AIG Bonuses Are Just the Tip of the Iceberg

Imagine there’s a bomb ticking in the basement of your neighbour’s home. Who would you want to defuse it? The bomb squad from the local police force, or some guys and gals who answered an online posting on Workopolis.com? Maybe better metaphor is Hannibal Lecter — who better to help the authorities find a serial killer than the one you’ve already got in custody?

That’s how I feel about the “stay bonuses” that were put in place for the propeller heads at AIG (NYSE: AIG). Who is going to keep these things from blowing the finance world to smithereens? The CDS bomb squad, of course (or maybe the Terrorists who created them). Without these stay bonuses, most of the smart folks would have bolted. Letting these Hannibals of the derivatives industry loose will accomplish nothing more than putting them across the street at a competitor firm, knowing exactly what the weaknesses in AIG’s book are.

Down in Washington, however, there is no such rationalization. New York’s Senator Charles Schumer didn’t dismiss suicide, at least not the physical type (via CNN):

“My colleagues and I are sending a letter to [AIG CEO Edward] Liddy informing him that he can go right ahead and tell the employees that are scheduled to get bonuses that they should voluntarily return them,” Sen. Charles Schumer said on the Senate floor. “Because if they don’t, we plan to tax virtually all of [the money] … so it is returned to its rightful owners, the taxpayers.”

Schumer’s comments came the same day New York Attorney General Andrew Cuomo confirmed in a letter to Congress that AIG paid 73 employees bonuses of more than $1 million each.

Boiled down, U.S. politicians seem to be of the view that since AIG is still in business merely due to the good graces of the U.S. Treasury, then traditional Wall Street bonuses are no longer in order. And if you are granted anything with a seventh figure in it, then don’t be surprised if the tax code gets a new line with your name on it.

Where was this “without us you’d be dead” attitude when Citibank (NYSE: C) awarded CEO Vikram Pandit 2008 compensation of US$10.8 million (US$7.73MM of which was in the form of a signing bonus last January)? I recognize that Mr. Pandit has waived any further bonuses until Citi is profitable, but if he can pull that off he’ll find himself making US$40-50 million thereafter. At least that’s what the Old Citibank would have paid a CEO over the past few years. Citi’s bailout number is only US$45 billion, but they’d be broke if not for the U.S. government. But no outrage over Mr. Pandit’s US$10.8MM? Why the double standard?

GMAC (GKM) is probably another player that couldn’t have survived without a rushed banking license and US$5 billion of federal capital. And then there’s Bank of America’s (BAC) bailouts. Where’s the Senate bill to tax Merrill’s traders at 100%? If the Treasury hadn’t put them together with BofA, and greased the skids while the shareholder vote took place, Merrill Lynch (MER) wouldn’t have made it to December 31st.

Senator Schumer — if you’re going to apply this standard fairly, AIG’s bonuses are just the tip of the iceberg.

Disclosure: No position

Comments

[elcopone:]

The real question is what does it say about our government when AIG execs are more scared of lawyers opinions and their own executive's potential lawsuits than they are about the governments wrath?

Mar 18 08:17 AM

[paulsjj:]

Most of the stimulus package can be considered as bonuses to the dem's special interest groups. As usual, the wrong questions get asked. Where did AIG's 180 billion bail out go? Who got it?

Mar 18 08:17 AM

[pacman1947:]

Matt,
The "tip of the iceberg" in this case is more like the outcroppings of a cemetery of shallow graves after a flood. The skeletons upwelling from the graves of these corrupt institutions must be reburied along with their caskets.

Integrity has been challenged, along with the sense of common decency.

The criminals on Wall Street have not learned their lessons. It may be time to choose: Revive them, or bury them.

Mar 18 08:19 AM

[MichaelJ007:]

The important thing is that everyone focuses on the less than 1% of total AIG bailout that was allocated to deferred compensation contracts, which were in place b4 the GOV got involved, instead of the massive GOV failures and corruption that got us into this mess in the 1st place. Talk about asking the wrong questions when will congress start asking- which GOV officials where on Madoff's payroll? How many at the SEC knew AIG's derivatives contracts were a ticking timebomb? I could go on and on.

