AIG Obligated to Pay Bonuses? Bull! 10 comments
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By guest author Laura Wilson, Information-Security-Resources.com Corporate Liability Editor
The plaint that credit default swap-promulgating AIG is contractually obligated to pay out millions in bonuses to the same pitted brass that led the company, the industry, and the entire economy off a cliff is a bunch of horse hooey.
If you are on the management team of a company that lays off workers, can't pay its bills, leaves shareholders holding nothing, and has to take public bailouts, it's your damn job to make a deal to restructure that company, or wind it down responsibly.
Your bonus is getting to keep porking up to the paycheck trough while other workers are losing salary, severance, and health care.
From the New York Times:
The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.
The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.
A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.
I sure would like to see those AIG contracts - I'll bet I can poke a hole in the specious supposition that the company really, really wants to do the right thing, but its little hands are tied. Since the public bailout of AIG, we all have an ownership interest in where the money is going, and are entitled to ask probing questions.
From the New York Times:
"We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.
Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me,” and noting that he receives no bonus himself.
“Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”
I know contracts inside and out, at the real-world, down and dirty level, not the black-box, ivory tower, theoretical stratum that gets adjusted as the tectonic plates of business deals crash into each other.
Although I have chosen not to practice law anymore, I am really good at understanding the terms of these agreements, and evaluating when it would appropriate to reward corporate players for their performance.
And, when it is not. From the New York Times:
Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than AIG, and none has infuriated lawmakers (and Ben Bernanke per 60 Minutes) more, with practices that policy makers have called "reckless"
The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds which were backed in many cases by subprime mortgages.
The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.
Any attorney who advises that these bonuses are appropriate ought to have his or her head checked.
Base salary, maybe, if not outrageous. No bonus. No severance unless everybody else also received proportionate assistance. Don't care what the contract says - attack it in bankruptcy or wind down - I saw it many times in the Silicon Valley meltdown.
But the official also said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.
AIG’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall. AIG had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, and when problems stemming from the mortgage crisis were just becoming clear.
There were concerns that some of the best-informed derivatives specialists might leave.the company. AIG then locked in $450 million for the financial products unit, and prepared to pay it in a series of installments to encourage people to stay.
This poignant issue is near and dear to me, as I have shut down management bonuses before, even when I would have received some of that money, and even when I really needed it.
I also have been lucky enough to work with one of the premier corporate governance experts in the country and with a bankruptcy and wind down expert whom I hope will end up on the federal bench.
In the past, I have known both of these gentlemen to express support for my assertion that it is appalling for a destitute company to pay out management and deal bonuses to the team that took the company under.
From the New York Times:
A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.
Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.
Nice. You just keep holding that moral compass you got there, guys.
Laura is a business consultant and an advocate for information security, consumer protection, long-term shareholder value, and better management decisions. Her specialty is finding and fixing risks and threats to sensitive data. Her experience includes international banking, credit card, and mortgage companies, venture capital portfolio companies, and software and technology providers. She practiced law in Silicon Valley during the tech boom and meltdown, handling corporate governance and information protection. The author gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to Information-Security-Resources.com.
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This article has 10 comments:
Like everyone else, I am indignant that taxpayer funds have been used to pay out huge bonuses in a company that has received a bailout out of my pocketbook. However, I also believe that the when employees of a company have earned bonuses through their toil and have lived up to their side of a contractual agreement, they deserve to be paid the bonuses they've earned. I doubt they deserve it, but if they've earned it based upon existing contracts and in good faith, they should be paid. The laborer is worthy of his hire.
If AIG had been allowed to fail, and had used the bankruptcy courts under a Chapter 11 filing, these contracts would have been dissolved by the Bankruptcy Court. The whole argument would have been a moot point. We probably wouldn't have even heard about it, because taxpayer funds would never have been used in the first place.
(By the way, our Constitution also empowers Congress to create bankruptcy laws under the "bankruptcy clause", which, in the wisdom of the Founders, creates an environment in which bad assets based upon bad decisions can be liquidated in a civil and fair manner for all stakeholders. Unfortunately, few people in Washington or Wall Street care about the Constitution any more. The further we stray from the principles embodied therein, the more trouble we create for ourselves! The further we stray, the more the successful American experiment becomes a failure. That's the natural consequence of an arrogant straying from the success formula they gave us.)
Your insistence that lawyers should simply look for loopholes in contractual agreements so they can break their word say much about your character and that of the macro society in which we live today, but nothing about the validity of those contractual agreements and obligations. The more legalistic minds seek to break not only their contractual agreements, but their WORD, the more a tyrannical government is required to reign in all our immoral behavior. Gradually, but surely, the crushing weight of more and more laws and legalistic language makes "criminals of us all".
On Mar 17 03:54 PM A.M. Freed wrote:
> ...If you actually read it, dipsht....
> ....And they are a hell of a lot more successful than you are, regardless of their current financial state....
>... And what are you sucking on in your picture? It's hard to tell,
> but I have a few guesses......
Cheers!
On Mar 17 05:55 PM TXB wrote:
> And you called me a troll? Charming
Case closed!
By the way, the Constitution also prohibits Congress from passing legislation ex post facto (after the fact) to punish an individual or group for doing something. It is called the "bill of attainder clause". So when the same Senators that placed the provision into the (mis-named) "stimulus" bill to protect those contracts, and now vow to tax the entire bonus at 100% in punitive legislative, it will be challenged in the courts, and they will strike it down under the "bill of attainder" clause of the Constitution.
Case closed!
On Mar 17 03:54 PM A.M. Freed wrote:
> Contracts made under false pretenses, while withholding material
> information, or with the intent to defraud are null and void.
>
> Case closed.
>
> If you actually read it, dipsht, no one used the NY Times to support
> an argument, only to relay the background story material.
>
> And they are a hell of a lot more successful than you are, regardless
> of their current financial state.
>
> And what are you sucking on in your picture? It's hard to tell,
> but I have a few guesses.
Case closed!
I have found that people engage in insult, straw man, and name-calling because they can't win their "case" with persuasion and good argument. Thus, they must engage in personal attacks and insults.
"Profanity is the effort of a weak mind to express itself forcefully." Spencer W.Kimball
My gains as a futures trader are no more "ill-gotten", as you purport, than any other investor's, including yours. I am no Wall Street banker. I've never worked on Wall Street, neither literally nor figuratively. I have never received a single penny of bailouts from the taxpayers. All of my gains in the futures market are honest trades that I've made without any help from the taxpayers. I have always been opposed to all the bailouts throughout the entirety of this imbroglio. If I had my way, ALL of the trillions of dollars of taxpayer funds wasted on bailouts would never have occurred.
However, I believe that when a company signs a contract with its employees, it has a duty to keep that contract. I also believe in the Constitution, and I have clearly indicated in this forum how abrogating those contractual obligations are a violation of three clauses in the US Constitution. Once again, since you can't win the argument, you hurl insults and false accusations at me!
Your repeated abuse tells no one in this forum anything of me. Your abusive behavior is the greatest testament to not only your nature, but your ideas as well. It reveals to everyone what type of person you are. I don't need to say anything in retaliation against you. You've done a fine job of accomplishing that yourself.