Paying the AIG Bonuses - The Alternative Is Worse

As the Union-sponsored buses toured homes of various AIG executives Friday, I was sitting in a small North York TV studio waiting, staring at a camera lens, waiting for a couple of Fox News anchors to come out of their interview break and pepper me with questions about AIG, retention payments, and all things greed-related.

When the interview request first came in on Thursday, my instinct was to say “no”. A New York-based Fox News producer had seen my post about the double standard between AIG & Citibank/Merrill, and contacted Amy about coming on their weekend show with Julie Banderas and Gregg Jarrett. Since I’d already made my AIG/Merrill points on BNN the day before with Kim Parlee (see prior post “BNN interview on AIG bonuses” March 18-09), what was the point?

Mr. Jarrett set aside about 10 minutes, and he wanted to talk about two blog posts that I had written over the past 7 weeks. A somewhat prescient piece about how the American Public were working up to their own version of the French Revolution (see prior post “America may be on the verge of its own French Revolution” February 2-09): in that one I suggested that the revolution would involve the tax code and pay caps, not pitchforks. It also predicted that U.S. politicians would figure out that if they didn’t join their fellow citizens marching against Wall Street, the mob would turn on them next.

The second post was my attempt to broaden the AIG bonus controversy beyond the obvious issue of whether or not their execs “deserve” bonuses. Retention payments for the derivative gurus who built the $2.7 trillion bomb, and having them safely defuse it, benefits the U.S. taypayer most than anyone else. It’s not that you want to pay retention sums, but it is better than the alternative. I tried a metaphor: “You pay Tony Soprano the protection money not because you want to, not ’cause it’s fair, but because the alternative is worse.”

Moreover, the red letter crime isn’t the $200 million paid out to AIG employees, it’s the US$3.6 billion that Merrill Lynch paid in bonuses during the last week of December. Neither would have been in business if not for the U.S. Federal Reserve, so why focus solely on AIG?

The dollars involved at Merrill, and the sleight-of-hand timing, is far more galling in my mind than the stay-payments at AIG. If guys took their AIG retention money and left before their contracts were up, then pursue them for Fraud. But if you contracted someone to stay to unwind the book, and they are doing what you’ve asked, then the money is smart (or at least self-interested), even if you have to grit your teeth when you sign the cheque.

As for the idea that “AIG is the cause of the economic crisis”, I would rank that firm below the guys who built the subprime mortgage structures, the agents who stuffed crappy borrowers into the conduits, the agencies that rated the CDOs and CLOs, and the regulators who allowed the investment banks to go from 12x levered to 33x levered in less that half a decade.

My main theme was simple: separate performance bonuses from retention payments. Don’t pay bonuses unless there was performance that warranted them, which is unlikely in AIG’s case. But in terms of retention payments, AIG’s experts still needed to unwind $2.6 trillion of derivative trades (now US$1.7T); you can’t fill those roles at any old job fair. It might make you mad, but the U.S. government has already loaned AIG US$173 billion, and I assume you want that money back. Don’t cut off your nose to spite your face.

Mr. Jarrett was quite kind throughout the interview, even if he doesn’t believe the AIG crew should be allowed (or are uniquely qualified) to unwind their own book. “Someone else out there must be able to do it”, he said. Maybe so. “Who will hire these guys? They’re incompetent!” Some have already fled to greener pastures, but he was on a roll. The American public want blood, and Mr. Jarrett is in that camp, too. Understandably so.

Mr. Jarrett did jump on the point I had made last Wednesday about Merrill’s December bonus payments being ignored in all of this, and we agreed vociferously on the injustice of that reality. “Merrill’s payments are the real crime”, I said, “and Washington is only focused on AIG.”

We signed off, and the producer said it was “fantastic”. I guess my Saturday afternoon was well spent. Not looking like a complete idiot is all one can hope for.

