'd like to see happen), it is probably the only way to try to get the money back. The reality is that, if the funds were transferred on Friday as is being reported, it isn't coming back.

Another interest point on fraudulent conveyance would be the CDS contracts. Given the GS was (a) a shareholder, (b) very familiar with the comapny through its research department, (c) a large counterparty is there potentially emails or memos highlighting concern by GS that AIG would be unable to ever actually meet its contractual obligation under these contracts? It seems to me that if this exists, GS would be considered an "insider" and a transfer of assets (even collateral posting) would be fraudulent conveyance.

Mar 17 08:24 AM

[prudentinve...:]

I am suggesting that a court may reasonably find it unconscionable that bonuses are being paid from taxpayers' funds that have been expended to prop up a failed company, and being paid to the traders who precipitated said company's failure. So, even if the contract were established in good faith, its execution under the circumstances may be deemed unconscionable.

As I mentioned in my post, I have no legal education, but have discovered over the years that the law does indeed tend to be quite logical.

On Mar 16 08:45 PM john1940 wrote:

> Prudentinvestor:
> Probably not, but I've never seen an unconscionable contract particularly
> in a corporate environment covering employment and compensation.
> Worse yet, I don't even know what unconscionable features could be
> negotiated and accepted between employer and employee these days.
> Educate me on what that means in a circumstance that actually happened.

Mar 17 09:27 AM

[frosty:]

This is good! I would only add that, if sued, AIG should demand a jury trial.

Mar 17 09:38 AM

[Al Jager:]

I agree whole heartedly with Felix Salmon. I was employed as the CEO of a group of vegetable farmers in Mich. for 35 years . My salary was based on my ability to get fair and prosperous prices for there products. I also recieved a 10 percent of the profits at the end of the year. If I didn't perform prosperously I would be out the door. There is no way that people should be rewarded for running a company into such dire straits.

Mar 17 09:54 AM

[Larrysyr:]

Contracts are breached all the time. The consequences are legal. If one party is unable to make good on their end of the contract, there are remedies available to the "injured" party. If there's no money left (see entry under "Madoff"), the injured party can get a judgment, but won't be able to collect. Felix has the right solution.

Next up - abrogate all the AIGFP CDS contracts. Let the counterparties come forward and make their claims. Divvy up whatever assets there are and let's move on.

AIG is a sinkhole, and our money is getting sucked into it. Time to get out.

Mar 17 10:58 AM

[Woz2000:]

If I had any business dealings with AIG, I would surely wind it down.

They don't plan to pay back the bailout money, so why not bankrupt them by taking away their business? If people stop doing business with them, they will soon see the wrath of the public outcry.

Mar 17 12:47 PM

[r cohn:]

First Ethics are important to only a minority of Wall Street traders.
Second if there an ironclad contract which involves millions of dollars , traders are going to sue and probably win legal fees in addition.PR takes a second place to money.
In my mind ,all of the bonuses paid over the last four years should be clawed back.Bonuses were based upon false profits .Will these bonuses be taken back.Bonuses payed on Wall St over the last 10 years were much,much bigger than at any time before despite the fact that Wall St was really much less profitable.Wall St has lost the trust of many people for ever

Mar 17 02:01 PM

[Nik Kondrat...:]

Great suggestions, but hasn't it already come out that AIG has paid several of the bonuses already?

Mar 17 09:49 PM

[halconnoche:]

Heres a suggestion. Any politician that took a campaign doantion from any company that received bailout money should be required to pay that back to the treasury.

Mar 19 07:04 PM

[mr freddo:]

Hey Chris B, nice call.

Mar 19 08:04 PM