Mar 18 08:37 AM

[holmesnmanny:]

It appears that the outrage over the petty 165 "million" in AIG bonuses is a smokescreen for the 2.65 "billion" that BofA gave out to Merril execs.

You notice you're not hearing anything anymore about the 2.65 "billion". This is all the talk right now. How the crooks at Merril can get away with stealing 2.65 "billion" is beyond comprehension.

Mar 18 09:27 AM

[holmesnmanny:]

Again, in case nobody caught that. It was 165 million in bonuses that Congress is complaining about versus 2650 million in bonuses that Merril gave out to their executives and nobody seems to care anymore.

Mar 18 09:35 AM

[joes:]

I think people do care about fairness, even thought it is never really achieved it becomes the symbol of the greed and incompetence. Merrill has not escaped yet, the best anyone with a bonus can hope for is that the focus of our ever smaller and less effective financial press loses interest and moves on to GM or some other failing segment of the economy.

Mar 18 09:42 AM

[holmesnmanny:]

Well, I'm not a bofa shareholder so my interest is just of a moral one, really. However, bofa did receive tarp funds so the US taxpayer is on the hook for that money that has to be accounted for.

Mar 18 09:46 AM

[ACCOUNTANT:]

Merrill's bonuses did not just go to their executives. They went to 40,000 different employees - most of which are called stock brokers.

Those brokers work on incentive plans that pay a certain amount during the year that is designed to approximate 60% of their total compensation and then there is a "settle-up" at the end of the year depending on each employee's performance level. That practice is not uncommon in any incentive driven occupation. Not paying out those incentives would have been no different than retroactively cutting a teacher's salary or a nurse's salary by 40% and asking for it back. The stock brokers had nothing to do with what was going on in the executive suites that got Merrill into its horrendous trouble.

That portion that went to the executive suites - i agree - that should never have been paid out - but that made up a relatively small (as a total percentage) portion of the total bonus payout.

Mar 18 10:27 AM

[holmesnmanny:]

If that is indeed true, then doing the math equates to "atleast" around 65,000 an employee, which I find hard to believe that 40,000 employees deserved atleast 65,000.

And this math is only based on 2.65 billion. They are reportedly given between 3 and 4 billion total.

Mar 18 10:33 AM

[LariAnn:]

It is clear to me that if Merrill had that much money laying around to hand out in bonuses or retention or whatever buzzword is used to describe it, they were charging their customers WAY too much for the services rendered! Instead, they should have given it to investors who lost money on deals made by these so-called brokers, instead of giving the money to the brokers.

Mar 18 10:51 AM

[jkhtrip:]

The Politicians know they they have given the charter to the Federal Reserve. They new or should have known what they were passing when they were passing it. It is quite simple really. STOP letting these boneheads make you think we need them. They are all part of the problem. No bill or "bailout Package should be passed that cannnot be read before it is voted upon. This is not difficult.

They just want you to accept that it was all an accident. Anyone who knows thier history knows that the banking Industry and especially the Larger Houses/investment firms are in bed with the Politicians. (At least the right ones) thise that have the hold to makje or break bills.

We need smaller govornmenmt not more! They do not produce anything and are never accountable for the harm they do. They are TAX COSUMERS not PRODUCERS.

It applys almost all the way down the line. It is sad when you pay criminals for doing what they were paid to do and let them off witha Bonus and throw some poor perosn in jail for Cannibus is living proof od the insensistivity andlack of willingness to abiode by the Law of the Land. The Constitution!

Mar 18 10:52 AM

[HBWOW:]

Who was it that said, "Ask not what you can do for your country, but what your country can do for you?" Multiple choice 1) Liddy,
2) Lewis, 3) Pandit, 4) Twain, 5) Dimon, 6) Kovacevich, 7) Pelosi,
8) Frank, 9) Dodd, 10) Cox, 11) Wall Street in total, 12) Congress in total, 13) Corporate insiders, or 14) all of the above plus.