And them Amy got this email within 15 minutes of the interview:

Listening to that Jackass, Mark McQueen on tv the other night defending the retention of a bunch of fucktards was disgusting. I know a lot of those people, people at Goldman, Merrill, Soros and others. They’re not particularly bright. I went to school with them and took a different path, thank god. What a spectacular way to show what incompetent idiots they are in front of the world. Mr. McQueen only reinforced his own retardation by attempting to defend. Thank god I have an inheritance that’s not based on Street Bullshit. I always figured my peers headed in this direction were gonna F(*&K it up. What a shame. Tell McQueen he’s not doing himself or the company any favors by attempting to defend. At least Cramer was contrite in front of another idiot, Jon Stewart.

Hope you lost mucho,

Chris

Now, was Chris actually listening to what I was saying? The headline of my blog piece that Mr. Jarrett referred to was “The AIG / Citibank double standard“. Nowhere does it say that paying bonuses for screwing up is a sensible thing to do; or that it should happen. What it does say is that once you’ve invested US$173 billion to keep AIG from blowing up, you’ve got spend some money to retain the derivatives specialists you need to defuse the bomb.

But the larger point was pretty clear, and by choosing a December 31, 2008 cutoff date, Congress still hasn’t dealt with it: both Citibank (C) and Merrill have their hands far dirtier than AIG.

Chris, that’s the ultimate point. And yes, I have lost “mucho”. But I didn’t cause the economy to melt down, either. So why is that deserved? Is your plan to put everyone who wears a suit and tie in shackles?

The American version of the French Revolution really might be upon us. And, irony of ironies, it’s a trust fund baby who is leading the riotous crowd.

Comments

[ditto:]

Amen! Can you pls send this to the 380 Reps that voted for the 90% tax. Are we that stupid and short sighted to not recognize that $165mm of payments is pennies to save this country. i hope this was just a political shot over the bow and the Senate and President will tame it way down.

Mar 22 01:10 PM

[kdo:]

I am personally far more disturbed about the original compensation scheme given to AIGFP execs which simply gave them 30% of profits. Is it just me, or does that seem like a ridiculous compensation scheme which focuses them completely on driving whatever profit they can get, regardless of the risk which is far more relevant to the problems we have? By the time the retention bonus scheme came along, I'm pretty sure it was obvious to everyone in the division, there would be no profits for a long time within the division and the only "profit performance" that anyone would be able to measure was associated with how little can we lose? That meant, there would be very little compensation for any future work under the previous plan. If I were CEO, I would be scared they would all leave.

Unfortunately AIG is far from the only practicioner of such compensation schemes, I think there are similarities throughout all of corporate America with the use of options, which are usually exercised and sold to cash quickly when they vest, instead of restricted stock which can force executives to keep more of their wealth in stock they can't sell. Didn't help Lehman or Bear, but at least there is a certain justice that executive wealth should get creamed if they lead their company to bankruptcy, instead of sold long ago and kept safely and diversified away. Anyone who thinks that it would be easy to simply replace the AIG team in the middle of the crisis I think is just angry and not really thinking clearly. I understand the anger, I just think it's the wrong compensation scheme to be angry about. It's the first one that helped impale the company. Those types of schemes are all over corporate america and still remain.

I also agree, MER was far more egretious. But really, part of the problem is this is the outlet for the financial mess we're in of which we should all be angry. Because for the most part, I think this is about as much as the general public and both houses really understand about the crisis. The dudes didn't deserve the money. Unfortunately, I am disturbed by what I see as the general level of understanding about the big things about where we go from here from our parties/houses/leaders. So instead everyone focuses on what they understand.

Mar 22 01:36 PM

[reality chk:]

