A More Modest AIG Bonus Proposal

We need to set aside our self-righteous indignation with respect to AIG (AIG) paying bonuses for a moment.

We are concerned with what could be viewed as the House of Representatives attempting to set aside our Constitution with its proposed ex post facto "after the fact" bill.

For a Democratic-led House HR1586 to have approved by a 328-93 vote ("yes" votes were 243 Democrats and 85 Republicans, with 6 Democrats and 87 Republicans opposed) to impose a 90% "punishment tax" on bonuses given to employees with family incomes above $250,000 at AIG (and other companies that received at least $5.0 billion in government bailout money) cheapens our entire political and judicial systems.

We are only as trustworthy as our word. If individuals in a Presidential administration or a legislator by design or by omission did not put a caveat into the Troubled Assets Relief Program (TARP) to curtail or eliminate such bonuses, then we as a society have given up the right to make changes after the fact.

Now, what we would contend is that Mr. Liddy did have a bit of a moral obligation as Chairman. We think it should have gone something like this for everyone expecting a $1.0 million or higher bonus in the division responsible:

Mr. Liddy says, "We intend to pay you a bonus, however it will be in stock and based on the December 31, 2007 close of $57.14 per share that would start you out at 17,501 shares.

"However, the shares of AIG decreased to $1.57 per share or 97.2% as of December 31, 2008 compared to 33.8% compression in the Dow. As such, your division was responsible for the excess decline in the shares of our company and facilitated the need for government intervention for our survival.

"But to be fair, we are reducing the shares you are entitled to by only half of the excess decline or 31.7%, which would yield 13,159 shares. Now, do you want the shares or a payout at the March 12, 2009 close of $0.41 per share, or $5,395 pre-tax?"

We suspect no one would have complained.

Now, if the employees and management of the notorious division would have accepted the shares, they would have been more likely to stay on to correct the problems they created. And suppose that over the next 5 years the shares increased in value to the December 31, 2007 level of $57.14 per share. The employees in question would reach approximately 751,900 tax-free, or approximately 20% more than what could have been received if they are able to keep their original bonus.

We remain less concerned for the bonuses paid at AIG, as they were contractual. We continue to take exception to the bonuses doled out by Mr. Thain, the former CEO of Merrill Lynch, which was paid out after receiving government aid and being acquired by Bank of America Corp. (BAC). Clearly these payments fall under ex post facto, and should be given back.

We need to remember that on our way to making AIG -- and by extension its employees -- one of the poster children for this economic downcycle, AIG is not the only company at fault.

Moreover, even though AIG made mistakes in its underwriting of the risk (insurance companies do that from time to time), the U.S. government was able to use the company as a backdoor tool to prop up the banking system in the U.S. This has potentially staved off an even more significant decline in the market if financial institutions and municipalities would have been forced to shutter their respective doors.

Comments

[perremon:]

Both your hypothetical situation with Mr. Liddy and your points in support of the contracts are poor arguments. The base of fact is that the leadership had not "a bit of moral obligation," but a high moral and business obligation to run a flagship business that has proven to be critical to to concerns and financial stability of the entire counrty and beyond. Secondly, contracts are re-negotiated all the time as either side gains a distinct advantage or disadvantage. That is part of good business. What is not good business is taking advantage of tax payers after a collossal failure. Finally, begging those who failed to come and resurrect thier crumbled empire is hogwash. There are many fine, even brilliant MBS's who could jump into new leadership positions and likely do just as well or better. History has proven it. These prima-donna CEO's were not so supremely talented, as their results clearly shows. They either didn't recognise the risks (unlikely) or or accepted the outsized risks in hot pursuit of stellar gains (aka - greed). Let them fall, or seek employment elsewhere if anyone would have them. America is full of talent of all sorts.

Mar 23 12:29 PM

[WayneS:]

We still don't know who these people are that received the retention bonuses. I don't mean their names, but what they did in the past and what they are doing now. We have prejudged them without any facts. They might just be the monsters we make them out to be. Maybe not. Liddy said that those responsible for AIG's collapse have been fired. Is this true or not? I don't know what the truth is. But I do know what is false and that is what is being repeated over and over and over by the media and politicians alike.

Mar 23 12:53 PM

[btwombat:]

Retention bonuses?

Is there really a big demand for people who screw up at financial institutions? Who is looking to hire these people?