Mar 18 10:56 AM

[KFC007:]

US is now assured top place in the ranking of nations according to the level of corruption. At the very least, who ever allowed the AIG bonuses should show moral courage by accepting failure and resigning.

Mar 18 11:02 AM

[retiredengi...:]

It is just the tip of the iceburg. I agree when congress hands out billions of tax payers dollars with no strings they are throwing our money away. I a company goes under and the tax payer bales them out how can you justify bonuses, dividends, or bond payments until they are solvent. They are braking the law and rewarding the crooks that took bad securities as colateral. There are plenty of people out looking for work that would do a better job of unwinding the mess than the crooks that caused it in the first place.

Mar 18 11:15 AM

[kbclements:]

Mark:
Either you don't understand your own analogy - or you gotta be kidding - you don't get Hanibal the Canibal to catch himself - chances are he will do a diligent job for years without no results. Same for these idiots at AIG. Find a few other propeller heads from outside of AIG to get the unwinding done. Berkshire was able to unwind the General Re book with just 2 people working on it (Mind you it might be tough to find a couple of people as good as Warren and Ajit).

Clean house - fire everyone that touched any derivatives - these people are a cancer on the firm, the industry and the world financial system.

Mar 18 11:17 AM

[Augustus:]

I really like these talking head CNBC hyperventilators discussing the AIG or Merrill bonuses. GE would be down the tubes months ago without the Fed guaranteeing their debt so they can roll it over. What does a CNBC shouter get in pay? Should it be decided by the House Finance Committee?

Mar 18 11:22 AM

[k9s-4-k8:]

The Dems call to return the money is a sham. Not that they might not attempt to get it back but that they weren't behind the bonuses going forward in the first place.
When the original stimulus bill was being drafted Senators Snow (R) and Wyden (D) proposed an amendment that would have blocked just this type of bonus payout. Chris Dodd (D) the chairman of the Senate finance committee together with backing of the Obama administration dropped it from the stimulus bill. Now its been revealed that Congress and the administration knew for more than a month that AIG was going to do this bonus plan. Within the last month the treasury sent another 30 billion to AIG. The outrage from Dems is ridiculous! They knew about this all along and in fact dropped legislation that would have made these bonuses impossible to do. Now they're outraged and protesting to Libby?

Mar 18 11:57 AM

[Gem Hudson:]

Do as Stalin said. Get in line but what was done as to en-Stalin his five year plan. Purge them all in 1930, 33 and 36.

Mar 18 12:16 PM

[mkreisel:]

We don't have to do it the Stalin way, it's bad PR.

A much better way would be to put personal information of anyone who dares to take that bonus on the web.

Mar 18 01:51 PM

[henarl:]

All of the government's professed anger over the AIG bonuses is just a PR smokescreen to try to pacify an outraged public and divert that outrage from themselves. The govt. owns 80% of AIG and, if they wanted, they could call a stockholders meeting and vote out the current directors and replace all of the bonus baby executives. Joe the Plumber couldn't do worse than losing over 60 billion in three months! Why do they still have their jobs?

Mar 18 03:44 PM

[guiron:]

So, to save GM and Ford the union workers who make the cars have to retroactively renegotiate their contracts (some of them have been retired for years), but we should honor the contracts of an insolvent financial institution so their derivatives traders don't go elsewhere to get paid obscenely for creating nothing? Who is hiring right now? As far as I'm concerned, we all are being made to sacrifice, particularly us wage slaves, so this whining by the overpaid is not bringing tears to my eyes.

Mar 18 04:08 PM

[beautyseer:]

Yes. It is time to make American businesses competitive again by confiscating all bonuses over $250,000 per year. If this is agood reason to pay hourly employees third world wages in "the greatest country in the world," it makes sense for pirate capitalists with their corporate jets, which they have recklessly crashed into their own corporate towers. Time for the REAL "War on Terrorism," Waa Street! We now know who the real enemies of the American Way of Life for all are -- the people who extend credit to American middle class families instead of paying them a living wage, securing their health care on an affordable basis and providing the possibility of retirement with dignity for all who made contributions to the working world in adulthood. Make the banks get so small they can't hurt us any more. Make AIG officials go to jail forthe outright fraud of insuring soap bubbles in tornadoes and then expecting the rest of us to pay. Make sure this insane bonus system ends badly for the greedy.