Look , What happens on the TV shows is a byproduct of the situation created by AIG. and the rest of the out of touch with the real world financial institutions. We can sit here and argue for the next 10 years the rights and the wrongs of every issue and every point of view of every analyst, journalist and spin doctor not to say anything about the idiots in congress.
The AIG bonusses are NOT Justifiable. Period.
These AIG executives have lost their sense of reality. They think they are superstars in this Free Market system.
They think they are the #1 first round draft choice,
the franchise player,
the #1 free agent.
It is out of realm to think that just this unit of AIG has at least 73 people that get a Bonus of $1M. With a typical bonus being 20% of the annual wage these people make over $5M / year. Unthinkable.
These guys think way to much of them selfs. This is nothing but a gang of predators. We have not even touched on the subject of deserving the bonus or not. These guys should be in JAIL, not given bonusses. The entire annual wage should be taxed at 90% not just the bonus. AIG, Wall Street and the rest of these scheme financial institutions have been isolated on this financial island of Greed and Corruption for so long they have become calous, and immune to the Normal way of life.
It is hard to debate this outrage, even harder for someone to defend these AIG Bonus actions today, when 5 months ago this company begged the taxpayers for help. The same taxpayers who barely make $30K to $60K / year. Like it or not the taxpayer owns this company .
Remember when you take out a loan they put a lien on your property.
The way the taxpayer sees this today is that the government passed the hat around and collected a bunch of money to help this company but instead the taxpayers money is going to support some rich punk who thinks way to much of them selfs lavish lifestyle.
In case you have not noticed, The taxpayer is pissed off with your thoughtless actions.
There is no way anyone can justify the AIG actions no matter how you spin it....
Give the Bonusses back NOW. Return the taxpayers money back to the government, and if you are so damn good make it on your own merits. Or the government can nationalize this company and make all these superstars government employees working for a REAL WAGE like $40K/year.

Mar 22 01:58 PM

[An American...:]

The BOMBS you refer to (the derivative contracts that are so complex that only those who authored them and so tightly wound them up could possibly unwind them) should have never been authored in the first place.

If they are so complex, then they are bad business.

The businesses that encouraged them are bad.

The people that run these businesses are bad.

The constituents who benefit from these BOMBS are bad.

The point is, maybe we should let these BOMBS go off - then those who had a hand in them will have their hands blown off (figuratively) and won't be able to do it again.

Mar 22 02:15 PM

[bgv:]

Is it not likely that originally AIG believed that the AIGFP execs operations would be positive contributors in a BIG way to the overall profitability of the company and therefore offered what they considered to be compensation packages competitive at the time? (hopefully before they needed government help) Has anyone ever said just what the historical impact of that small group was on the earnings of the company up to the time of the 'problem'.

Mar 22 02:34 PM

[Momintn:]

So how many employees work in CT and how many work in London? How many employees of AIGFP are Americans?
A few quotes from the NY Times.
"In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees. "

From the Washington Post
"At least 73 employees of AIG's Financial Products unit -- the London-based division of the insurance giant that sold the high-risk derivatives blamed for the company's near-collapse -- got bonuses of at least $1 million out of the $165 million pot of bonuses that was recently revealed, New York Attorney General Andrew Cuomo said moments ago."

Funny now how the media has dropped the "London-based" part from the explanation. We are subsidizing an off-shored company that has destroyed our economy. Don't you think Americans deserve to know the truth?

And half of the banks that AIG paid are outside of the USA. Are the taxpayers to pay all of the claims on policies that AIG cannot pay, even to companies outside of the USA? AIG has just become a big conduit for companies to get money out of our treasury. They need to be shut down.

Mar 22 03:16 PM

[Adaminatree:]

It's ashame that the media and government officials and the general public aren't complaining about the nifty tax break given to the Bernie Madoff investors. Being that most of them are Jewish, they were given a GREAT tax advantage ... to be able to write off the "losses" they suffered from Madoff. How about the losses us "ordinary" people suffered from the dismal failure of Bear Stearns, etc? Give us the same deal the Madoff investors got!!

Mar 22 09:21 PM

[mesoclone:]

There is great anger among the proles. We've discovered that too many of those managing our wealth have been grossly over-payed. The AIG bonus flap is just a symptom of this strong undercurrent, and the dangerous irrationality it can trigger.

The moral hazards that have developed in our financial system show up to the little guy as rampant unfairness, and the rise of a wealthy elite. This appearance is real - CEO's are NOT worth tens of millions of dollars a year, no matter the company they head.

The disconnect is largely a result of the disconnect between the incentives of the ownership (employees through pension funds and 401Ks, investors through mutual funds) and the incentives of those who use this money - be they fund managers, bankers or executives. This is a cancer in modern capitalism that must be excised... but the process for doing so will likely make sausage out of the patient.