Mar 23 01:19 PM

[btwombat:]

Retention bonuses?

Is there really a big demand for the people who screwed up at AIG? Seriously, who would want to hire them?

Mar 23 01:22 PM

[henarl:]

As to the "sanctity" of contract law, contracts are ignored, overturned, or rescinded all the time in bankruptcy court. AIG, by accepting government largess in order to stay in business, is effectively in bankruptcy and the government is now their bankruptcy judge so contract law should not apply.

Mar 23 01:31 PM

[WayneS:]

RE: btwonbat; WAKEUP; henarl

I rest my case.

Mar 23 02:10 PM

[jackooo:]

On Mar 23 01:31 PM henarl wrote:
> As to the "sanctity" of contract law, contracts are ignored, overturned,
> or rescinded all the time in bankruptcy court. AIG, by accepting
> government largess in order to stay in business, is effectively in
> bankruptcy and the government is now their bankruptcy judge so contract
> law should not apply.

My union contract at TWA was changed for me & thousands of people. Was that illegal??? We were not in bankruptcy either.

Mar 23 02:46 PM

[fbcx:]

Again, the talking heads and their lemming followers miss the point. Many of those bonuses were performance bonuses based on actual production. Whether the entire firm made or lost money is immaterial. Whether those people saw no future at AIG for reasons beyond their control and left, does not mean their bonuses should be returned. For those that were retention bonuses, lets put hipocracy aside for a moment and think like businessmen. You've got a BIG problem...$2.7 trillion of very complicated assets that need to be unwound and sold for the highest dollar amount possible in order to be able to pay back the $170 billion the government has loaned you. Who do you want doing that? The janitor, an intern (neither of whom can even spell derivative asset) or the people who created the damn things to begin with an probably understand them better than anyone else. These people know they aren't wanted at AIG (but don't kid yourselves there are plenty of private equity shops who would hire them in a heart-beat with very nice comp packages to help them filter through the inventory and buy the bargains), so how do you keep them long enough to unwind their mess? It doesn't take a Harvard MBA to know you have to pay them not to leave and to stay and power down the the shop while making as many saves as they can on the downside. I don't care which private equity shop they go to after they finish cleaning house, but I do need them to stay and clean house. If I have to I'll pay .00619% ($167 million) of the $2.7 trillion to keep them around and do that job as best they can. I would. If you are thinking like an investor, which you should since you just invested $170 billion of taxpayers money in this outfit, you would do the same thing and quit thinking like a vengeful idiot talking head on TV. Christ, no wonder this country is go F***ed up! We've got Senators and Congressmen acting like uneducated juveniles instead of guardians of our nations wealth and wellbeing.

Mar 23 04:42 PM

[mediapro:]

Actually, unlike some commenting, I read the article. I would go along with the stock compensation scheme suggested by the Zack's writer. If they (the FP folks) are truly committed to righting their wrongs and unwinding their mess, then building the compnay back to a sustainable footing through a stock incentive makes sense for all of us.

As to your points about the best way to do this, you totally missed the point of the article. To use a silly alternative such as "the janitor" or "intern" is a false choice. The folks in the FP division are mostly living in other countries (the British bunch are the biggest majority). Why should they give a whit about a law that doesn't affect them?

DO you recall that nearly 20% of these bonus babies who got "retention bonuses" left the company immediately AFTER the bonuses were granted?

And if you are so concerned with protecting our taxpayer assets, then exert your energy towards something constructive. For five examples:

1. Reinstate Glass-Steagall. None of these shops (Citigroup, B of A, etc.) should have ever been allowed to dally in businesses about which they knew nothing. AIG has (had) 111,000 employees. It's an insurance company. How can it effectively manage its core business while allowing these geniouses to manipulate the financial markets with CDO's and CDS's?

2. Eliminate bonus structures altogether. Why are salaried employees and small businesses hit time and time again, while big business always seems to 'bend' the rules and still come out on top? Think of it this way, if I’m an average corporation and I pay a qualified employee 100k as their salary, I am required to withhold taxes, insurance and a host of other items – in addition to setting aside money for federal programs. However, if I pay that individual 60k, and a bonus 40k, the situation looks much better. The employee has to handle withholding taxes on the 40k and I am only required to deal with the payroll effects of 60k.

3. Fix the tax code. Just a few examples:

A. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

B. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck.

C. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the "bonus structure", offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

C. Finally, would someone please explain to me why there is a ~$106 K cap on wage contributions to Social Security?

While we are all arguing about the validity of the clawback option, we are missing the larger point of just how egregiously the average Joe has been pummeled by a tax system that redistributes wealth from the working middle class up to the 2% Captains of America that continue to rape this country and its resources.

On Mar 23 04:42 PM fbcx wrote:

> Again, the talking heads and their lemming followers miss the point.
> Many of those bonuses were performance bonuses based on actual production.
> Whether the entire firm made or lost money is immaterial. Whether
> those people saw no future at AIG for reasons beyond their control
> and left, does not mean their bonuses should be returned. For those
> that were retention bonuses, lets put hipocracy aside for a moment
> and think like businessmen. You've got a BIG problem...$2.7 trillion
> of very complicated assets that need to be unwound and sold for the
> highest dollar amount possible in order to be able to pay back the
> $170 billion the government has loaned you. Who do you want doing
> that? The janitor, an intern (neither of whom can even spell derivative
> asset) or the people who created the damn things to begin with an
> probably understand them better than anyone else. These people know
> they aren't wanted at AIG (but don't kid yourselves there are plenty
> of private equity shops who would hire them in a heart-beat with
> very nice comp packages to help them filter through the inventory
> and buy the bargains), so how do you keep them long enough to unwind
> their mess? It doesn't take a Harvard MBA to know you have to pay
> them not to leave and to stay and power down the the shop while making
> as many saves as they can on the downside. I don't care which private
> equity shop they go to after they finish cleaning house, but I do
> need them to stay and clean house. If I have to I'll pay .00619%
> ($167 million) of the $2.7 trillion to keep them around and do that
> job as best they can. I would. If you are thinking like an investor,
> which you should since you just invested $170 billion of taxpayers
> money in this outfit, you would do the same thing and quit thinking
> like a vengeful idiot talking head on TV. Christ, no wonder this
> country is go F***ed up! We've got Senators and Congressmen acting
> like uneducated juveniles instead of guardians of our nations wealth
> and wellbeing.

Mar 23 05:21 PM

[bcncv:]

mediapro: I agree with most of your points, but your comment about people leaving the company immediately after a bonus is a bit misleading. A number of people whose divisions were being wound down were paid retention money to stay until a specific date. They were expected to not have a job after that date.

It's okay to be outraged, because this is the complete pinnacle of corporate/government stupidity. Just be honest about the facts that you're outraged about.

Mar 23 07:59 PM

[WayneS:]

Mediapro - Last year the "Big Three" oil companies combined to make $71 billion. They paid $169 billion in taxes. Where are the subsidies you are talking about? XOM paid $16 billion more in taxes than they made in the US over the past several years.

Mar 23 08:45 PM

[mediapro:]

I won't bother to correct your outrageous assumptions about income and tax payments, but if you want a balanced presentation of the annual subsidies enjoyed by big oil, follow this link. My $30 Billion annually was, as you will read, a rather conservative estimate.

cleantech.com/news/nod...

On Mar 23 08:45 PM WayneS wrote:

> Mediapro - Last year the "Big Three" oil companies combined to make
> $71 billion. They paid $169 billion in taxes. Where are the subsidies
> you are talking about? XOM paid $16 billion more in taxes than they
> made in the US over the past several years.

Mar 23 09:14 PM

[terryg8:]

I always opposed the TARP legislation for 2 simple reasons. First, Government has no place in the free markets beyond reasonable laws against unfair practice or fraud. Secondly, Government has a very poor record when it does get involved and most often makes the problems worse rather than better.

We now have a nation up in arms about bonuses being paid to AIG employees that were under contracts that existed prior to the payment of any Government money to AIG. As a resolution to this outrage, we would now turn hundreds of years on contract law on its head and rescind legal and binding contracts because Congress is unhappy. If that is not possible, we will then use the tax code to punish one group and, in effect, still not honor the contracts. In case some of you might have forgotten what your parents should have taught you, “two wrongs do not make a right” and “the ends do not justify the means”.

The fact is that we assumed many of the liabilities of AIG when we took an 80% ownership share in the company. Among these were the bonus structures, like it or not. We are stuck with much larger and more expensive things as well that will cost all of us dearly. It is possible, had we simply let AIG go to court and declare chapter 11 bankruptcy, that we could have seen these contracts addressed in a court of law although I think it would be unlikely that the court would have voided these contracts even then. In any case, the money spent would have been that of the stockholders and bondholders and not the US Tax Payers!