Mar 18 05:35 PM

[deh5557:]

What happened to WE THE PEOPLE, yes we can.

STOP using these instutions. they make their miserable extistence from us, lets stop using them. Close out your accounts with them and don't do business with them. If they don't have customers how can our crooked government keep giving them our money:?

Mar 18 07:17 PM

[european_pov:]

The argument saying "you have to pay bonuses to keep them" proves one point : the top management of financial firms is just made of mercenaries. Maybe good at their jobs (?) but absolutely not commited to it. The fact that "11 top managers letf AOG despite of the bonuses being paid" confirms the point. The fact that "if they leave they will work against us" confirms the point. Compare that with the commitment and the (far leaner) salaries of doctors, researchers, teachers working hard and with passion to increase the nation knowledge; with what the guy in the local store earns for the necessary services and goods he provides with a smile to his customers. Those pay the bill. Is it a good thing to give mercenaries so much power as to make the whole system crash ? Remember what happened to the old city of Carthage destroyed by its own mercenaries.

Mar 18 07:49 PM

[Mad Hedge F...:]

There is blood on their hands. I’m glad that I’m not counting on an AIG bonus check to clear the bank. CNBC has turned into the AIG channel. I can only imagine how that annual review conversation went down. “The good news is that your bonus is $5 million. The bad news is that you will have to spend $25 million in legal fees defending it”. Thank goodness for small favors. What hath Obama wrought?

Mar 18 08:43 PM

[BxCapricorn:]

The MHFT is hilarious. 539 comments, and not in the top 100 who post comments here. I'm guessing your report card always said, "does not play well with others", which would be a badge of honor if you were a maverick thinker, instead of an pariah to society. Oh, what a drag. AIG "upper management" didn't get their bonus checks, free and clear, because they abused an unregulated system, akin to someone who robs an convenience store because they know they can't afford security cameras.

Mar 18 09:51 PM

[Bobco23:]

Carthage was not destroyed by its own mercenaries.

1). It did not employ mercenaries and
2) it was destroyed by the Roman army in a progression of 3 wars, which you may recall from your high school history class as the Punic Wars.

The first Punic War was fought from 264-241 BC and resulted in territorial losses for Carthage and reparations. The Second Punic War was fought from 218 to 201 BC and resulted in subjugation and submission to Roman authority as well as greater reparations. The Third Punic War was fought from 149-146 BC at the urging of Cato the Elder and was percipitated by Carthage violating a provision not to take action against aggression without permission from Rome, which they did not get. The citizens of Carthatge fought the Romans in the streets of the city for weeks, but finally succumbed to the superior Roman army. The survivors were sold into slavery, the city burned, and the soil sowed with salt.

There were no Carthaginian mercenaries involved to turn against the citizens of Carthage, although it is likely the Romans had several legions of mercenaries.


On Mar 18 07:49 PM european_pov wrote:

> The argument saying "you have to pay bonuses to keep them" proves
> one point : the top management of financial firms is just made of
> mercenaries. Maybe good at their jobs (?) but absolutely not commited
> to it. The fact that "11 top managers letf AOG despite of the bonuses
> being paid" confirms the point. The fact that "if they leave they
> will work against us" confirms the point. Compare that with the commitment
> and the (far leaner) salaries of doctors, researchers, teachers working
> hard and with passion to increase the nation knowledge; with what
> the guy in the local store earns for the necessary services and goods
> he provides with a smile to his customers. Those pay the bill. Is
> it a good thing to give mercenaries so much power as to make the
> whole system crash ? Remember what happened to the old city of Carthage
> destroyed by its own mercenaries.