Mar 23 12:58 AM

[THofler:]

There's an important related issue. Why do we have a Sarbanes/Oxley law? The geniuses in Congress should either advance an effort to prosecute John Thain and other Merrill honchos, or they should repeal Sarbox.

Did Merrill cook the books prior to the BofA merger? Not sure? Prosecute under Sarbox! If they're not going to do any of this then Sarbox is completely useless. Lord knows Sarbox has prevented countless small IPOs over the years and sent lots of business to London. Get rid of it if it is useless.

But I think it is nutty to have a blanket bonus tax that blankets ALL of the major banks. GS, WFC, USB are now trading at book value or better. One or several of these guys are going to issue a secondary (or other capital raise) this week probably and pay back the TARP funds. And then they'll start poaching employees from C or BAC.

Mar 23 01:40 AM

[huskerbob:]

Roy McKoi makes a good point: how smart do you need to be to writes checks to the banks on the winning side of these contracts? Goldman Sachs is getting paid 100%.
Please get these bonuses rescinded so we can move on to focus on more egregious problems. Frank and friends are just setting AIGer's up so the hoi polloi can vent their anger at someone other than congress or GS. In 1930's Germany the politicians blamed the Jews. Our gang is no less scrupulous when it comes to finding a scapegoat. When this blows over they will villify someone else.

Mar 23 04:10 AM

[Did U Think...:]

I have a better idea than paying criminals more money to undo what they have done. I suggest that they each be convicted of criminal negligence on a grand scale and that their sentence will be tied to their performance.
American taxpayer makes money in the unwind=no jail
For every billion that the American tax payer has to eat in this, 1 year in the slam, no chance of parole.

How much more incentive would they need?

Mar 23 04:48 AM

[petetoth:]

If I'm not mistaken, historically it was the trust-fund babies who started and led the revolutions. The regular folk had no time, energy, or money for such deeds as they were striving to make ends meet or they feared losing their jobs thus did not want to rock the boat.

Mar 23 10:22 AM

[SeeTheLight:]

Mark, the fact is that you are dead on. People will hire these AIG specialists. Do people think companies don't hire hackers or other miscreants. Just think about it like this. If someone built a nuclear bomb and accidentally blew it up, do you think people would hire this person (assuming he didn't kill himself). Absolutely, and at a massive salary, the guy is smart enough to build a nuclear bomb, and now he knows what not to do to set it off again.

Who is stupid enough to think that all these deratives are going away. They are not, they'll just be replaced with better and hopefully safer versions, by the same people who made them the first time. Funny enough, smart people understand that other smart people make mistakes. They are humans. And guess what, people will be lining up to hire these AIG people at the same wages, because they made AIG billions of dollars before the house of cards fell in. Do people think others won't want to try again. Of course they will.

If you don't pay these people, they will leave and go and do this work elsewhere for the same (or more) pay. What the masses don't understand is that the top people will get hired regardless of a recession. They are always in demand, even the ones that are shysters, someone is always greedy enough to give them another chance. If you need an example, see Donald Trump, who's casino biz is Chapter 11 for the third time in just over a decade, and yet someone will fork over to him more money.

People are the value in a company. If the top people go, then the company is worthless. That's all AIG has left, smart people who made a costly mistake. Now the US government is forcing out the smart people. If you want to talk about a worthless organization, look at Congress. But then again I'm Canadian, so this debacle is not on my tax dollar.

(Note: I am not specifically calling out the US gov't, Canada's is no better, well except for our anti-lobbying rules and tight limits on campaign dollars, but still corrupt and ignorant).

Good Luck All

Mar 24 05:50 AM

[Conan the B...:]

Someone gives you a loan, no strings attached.

They don't like what you are doing. They change the conditions and Backdate them to the time of the loan without asking for your consent.

Breach of Contract for a start, Backdating also illegal. A Majority owner in any corporation has to look out for the interests of the Minority holders.

The Minority Owners deserve the right to be heard.

Mar 25 12:52 AM

[Conan the B...:]

Greenspan knew what was going on. He let it go on.

He should be grilled by Congress, sentenced without trial and be put into jail.

The Low interest rate environment spawned the Housing and Derivative fiascos. He controlled that environment. Its all his fault. IMO

Mar 25 12:57 AM