We have been told that AIG was “too big to fail” but I must wonder if it is not too dysfunctional to survive without perhaps trillions of taxpayer dollars to bring AIG back to solvency. In light of that, these bonuses seem pretty small. In light of the actions and changes to our legal system required to get that money back, these payments are truly not worth the damage. If you must have some revenge you might consider having Mr. Dodd and Mr. Obama return the $100,000 plus they both got from AIG executives in 2008 as campaign contributions. That is the thing that you all should really be angry about!

Mar 24 12:23 AM

[terryg8:]

On Mar 23 08:45 PM WayneS wrote:

> Mediapro - Last year the "Big Three" oil companies combined to make
> $71 billion. They paid $169 billion in taxes. Where are the subsidies
> you are talking about? XOM paid $16 billion more in taxes than they
> made in the US over the past several years.

Yes, and that does not include the sales taxes paid at the state level, income taxes by their employees, or lease expenses paid. They find it, drill for it, pump it, transport it, refine it, transport the finished products again, and then retail it all for about half of what Government makes for sitting on their congressional ah chairs and doing nothing!

Mar 24 12:27 AM

[terryg8:]

When you wake up, you might want to consider the facts.

The bonuses paid were based on retention not profit. The profit bonus was NOT paid.

The contracts were written PRIOR to any Government bail out money being offered.

The current CEO, a Mr. Liddy, had zero to do with all this, has come out of retirement at the request of the government to oversee AIG, and is PAID ONE DOLLAR A YEAR! I think congress tried to make him a scape goat but it did not work with those of us who are informed.

On Mar 23 01:27 PM WAKEUP wrote:

> All you Zackies need to get this understood: Bonuses are paid for
> SUPERIOR performance. In the case of a financial products company,
> that means PROFIT. Since AIG LOST money, there is NO REASON FOR ANY
> BONUSES. Get it? NO PROFIT MEANS NO BONUS FOR ANYONE. This whole
> AIG bonus-thing was one more whiny, wimpy fratboy/old boy system
> scheme to get one last drop of blood out of a dying turnip. I'm damned
> tired of this whole thing. Fire everybody in management at AIG (reason
> for firing: incompetence, which will hold water in any court), send
> them on their way, and get ALL that bonus money back. There is no
> moral or legal obligation to uphold the terms of an illegal contract.
> In this case the illegality took place when AIG promised bonuses
> which AIG KNEW it had no money to cover, deliberately leaving the
> taxpayers holding the bag. And anybody with two brain cells to rub
> together knows that AIG saw this whole mess coming, before it carved
> out this B.S. bonus deal.

Mar 24 12:35 AM

[Responsibility:]

The problems of excessive executive compensations in public companies have been known for a long time, long before this crisis. This crisis and outrageous situations have finally prompted the majority of the people to say "enough is enough". These executives have their ways for too long without proper regulations. We need regulations, not just for salaries, but also on expenses (they live luxuriously on Company's expense accounts), in order to restore some trust people have in US's public companies.

Additionally, there will be problems to keep these people who have accustomed to their ways that put their personal benefits ahead of everything else. They have ways to keep a company going nowhere while making as much money as possible for themselves years after years. A good CEO will take the chance to clean house instead, keeping those who are more interested to grow with the Company rather than to milk the Company.

Obama had acknowledged during the Tonight Show that he understood the problem with these overpaid executives who have ruled public companies like hostages. The public should hold Obama responsible and help Obama to set regulations and laws to correct the corrupted culture in many public companies.

Mar 24 11:36 AM

[WayneS:]

mediapro - I visited the site you provided, but could find nothing to back their statements. The data I got came from government regulated sources. Also, the reason people in Venezuela only pay $0.10 a liter is the lack of taxes. Well over half of the cost of a gallon of gasoline is taxes as it should be. We, the drivers, waste most of the gasoline we use with poor choices in vehicles and driving habits. WE pollute the earth. If we became more efficient, the price of gasoline would go down and there would be less pollution. We choose not to be good stewards of this earth.