Mar 18 10:50 PM

[nova:]

It appears that everybody (Obama and his associates, politicians, prosecutors, media, etc.,) are talking about our economic ills AND nobody is doing anything about corruption, fraud, looting.

Just talking... Well, Obama and politicians think that all we need is more money to steal and loot.

Mar 18 10:51 PM

[MudEngineer:]

One of the ones in our government who knew about the AIG bonuses ahead of time was Chris Dodd who added a small segment to the recent stimulus package that was not read by anyone. It stated that any AIG contracts in place prior to February 11, 2009 would be honored. This was months and months after the first taxpayers money was given to AIG. This is nothing short of criminal by a U.S. Senator who received over $100,000 in contributions from AIG. One more that must be voted out of office at the soonest availible opportunity.

Mar 18 10:59 PM

[William Cowie:]

While I agree with your basic point, there are two differences:

1. The Merrill thing was pulled in the early days, before Washington knew what hit them.

2. The Merrill bonuses were not paid to the very culprits in the organization who sold the company (and part of the country down the river) like the AIG bozos.

Please remember, I agree with your point that we need to figure out some way to fix the Merrill debacle, but this latest outrage is more intense, because:

By now Geithner and his team ought to have known better. Isn't he from Wall Street? If the horse bolts once, you made a mistake. If the horse botls again, you're an idiot who doesn't learn from your mistakes. Even if the second horse is smaller.

Much of the outrage is directed at our leaders for allowing this to happen. The AIG bozos are crooks - we all knew that. That they are able to pull this off, and still have the huevos to rely on anonymity, reflects more on the leadership Washington has assumed than anything else.



On Mar 18 09:27 AM holmesnmanny wrote:

> It appears that the outrage over the petty 165 "million" in AIG bonuses
> is a smokescreen for the 2.65 "billion" that BofA gave out to Merril
> execs.
>
> You notice you're not hearing anything anymore about the 2.65 "billion".
> This is all the talk right now. How the crooks at Merril can get
> away with stealing 2.65 "billion" is beyond comprehension.

Mar 19 12:18 AM

[William Cowie:]

Good point. Perhaps what we're witnessing is the exposure of the insidiousness of the lobbying establishment, and its cost to us.

We should send this along to Jon Stewart and let him call Chris Dodd to account, don't you think? He's one guy who probably didn't receive anything from AIG...


On Mar 18 10:59 PM MudEngineer wrote:

> One of the ones in our government who knew about the AIG bonuses
> ahead of time was Chris Dodd who added a small segment to the recent
> stimulus package that was not read by anyone. It stated that any
> AIG contracts in place prior to February 11, 2009 would be honored.
> This was months and months after the first taxpayers money was given
> to AIG. This is nothing short of criminal by a U.S. Senator who received
> over $100,000 in contributions from AIG. One more that must be voted
> out of office at the soonest availible opportunity.

Mar 19 12:21 AM

[1worldcurrency:]

165 million in bonuses.
12,900 million direct to Goldman Sachs, who paid bigger bonuses.

Mar 19 03:19 AM

[Mr. Ed, Jr.:]

Sen. Charles Schumer said on the Senate floor. “Because if they don’t, we plan to tax virtually all of [the money] … so it is returned to its rightful owners, the taxpayers.”


This is more frightening to me than anyone's undeserved bonus-- that a US Senator would steal back the bonus money by creating special tax law targeting a handful of citizens. I guess that is why Barney Frank demanded the list of names from AIG CEO Liddy.

What is this country becoming ?

Mar 19 03:24 AM

[Responsibility:]

Un-justifiable executive awards have been known for a long time before this big financial crisis, just like un-justifiable excessive consumer spending. To make change, we need to voice out against these un-justifiable behaviors in the same manner as we voice out against crimes towards children or injustice towards minorities. When we have demonstrations on the street and preachings in sunday schools and church services against these behaviors by the general public, real change may come then.

We have put too little priority on financial responsibilities in comparison to priority on having a luxurious life style.

Mar 19 11:50 AM