On Mar 23 09:14 PM mediapro wrote:

> I won't bother to correct your outrageous assumptions about income
> and tax payments, but if you want a balanced presentation of the
> annual subsidies enjoyed by big oil, follow this link. My $30 Billion
> annually was, as you will read, a rather conservative estimate.<br/>

Mar 24 12:38 PM

[WayneS:]

P.S. There are over 500 oil companies in the US, not three.

Mar 24 12:56 PM

[mediapro:]

Here's the data compiled by Greentech (below), a part of the energy group, though focused on non-polluting alternatives. The title of the article is "Oil Industry Subsidies for Dummies", and it presents a rather unbiased assessment of oil industry subsidies.

"The American oil and gas industry might receive anywhere between $15 billion and $35 billion a year in subsidies from taxpayers.

Why such a large margin of error? The exact number is slippery and hard to quantify, given the myriad of programs that can be broadly characterized as subsidies when it comes to fossil fuels. For instance, the U.S. government has generally propped the industry up with:

* Construction bonds at low interest rates or tax-free
* Research-and-development programs at low or no cost
* Assuming the legal risks of exploration and development in a company's stead
* Below-cost loans with lenient repayment conditions
* Income tax breaks, especially featuring obscure provisions in tax laws designed to receive little congressional oversight when they expire
* Sales tax breaks - taxes on petroleum products are lower than average sales tax rates for other goods
* Giving money to international financial institutions (the U.S. has given tens of billions of dollars to the World Bank and U.S. Export-Import Bank to encourage oil production internationally, according to Friends of the Earth)
* The U.S. Strategic Petroleum Reserve
* Construction and protection of the nation's highway system
* Allowing the industry to pollute - what would oil cost if the industry had to pay to protect its shipments, and clean up its spills? If the environmental impact of burning petroleum were considered a cost? Or if it were held responsible for the particulate matter in people's lungs, in liability similar to that being asserted in the tobacco industry?
* Relaxing the amount of royalties to be paid"

One example of how oil companies shortchange the American taxpayer:

XOM earned $7.6 Billion on domestic production in 2007 and paid $2.7 Billion in U.S. income taxes. Worldwide they earned $45 Billion and paid $23 Billion in foreign taxes. That's a 36% U.S. rate compared with a 52% rate foreign. That source is XOM's 10-K filing.

Additionally, the U.S. allows




On Mar 24 12:56 PM WayneS wrote:

> P.S. There are over 500 oil companies in the US, not three.

Mar 24 08:21 PM

[biomedlives:]

"Government has no place in the free markets beyond reasonable laws against unfair practice or fraud. " That view brought us to the current financial crisis.


On Mar 24 12:23 AM terryg8 wrote:

> I always opposed the TARP legislation for 2 simple reasons. First,
> Government has no place in the free markets beyond reasonable laws
> against unfair practice or fraud. Secondly, Government has a very
> poor record when it does get involved and most often makes the problems
> worse rather than better.
>
> We now have a nation up in arms about bonuses being paid to AIG employees
> that were under contracts that existed prior to the payment of any
> Government money to AIG. As a resolution to this outrage, we would
> now turn hundreds of years on contract law on its head and rescind
> legal and binding contracts because Congress is unhappy. If that
> is not possible, we will then use the tax code to punish one group
> and, in effect, still not honor the contracts. In case some of you
> might have forgotten what your parents should have taught you, “two
> wrongs do not make a right” and “the ends do not justify the means”.
>
>
> The fact is that we assumed many of the liabilities of AIG when we
> took an 80% ownership share in the company. Among these were the
> bonus structures, like it or not. We are stuck with much larger
> and more expensive things as well that will cost all of us dearly.
> It is possible, had we simply let AIG go to court and declare chapter
> 11 bankruptcy, that we could have seen these contracts addressed
> in a court of law although I think it would be unlikely that the
> court would have voided these contracts even then. In any case, the
> money spent would have been that of the stockholders and bondholders
> and not the US Tax Payers!
>
> We have been told that AIG was “too big to fail” but I must wonder
> if it is not too dysfunctional to survive without perhaps trillions
> of taxpayer dollars to bring AIG back to solvency. In light of that,
> these bonuses seem pretty small. In light of the actions and changes
> to our legal system required to get that money back, these payments
> are truly not worth the damage. If you must have some revenge you
> might consider having Mr. Dodd and Mr. Obama return the $100,000
> plus they both got from AIG executives in 2008 as campaign contributions.
> That is the thing that you all should really be angry about!
>

Mar 26 09:33 AM